Proposal for a Council Regulation imposing a definitive countervailing duty and collecting definitively the provisional duty imposed on imports of certain electronic microcircuits known as DRAMs (dynamic random access memories) originating in the Republic of Korea
Date: 2003-07-24
Institutions: European Commission
Subjects: South Korea, anti-dumping duty, anti-dumping legislation, countervailing charge, dumping, electronic component, import (EU), originating product

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 24.07.2003
COM(2003) 457 final

Proposal for a

COUNCIL REGULATION

imposing a definitive countervailing duty and collecting definitively the provisional duty
imposed on imports of certain electronic microcircuits known as DRAMs (dynamic
random access memories) originating in the Republic of Korea

(presented by the Commission)

EXPLANATORY MEMORANDUM

On  25  July  2002,  the  Commission  initiated  an  anti-subsidy  investigation  with  regard  to
imports into the Community of certain electronic microcircuits known as DRAMs (dynamic
random access memories) originating in the Republic of Korea.

The  investigation  revealed  the  existence  of  injurious  subsidisation,  and  consequently  the
Commission, by Regulation (EC) No 708/2003, imposed a provisional countervailing duty on
imports from the Republic of Korea.

The attached proposal for a Council Regulation is based on the definitive findings on subsidy,
injury,  causation  and  Community  interest  which  confirmed  or  modified  the  provisional
findings.

It is therefore proposed that the Council adopt the attached proposal for a Regulation which
should  be  published  in  the  Official  Journal  of  the  European  Union  no  later  than  24  August
2003.

2

Proposal for a

COUNCIL REGULATION

imposing a definitive countervailing duty and collecting definitively the provisional duty
imposed on imports of certain electronic microcircuits known as DRAMs (dynamic
random access memories) originating in the Republic of Korea

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having  regard  to  Council  Regulation  (EC)  No  2026/97  of  6  October  1997  on  protection
against  subsidised  imports  from  countries  not  members  of  the  European  Community1,  as
amended by Regulation (EC) No 1973/20022, and in particular Article 15 thereof,

Having  regard  to  the  proposal  submitted  by  the  Commission  after  consulting  the  Advisory
Committee3,

Whereas:

(1) 

(2) 

(3) 

A. PROVISIONAL MEASURES

By  Commission  Regulation  (EC)  No  708/20034,  (hereinafter  referred  to  as  ‘the
provisional  Regulation’),  a  provisional  countervailing  duty  was  imposed  on  imports
into  the  Community  of  certain  electronic  microcircuits  known  as  DRAMs  (dynamic
random access memories) originating in the Republic of Korea.

It is recalled that the investigation of subsidisation and injury covered the period from
1  January  2001  to  31  December  2001  (‘IP’).  The  examination  of  trends  relevant  for
the assessment of injury covered the period from 1 January 1998 to the end of the IP
(‘period under consideration’).

B. SUBSEQUENT PROCEDURE

Subsequent to the disclosure of the essential facts and considerations on the basis of
which  it  was  decided  to  impose  provisional  measures,  several  interested  parties
submitted comments in writing. In accordance with the provisions of Article 11(5) of
Council  Regulation  (EC)  No  2026/97  (hereinafter  referred  to  as  the  ‘basic
Regulation’),  all  interested  parties  who  requested  a  hearing  were  granted  an
opportunity to be heard by the Commission.

1

2

3

4

OJ L 288, 21.10.1997, p. 1.
OJ L 305, 7.11.2002, p.4.
OJ C […], […), p. […]
OJ L 102, 24.4.2003, p.7.

3

                                                
(4) 

(5) 

The  Commission  continued  to  seek  and  verify  all  information  deemed  necessary  for
the definitive findings.

All  parties  were  informed  of  the  essential  facts  and  considerations  on  the  basis  of
which it was intended to recommend the imposition of a definitive countervailing duty
and the definitive collection of amounts secured by way of the provisional duty. They
were also granted a period within which they could make representations subsequent
to this disclosure.

(6) 

The oral and written arguments submitted by the parties were considered, and, where
appropriate, the provisional findings have been modified accordingly.

(7) 

(8) 

C. PRODUCT UNDER CONSIDERATION AND LIKE PRODUCT

As  no  comments  were  received  following  disclosure  of  the  provisional  findings
regarding the definition of the product concerned and the like product, the conclusions
as set out in recitals (8) to (11) of the provisional Regulation are confirmed.

D. SUBSIDIES

Following  the  publication  of  the  Regulation  imposing  the  provisional  countervailing
duty,  the  Community  producers,  Samsung  Electronics  Co.,  Ltd.  ('Samsung'),  Hynix
Semiconductor  Inc.  ('Hynix'),  the  government  of  Korea  ('GOK'),  Korea  Exchange
Bank  ('KEB'),  Korea  Development  Bank  ('KDB'),  Citibank  Seoul,  Woori  Bank,
National  Agricultural  Cooperative  Federation  ('NACF')  and  Shinhan  Bank  submitted
comments  concerning  the  Commission's findings  as  regards  subsidies.  The  measures
commented are the  syndicated loan of  KRW  800  billion,  KEIC  guarantee  for  export
credits in the amount of USD 600 million, KDB Debenture Programme, purchase by
the  creditor  banks  of  KRW  1  trillion  worth  convertible  bonds  in  May  2001  and  the
October 2001 restructuring package. Since  some  general issues  are  important for the
assessment  of  all  measures  investigated,  these  issues  are  set  out  in  an  introductory
chapter below.

1.

Introduction

(i) Financial contribution by a government

(9) 

The issue of what constitutes a “financial contribution by a government” is central to
this  investigation,  and  it  is  worth  restating  some  guiding  principles  on  the  matter.
According to Article 2 of the basic Regulation, for a subsidy to exist there is a need to
establish as a first step that there is a financial contribution by a government. Article
1(3) of the basic Regulation defines 'government' as a government or any public body
within the territory of the country of origin of exports. According to Article 2(1)(a)(iv)
of the basic Regulation, a financial contribution by a government shall be deemed to
exist also when a government entrusts or directs a private body to carry out measures
which would constitute a contribution by a government pursuant to points (i), (ii) and
(iii) of the same Article.

(10)  A  financial  contribution  by  a  government  or  public  body  is  a  subsidy  per  se  if  it
confers a benefit. If an entity is not determined to be a public body, it is by default a
private body, and government direction must be shown under Article 2(1)(a)(iv) of the
basic Regulation for there to be a subsidy.

4

(11)  Government ownership, even 100% ownership, does not in itself mean that a company
concerned  is  considered  to  be  a  public  body.  Nor  does  government  ownership,  at
whatever level, create a “rebuttable presumption” of a public body. However, the level
of  government  ownership  is  an  important,  in  some  cases  the  most  important,
component  of  a  determination  of  whether  a  public  body  exists.  The  higher  the
government’s share, the more likely a finding of a public body.

(12)  Where  companies  are  100%  private  and  where  the  government  is  not  the  main
shareholder, it will normally be difficult to establish that a company is a public body,
unless convincing evidence to the contrary exists. In both of these cases, the company
would  be  considered  to  be  a  private  body,  and  'direction'  from  the  government  to
provide  financial  contributions  would  have  to  be  shown  under  Article  2(1)(a)(iv)  of
the basic Regulation.

(13)  Conversely, if the government is the largest, and especially the majority shareholder in
a company, the company in question may well be considered to be public body if other
relevant  criteria  are  fulfilled.  These  criteria  take  account  of  the  notion,  implicit  in
dictionary definitions, that a public body is an institution authorised to act on behalf of
a  community  as  a  government  entity,  as  distinct  from  a  private  body  which  is
presumed to act in the interests of its owners.

(14)  The relevant criteria which can be taken into account in determining whether a given

company does indeed qualify as a public body include:

a)

b)

The pursuance of public policy objectives which go beyond the normal remit of
a private organisation and include, for instance, a requirement to take account
of national or regional economic interests,  promotion  of social objectives  etc.
These criteria may be non-commercial, in the sense that they compromise the
normal objective of profit maximisation.

Government  control  going  beyond  ownership.  The  higher  the  government
ownership, the more likely it is that control exists. This can be demonstrated by
government  influence in appointments, the right  of  the  government  to  review
results and to determine objectives, and the extent to which the government has
to be involved in individual investment or business decisions.

(15)  With  regard  to  the  notion  of  direction  in  Article  2(1)(a)(iv),  this  exists  where  the
government  requires  a  private  body  to  carry  out  functions  normally  vested  in  the
government  and  the  practice  does  not  differ  from  practices  normally  followed  by
governments.  It  is  not  sufficient  to  show  that  a  government  merely  encouraged  or
facilitated such actions, although such encouragement or facilitation may be a factor to
be considered.

(ii) Non-cooperation

(16)  When  determining  the  existence  of  a  public  body  or  of  government  direction,  the
investigating authority bears the burden of proof when making a positive finding. Such
findings must be made on the basis of positive evidence, taking account of the totality
of the  facts  on the record  and  available  to  the  authority,  and  weighing  these  facts  in
accordance  with  the  considerations  above.  In  appreciating  the  facts  in  question,  due
account must be taken, in  accordance with Article 28 of the basic Regulation, of the
failure of certain parties to cooperate fully with the investigation, which has in some

5

(17) 

(18) 

cases necessitated the use of information from other sources. In this particular case, it
has become apparent that the GOK failed to provide a number of requested documents
on  meetings  relating  to  the  future  of  Hynix.  The  GOK  also  failed  to  inform  the
Commission  that  such  meetings  took  place,  in  spite  of  clear  requests  being  made  to
this end in the questionnaire and at the on-spot verification. The GOK has been made
aware of the consequences of non-cooperation in accordance with Article 28 (1)  and
(6) of the basic Regulation. In view of this lack of cooperation, it has been necessary,
in addition to taking account of relevant GOK documents submitted by other parties,
to  use  information  from  secondary  sources,  including  from  the  Korean  press.  Such
information has been viewed with special circumspection, the GOK and Hynix given
the opportunity to comment on it, and, where practicable has been cross-checked with
other independent sources.

In its comments on the final disclosure GOK objected to the conclusions made that it
had withheld important information in relation to certain documents and meetings and
had  not  fully  co-operated  with  the  investigation.  GOK  claimed  that  the  Commission
had posed imprecise questions and that the documents and meetings were not covered
by the Commission's requests. It is noted that the questions posed in the questionnaires
as  regards  each  individual  measure  investigated  as  well  as  during  the  verification
visits, were clear and unambiguous and referred specifically to any GOK involvement
in  any  meetings  concerning  the  measures  under  investigation.  Thus  the  assertion  of
GOK that they did not consider this information to be covered by the questions asked
is not found to be convincing.

It  is  also  recalled  that  a  number  of  Korean  banks  failed  to  co-operate  with  the
Commission  in  the  investigation.  In  particular,  KorAm  Bank  and  Citibank  failed  to
respond  to  deficiency  letters  concerning  their  response  to  the  questionnaire  and,
therefore,  to  provide  necessary  information.  Kookmin  Bank,  Korea  First  Bank  and
Shinhan  Bank  refused  to  accept  on-spot  verification  of  their  responses  to  the
questionnaire. All banks were informed that their non-co-operation may have adverse
effects on the outcome of the investigation with regard to their  client Hynix and that
any  findings  may  be  made  on  the  basis  of  the  facts  available  in  accordance  with
Article 28 of the basic Regulation. They were  also given an opportunity to comment
and  the  consequences  of  the  non-cooperation  were  made  known  to  them.  Similarly,
Hynix has to be considered as a partial non-cooperator in this investigation. Its failure
to allow its financial advisor to cooperate, seriously impeded the investigation.

(iii) Financial situation of Hynix

(19)  As  a  general  remark  it  is  recalled  that  the  financial  situation  of  Hynix  was  critical
during recent years including the investigation period. The company was loss making
even during 2000, a year generally considered to have been very good for the DRAMs
industry. It is noted that at the  end of 2000, Hynix had accumulated more than USD
9,46 billion of liabilities. This was almost twice its net worth and more than four times
the value of the market capitalisation of the company.5 Moreover, the majority of these
liabilities  were  maturing  throughout  2001  when  the  company  was  facing  serious
liquidity  problems.  Even  GOK  recognised  already  in  November  2000  "the  cash
crunch  of  Hyundai  Electronics".  At  the  beginning  of  2001,  investment  analysts  like
Morgan Stanley and UBS Warburg predicted that the company would not be able to

5

Hynix business plan for 2001 filed with the FSC, 21 March 2002.

6

                                                
generate  cash  from  internal  cash  flow  or  asset  disposals  to  pay  off  its  maturing
liabilities.  In  October  2001,  when  the  bailout  measures  subject  to  this  investigation
where decided upon, Hynix's debts were six times its equity.

(20)  The financial ratios of Hynix according to so called Altman Z-score model, designed
specifically to predict the likely failure of Korean companies, were in  1999-2001  far
worse  than  other  Korean  companies  that  actually  did  fail.  The  Hynix  scores  were
700%  higher  than  the  threshold  level  of  a  company  in  severe  financial  distress.6
Hynix's current and quick ratios were indicative of a company with totally inadequate
liquidity to cover obligations7. Hynix's net profit margin, return on assets, and return
on  equity  were  negative  in  nearly  every  year  since  1997,  with  net  margins  reaching
negative 24,3% in 2000 and  a negative  93,83%  in  2001.  In every  year  from 1997 to
1999,  the  company's  cash  flow  from  operations  was  not  enough  to  cover  even  one
sixth of its debt or total liabilities. Hynix would have required additional cash flows of
KRW  2  trillion  in  2000  and  KRW  4,5  trillion  in  2001  merely  to  meet  its  debt
repayment schedule during that period. In January 2001 in a UBS Warburg report, the
firm reported that bankruptcy concerns had depressed Hynix shares and that investors
were concerned that Hynix would have insufficient cash flow to repay maturing debt
and be faced with potential bankruptcy should it not be able to refinance its debt.

(21)  The 2001 financial accounts also discounted the possibility of future financial success
for  Hynix,  stating  that  the  "entire  normalisation  of  the  company's  operation  requires
the  continuous  support  from  creditor  banks  until  the  selling  price  of  semiconductor
products sufficiently recovers". These facts indicate that both the history and the future
of  Hynix  was  characterised  with  its  dependency  on  financial  assistance  from  its
creditors. Hynix had during the IP reached a point where it was unable to finance its
operations by the returns generated by its activities.

(22)  The deteriorating situation of Hynix in 2001 was also reflected in its credit rating. At
the  beginning  of  January  2001  the  rating  of  Hynix  was  investment  grade  BBB-
according  to  the  Korean  rating  agencies  and  a  speculative  grade  B  by  Standard  and
Poor's.  The  Korean  agencies  downgraded  Hynix  to  speculative  BB+  grade  on  22
January 2001. The Standard and Poor's rating was downgraded to B- in March 2001,
CCC+ in August 2001 and "selective default" ('SD') in October 2001.

(23)  The  highest  rating  assigned  by  Standard  and  Poor's  is  AAA.  This  indicates  an
extremely strong capacity to meet financial commitments. AA rating indicates that this
capacity  is  very  strong.  A  is  more  susceptible  to  the  adverse  effects  of  changes  in
to  meet  financial
circumstances  and  economic  conditions,  but 
commitments  is  still  strong.  BBB  indicates  that  adverse  economic  conditions  or
changing  circumstances  are  more  likely  to  lead  to  a  weakened  capacity  to  meet  the
financial  commitments.  Ratings  BB,  B,  CCC,  CC  and  C  are  regarded  as  having
significant  speculative  characteristics.  A  BB  rated  company  already  faces  major
ongoing  uncertainties  or  exposure  to  adverse  business,  financial,  or  economic
conditions that  could lead to the  company's  inadequate  capacity  to  meet  its  financial
commitments. As regards B, adverse business, financial, or economic conditions will
likely  impair  the  company's  capacity  to  meet  its  financial  commitments.  CCC  is

the  capacity 

6

7

Expert  Report  of  Professor  Antihony  Saunders  in  the  Matter  of  the  Countervailing  Duty  Petition  on
behalf of Petitioner: Micron Technology, 10 March 2003, ('Saunders Report'), 30-35.
Saunders Report, 20-21.

7

                                                
currently vulnerable to non-payment and dependent on favourable business, financial
and economic conditions to meet its commitments. CC means that the company thus
rated  is  currently  highly  vulnerable  to  non-payment.  The  rating  C  may  be  used  to
cover a situation where a bankruptcy petition has been filed or similar action has been
taken but payments on this obligation are being continued. SD or D indicates a failure
to pay a financial obligation. SD is assigned to a company which can be expected to
default  selectively,  namely  continue  to  pay  certain  classes  of  obligations  while  not
paying others. The worst rating is D, which is normally used only where a default has
actually occurred. It is not prospective as are the other ratings. The ratings from AA to
CCC  may  be  modified  by  the  addition  of  a  plus  or  minus  sign  to  show  relative
standing within the major rating categories. The four highest categories, AAA, AA, A
and BBB are generally recognised as being investment grade. Debt rated BB or below
generally is referred to as speculative grade. The term “junk bond” is merely a more
irreverent expression for this category of more risky debt8.

(iv) Public interest considerations

(24)  The  financial  difficulties  of  Hynix  considerably  increased  following  the  acquisition
and  subsequent  merger  with  LG  Semicon  Co.,  Ltd  in  1999.  The  information  on  the
record  indicates  that  the  1999  acquisition  and  subsequent  merger  between  LG
Semicon and Hynix was not based on market principles, but was forced upon them by
the  GOK  as  a  part  of  the  so  called  "big  deal"  policy.  GOK  felt  that  three
semiconductor  companies  would  be  too  many  in  a  weakening  market  situation,  and
wanted to reduce them to two to consolidate and streamline the core competencies of
the companies. As a result of the forced acquisition and merger Hynix had to take over
LG  debt  and  pay  to  it  a  considerable  amount  as  an  acquisition  price,  which  almost
doubled  its  own  liabilities.  The  GOK  itself  could  be  said  to  have  contributed  to  the
ever-worsening financial situation of Hynix. As Hynix situation worsened further after
the merger,  it  was  widely  perceived  that  GOK  felt  compelled  to  protect  Hynix  from
failure since it had a responsibility to take care of the "big deal" companies.9

(25)  The  information  on  the  record  also  indicates  that  GOK  considered  Hynix  far  too
important  for  the  Korean  economy  to  be  left  to  fail.  Hynix  accounted  for  4%  of  the
Korean  exports  in  2001.  It  employed  24.000  people  and  a  far  greater  number  in
upstream  and  downstream  industries.  Semiconductors  was  nominated  as  one  of  the
strategic export oriented industries of Korea, which also was the reason of the forced
merger following the GOK "big deal" policy.

(26) 

In  November  2002,  Korea’s  Grand  National  Party  (’GNP’)  completed  a  study
regarding  GOK  mismanagement  of  funds  in  recent  years.  It  included  an  extensive
section on the bailout of Hynix and other Hyundai companies.10 The GNP declared the
bailout  of  Hynix  and  other  Hyundai  companies  as  a  major  setback  to  its  efforts  to
bring about market-based reform. The GNP observed that if market principles were to
be kept, the Hyundai group’s subsidiaries including Hynix should have been bound by
the  same  market  principles  as  other 
the
administration forced financial institutions to extend loans to the Hyundai Group and
mobilised  GOK-invested  banks  and  other  GOK-funded  or  invested  institutions  to

troubled  businesses.  Nevertheless, 

8

9

10

Standard and Poor’s, Corporate Ratings Criteria, www standardandpoors.com.
Private Financial experts Verification report, meeting 6 at 14.
Public Fund Mismanagement Report,  Special  Committee  on  Parliamentary  Inspection  of  Public  Fund
Administration, Grand National Party, November 2002.

8

                                                
extend  considerable  amounts  to  the  Hyundai  group.  With  respect  to  Hynix  in
particular,  the  GNP  determined  that  the  GOK  had  steered  some  KRW  13,7  trillion
(USD 10,3 billion) in public funds to Hynix. The GNP also attributed the GOK forced
merger  of  Hynix  and  LG  Semicon  to  Hynix’s  later  difficulties,  an  action,  which
according to it was undertaken, with total disregard for market principles. In defending
the  GOK  measures  to  finance  Hynix,  a  GOK  official  stated  that  the  GOK  was  only
doing  what  was  necessary  to  save  companies  that  were  strategically  important  to
Korea.

2.

Tax reserves, tax exemption and tax credit

(27)  Following the imposition of provisional measures no comments which could alter the
findings  set  out  in  recitals  (17)  to  (25)  of  the  provisional  Regulation  were  made.
Therefore, these findings are hereby confirmed. Since any subsidy found for Samsung
was  de  minimis,  no  definitive  countervailing  measures  should  be  imposed  on  this
company.

3.

Syndicated loan of KRW 800 billion (January 2001)

(28)  As set out in the provisional Regulation, it was provisionally concluded that there was
insufficient  evidence  to  make  a  positive  finding  of  a  subsidy  and  it  was  therefore
decided not to countervail this programme. Some interested parties disagreed with this
conclusion and have asked for the provisional finding to be reviewed. They argue that
under  normal  market  conditions,  a  company  in  a  comparable  financial  situation  to
Hynix would not have obtained financing from commercial sources.

(29)  One  interested  party  argued  that  Hynix  was  not  creditworthy  at  the  time  of  the
measure  and  therefore  the  GOK  direction  is  the  only  possible  explanation  for  the
creditors'  decision  to  extend  new  lending  to  Hynix.  Hence,  they  argued,  the  loan
conferred  a  benefit  to  Hynix  and  should  be  countervailed  in  full.  Furthermore  that
interested party argued, the syndicated loan also conferred a benefit to Hynix because
the  loan  itself  could  not  have  been  granted  without  the  Financial  Supervisory
Commission's11 ('FSC') selective waiver of legal lending limits. GOK directed FSC to
raise  the  legal  lending  limits  of  certain  banks  to  ensure  the  existence  of  enough
participants to raise the KRW 800 billion loan.

(30)  Since  the  publication  of  the  provisional  Regulation,  new  information  of  the  GOK
directing  FCS  to  raise  the  legal  lending  limits  of  some  banks  participating  in  the
syndicated loan has been obtained. The Commission's provisional findings as regards
this measure should therefore be reassessed  in the  light  of  the  new  information.  The
interested parties, Hynix and GOK, were specifically invited to comment on the new
information and their comments have been taken into account in the reassessment of
this measure.

(31)  According  to  Article  35  of  the  Banking  Act  of  Korea,  "no  financial  institution  shall
extend credits exceeding 25/100 of the relevant financial institution's equity capital to
the  same  individual,  corporation  and  person,  or  20/100  to  the  same  individual  or

11

FSC  was  established  under  the  Act  on  Establishment  of  Financial  Supervisory  Agencies  in  1996.  It
supervises financial institutions and also enacts or amends separate supervisory regulations for different
financial sectors. It is funded by GOK. It is considered as a public body in the meaning of Article 1(3)
of the basic Regulation.

9

                                                
corporation"12.  FSC  can,  however,  approve  exceeding  these  ceilings  on  the  basis  of
Article 20(3) of the Enforcement Decree of the Banking Act, which lists specific cases
in which such approval can be granted. Without FSC approval, banks  cannot  exceed
the legal lending limits laid down in the Banking Act.

(32)  On 28 November 2000, a letter from the Ministry of Finance and Economy, signed by
the Minister of Finance and Economy, was sent to the President of the Korea Export
Insurance Corporation ('KEIC') and the President of the KEB. The letter transmits the
results  of  the  discussion  on  "alleviating  the  cash  crunch  of  Hyundai  Electronics13",
which  was  on  the  agenda  of  the  Economic  Ministers'  meeting  held  on  the  same  day
(November 28). The letter orders the recipients to make sure that themeasures decided
would be "carried out perfectly". The letter also states that the measures to help Hynix
were initiated by the Financial Supervisory Service. The letter orders KEB to request
an extension of the credit ceilings on behalf of the creditor financial institutions, which
according  to  the  results  of  the  Economic  Ministers'  discussions  would  be  subject  to
special approval by the FSC. The Minister thereby imposed on KEB an obligation to
apply for the extension and on FSC to approve such an application.

(33) 

(34) 

(35) 

In December 2000, KEB filed the request for approval of this extended credit limit for
Hynix  financing  and  submitted  similar  requests  for  Korea  First  Bank  ('KFB')  and
KDB.  In  the  FSC  decision  it  was  explained  that  these  banks  intended  to  grant  a
syndicated  loan  and  a  D/A  facility  (documents  against  acceptance  backed  loans)  to
Hynix.  FSC  approved  these  requests  on  the  basis  of  Article  20(3)1.3.  of  the
Enforcement  Decree.  This  provision  allows  FSC  to  extend  the  ceilings  "when  it
recognises that it is inevitable for the industrial development… or the stability of the
national  life."  This  provision  is  a  public  interest  provision  and  shows  that  from  the
GOK point of view, the granting of the extra credit was a public interest issue.

It  is  noted  that  according  to  the  minutes  of  the  relevant  FSC  meeting,  the  FSC
Commissioners approved the increase in the credit ceiling for Hynix financing because
Hynix was too big and too important to fail. In the minutes the following is explained:
"The  semiconductor  industry  is  a  strategic  industry;  after  Hynix's  merger  with  LG
Semicon in 1999, the company accounted for 20% of the world semiconductor market
and 4% of the Korean exports. Hynix employs 24.000 employees in the industry, and
other involved companies exceed 2.500 with over 150.000 employees. To support the
syndicated 
international
competitiveness.  Therefore,  for  the  promotion  of  the  electronics  industry  policy,  the
FSC finds it in the best interest to increase the ceiling."14

improve  Korea's 

financing  would 

loan  and  D/A 

It  is  noted  that  without  the  extension  of  the  credit  ceilings  it  would  have  been
impossible for the three above-mentioned banks to participate in the syndicated loan.
They  would  have  breached  their  obligations  under  the  Banking  Act.  The  GOK,  by
directing  FSC  to  approve  the  extension  and  by  directing  KEB  to  apply  for  such
extension,  had  effectively  directed  the  banks  to  extend  the  loans  in  a  way  that  they
would not otherwise have been able to do under Korean banking laws. It was evident
that  the  credit  limits  needed  to  be  lifted  in  order  to  provide  the  financing  to  Hynix.
Indeed,  when  GOK  and  Hynix  were  invited  specifically  to  comment  on  the  new

12

13

14

English Translation of the Korean text.
The name of Hyundai Electronics was changed to Hynix Semiconductor on 29 March 2001.
GOK Verification Report, at 16-17.

10

                                                
(36) 

information  indicating  the  GOK  direction  as  regards  the  lifting  of  the  credit  limits,
neither of them indicated in their comments that there would have been another source
of  funding  available  to  Hynix  at  the  time  of  the  measures.  Moreover,  neither  party
invoked any such probability at any other stage of the investigation.

In  accordance  with  the  findings  set  out  in  recitals  (55)  to  (59)  of  the  provisional
Regulation which are hereby confirmed, KDB is considered to be a public body within
the meaning of Article 1(3) of the basic Regulation. As regards KEB and KFB, their
participation  in  the  syndicated  loan  for  an  amount  of  KRW  100  billion  each  is
considered to be directed by GOK in pursuing the public policy goal of alleviating the
difficult financial situation of Hynix for reasons of industrial development. Therefore,
they  are  in  this  case  considered  to  be  directed  by  the  GOK  to  carry  out  a  function
normally vested in the GOK. The fact that the particular provision of the Enforcement
Decree was evoked, also demonstrates that lifting the credit limits was considered as a
question of public interest. Moreover, the GOK intervention shows that the granting of
the  extra  credit  was  a  question  of  public  interest,  which  falls  within  the  practices
normally  followed  by  governments.  Therefore,  the  participation  of  the  banks  in  the
syndicated loan fulfils the criteria explained in recital (15) above. Consequently, these
measures constitute a financial contribution by government within the meaning of the
basic  Regulation  in  Article  2(1)(a)(i)  for  KDB  and  Article  2(1)(a)(iv)  for  KEB  and
KFB.

(37)  According to Article 5 of the basic Regulation, the amount of countervailable subsidy
shall be calculated in terms of the benefit conferred to the recipient. The participation
of the three banks in the syndicated loan confers a benefit to Hynix to the amount by
which the legal lending limits have been exceeded, since this is the amount that Hynix
was able to receive only due to the lifting of the limits. Without the lifting of the limits
these amounts would not have been granted to Hynix by the banks in question. There
was no indication that any other source of similar financing was available to Hynix at
the  time  of  the  measures.  The  amounts  exceeding  the  credit  limits  are  therefore
considered as subsidies. Since these subsidies are ad hoc measures granted to only one
company, they are specific pursuant to Article 3 of the basic Regulation and therefore
countervailable.  It  is  noted,  however,  that  the  shares  of  KDB  and  KEB  of  the
syndicated  loan  are  already  countervailed  as  part  of  the  October  2001  measures.
Therefore, in order to avoid double counting, these measures are not countervailed in
the context of the January 2001 syndicated loan. As regards the KFB share of the loan
exceeding  the  legal  lending  limit,  the  information  on  the  record  indicates  that  any
benefit resulting from the lifting of the loan limits would be negligible. Therefore, it is
not countervailed in this context.

4.

KEIC guarantee for export credits in the amount of USD 600 million (January
2001)

(38)  As set out in the provisional Regulation, it was provisionally concluded that there was
insufficient  evidence  to  make  a  positive  finding  of  a  subsidy  and  it  was  therefore
decided  not  to  countervail  this  measure.  Some  interested  parties  disagreed  with  this
conclusion and asked for the provisional finding to be reviewed.

(39)  One interested party argued that the countervailable benefit of the measure should not
be  based  on  the  premiums  charged  to  Hynix,  as  was  done  in  the  provisional
Regulation. Instead the party argued that the benefit should be based on the fact that
the increase of the credit limit would not have been obtained by Hynix on the market.

11

(40) 

It was only able to obtain an increase in its credit limit because GOK instructed KEIC
(Korea Export Insurance Corporation) to guarantee the increase.

It is noted that according to the information on the record, the banks extended the D/A
(documents against acceptance) ceiling only because this extension was guaranteed by
KEIC.  The  additional  credit  was  dependent  on  the  guarantee.  In  the  provisional
Regulation the premium paid by Hynix for the guarantee was examined but no subsidy
was  found  on  this  basis.  At  the  time  of  the  provisional  measures,  there  was  no
convincing evidence on the record indicating that the GOK had directed the KEIC to
issue the guarantee in question. In the questionnaires GOK had been requested to give
details of the involvement of GOK or public officials in the process of providing the
guarantee  to  Hynix,  including  details  of  relevant  meetings.  An  explanation  was  in
particular requested on the role of the  Financial Supervisory Service15 (‘FSS’) in the
process. The same questions were put to the GOK, FSC/FSS and the KEIC during the
verification  visit.  In  their  replies  these  parties  explained  that  neither  GOK  nor
FSC/FSS were allowed to interfere in the decision making process on underwriting the
Hynix guarantee.

(41)  However,  since  the  publication  of  the  provisional  Regulation,  new  information
concerning  the  GOK's  role  in  directing  KEIC  to  provide  the  guarantee  for  the
extension of the D/A facility by USD 600 million has been obtained. The provisional
findings as regards this measure should therefore be reassessed in the light of the new
information.  The  interested  parties,  Hynix  and  GOK,  were  specifically  invited  to
comment on the new information and their comments have been taken into account in
the reassessment of this measure.

(42) 

In  accordance  with  the  findings  set  out  in  recital  (32)  of  the  provisional  Regulation
which are hereby confirmed, KEIC is considered to be a public body. Furthermore, as
described above under recital (32), the Minister of Finance and Economy sent a letter
to  the  President  of  the  KEIC  and  the  President  of  the  KEB.  The  second  item  in  the
letter  reads  as  follows:  "As  for  the  provision  of  D/A  backed  loans,  the  KEIC  will
temporarily  resume  the  insurance  for  the  balance  of  the  non-negotiated  D/A”.  A
similar letter  requesting KEIC to  "take actions accordingly"  was sent  to  the  CEO  of
KEIC on 30 November 2000 by the Minister of Commerce, Industry and Energy.

(43)  A  further  letter  was  sent  to  the  same  persons,  the  President  of  the  KEIC  and  the
President  of  the  KEB,  on  10  January  2001.  This  letter  was  signed  by  three  Korean
Ministers: the Minister of Finance and Economy, the Minister of Commerce, Industry
and Energy and the Minister of Planning and Budget. The letter submitted the results
of the discussions on the acquisition of Hynix D/A at the Economic Ministers' Meeting
held on 9 January 2001. The results were the following: "(1) Have the KEIC insure the
Hynix  D/A  acquired  by  creditor  banks  by  30  June  2001,  up  to  a  total  of  USD  600
million.  (2)  As  for  the  shortage  of  reserve  payment  capacity  of  the  KEIC  fund  that
might occur in relation to this matter, support will be provided from a separate source
of funding". GOK thereby committed itself to compensate KEIC in case it needed to
pay out the guarantee and could not do so out of its own risk reserves.

15

FSS is a public agency whose main task is to carry out financial supervision under the FSC's guidance.
It is considered as a public body in the meaning of Article 1(3) of the basic Regulation.

12

                                                
(44) 

Information on the record indicates that the KEIC position at the time was that Hynix
was in a state of a technical insolvency. However, a high-level executive of the KEIC
stated at the 1 December 2000 board meeting that "we came to support this transaction
at the  direction  of  the  Minister  of  Industry  and  Resources"16.  Consequently,  several
Ministers ordered KEIC to ensure the D/A extension. In recital (35) above the public
policy  reasons  of  this  decision  are  explained,  as  expressed  by  FSC  in  the  meeting
where the measures were discussed.  KEIC  supported these measures only due to the
GOK direction. Since the banks who extended the ceiling only did so on the condition
that the extension was guaranteed, the guarantee was an essential precondition for the
loan. Therefore, the loan was given as a result of the guarantee.

(45)  Thus the guarantee was given by KEIC due to specific GOK direction in pursuing the
public policy goal of alleviating the difficult financial situation of Hynix for reasons of
industrial  development.  Therefore,  KEIC,  despite  being  a  public  body,  was
specifically directed by the GOK to carry out a function and follow practices normally
vested  in  the  GOK.  Consequently,  the  guarantee  is  a  financial  contribution  by
government within the meaning of Articles 2(1)(a)(iv) and (i) of the basic Regulation.
This  guarantee  conferred  a  benefit  to  Hynix,  since  without  the  guarantee  Hynix  was
not  able  to  receive  the  D/A  extension  of  USD  600  million.  At  the  same  time,  the
GOK’s assurance that KEIC would be compensated in case of default showed that the
premium paid by Hynix could not cover the risk undertaken by KEIC to guarantee the
D/A extension and, therefore constituted a non-commercial act. The GOK effectively
underwrote  the  risk  of  failure  of  payment  by  Hynix  without  asking  for  any
compensation for it. According to the information on the record, the banks would not
have granted the D/A facility without the guarantee. Moreover, there is no information
that  Hynix  could  have  obtained  comparable  financing  from  other  sources.  This
coverage  of  the  guarantee,  without  any  adequate  premium  being  paid,  is  therefore
considered to have conferred a benefit to Hynix within the meaning of Article 2(2) of
the basic Regulation. In view of the provisions of Article 6(c) of the basic Regulation,
since no comparable commercial loan could have been obtained without the guarantee,
the  coverage  of  the  D/A  extension  is  effectively  a  grant.  The  benefit  to  Hynix  and
thereby  the  amount  of  the  subsidy  is  the  amount  of  the  D/A  extension,  USD  600
million.

(46) 

In  its  comments  on  the  final  disclosure  GOK  and  Hynix  argued  that  KEIC  did  not
provide funds to Hynix, only insurance,  and  that  Hynix  paid  market  interest  rates  to
banks for the D/A financing. Therefore, the benefit conferred on Hynix by the measure
should  have  been  the  difference  in  costs  between  what  Hynix  paid  for  the  D/A
financing and what it would have paid without the KEIC guarantee. It is noted that the
benefit to Hynix is the whole amount of the loans which would have not been granted
in  whole  or  in  part  without  the  KEIC  guarantee  which  was  underwritten  by  GOK.
There was no indication that an alternative financing without guarantee was available
to Hynix at the time, and Hynix never raised such a possibility. Therefore there is no
benchmark for the cost  comparison requested by the parties.  In addition, Hynix paid
no  extra  premium  for  the  complete  underwriting  of  the  full  amount  of  the  loans  by
GOK.  Under  these  circumstances,  the  benefit  for  Hynix  is  considered  to  be  the  full
amount of the guarantee underwritten by GOK.

16

The Korea Economic Daily, 28.8.2001, following the disclosure of official correspondence by Members
of the National Assembly of Korea.

13

                                                
(47)  Since  the  D/A  facility  is  an  export  credit  facility,  and  is  therefore  contingent  upon
export  performance,  the  subsidy  of  USD  600  million  is  specific  in  the  meaning  of
Article 3(4)(a) of the basic Regulation and therefore countervailable. Since the subsidy
is  an  export  subsidy,  its  amount  should  be  allocated  over  the  export  turnover  in
accordance to section F(b)(i) of the Community Guidelines for the Calculation of the
amount of  Subsidy in Countervailing  Duty  Investigations  (‘the  Guidelines’)17.  Using
the  same  calculation  method  as  that  explained  in  recitals  (67)  and  (108)  of  the
provisional Regulation, but allocating the subsidy over the export turnover instead of
the  total  turnover  since  the  subsidy  in  question  is  an  export  subsidy,  the  subsidy
amounts to 5,1%.

5.

KDB Debenture Programme (January 2001)

(48)  Following  the  publication  of  the  Regulation  imposing  the  provisional  countervailing
duty,  Hynix,  GOK  and  KDB  submitted  comments  concerning  the  Commission's
findings as regards the KDB Debenture programme.

(a) Benefit conferred by the measure

(49)  Firstly,  Hynix,  GOK  and  KDB  argued  that  the  KDB  programme  was  aimed  at
temporarily providing a measure with a view to normalising the bond market and did
not  confer  a  benefit  to  Hynix.  They  argued  that  there  was  no  benefit,  since  the
programme  was  extended  to  Hynix  on  prevailing  market  terms  and  interest  rates.
Hynix also argued that since it obtained the syndicated loan in January 2001 and new
capital  via  GDR  (global  depository  receipt)  issuance  in  May  2001,  it  cannot  be
claimed that it could not refinance its bonds via the market.

(50)  As regards the argument that the KDB Programme did not confer any benefit to Hynix
since the programme was  allegedly undertaken at prevailing market  rates, it  is noted
that  according  to  the  information  submitted  by  KDB  in  its  questionnaire  replies,  the
interest  rate  after  conversion  to  new  bonds  issued  under  the  KDB  Programme  was
substantially  lower  than  the  original  interest  rate.  In  case  of  the  bonds  issued  in
January 2001 the difference was around 50% lower, representing 10 percentage points.
This  was  despite  the  fact  that  under  normal  market  conditions,  bonds  which  are
refinanced  due  to  anticipated  failure  of  the  company  to  pay  them  out  have  higher
interest  rates  than  the  original  bonds,  reflecting  the  higher  anticipated  risk  of  the
issuing  company  concerned  to  honour  them.18  Consequently,  the  evidence  on  the
record  indicates  that  the  interest  rates  applied  for  the  KDB  Programme  were  not  in
conformity with market rates.

(51)  As  regards  the  argument  that  Hynix  could  refinance  its  bonds  via  the  market,  in
particular via the syndicated loan and the GDR issuance of May, it is noted that bonds
and loans are very different instruments and cannot be directly compared. The Korean
bond market applied extremely strict conditions in 2001 and companies with moderate
credit  ratings  were  not  able  to  refinance  their  bonds  in  the  market.  As  explained  in
recital  (61)  of  the  provisional  Regulation,  GOK  itself  acknowledged  this  in  its
questionnaire  reply.  This  fact  is  also  evidenced  by  other  documents  on  the  record19.
From  July  2000  onwards  financing  conditions  in  the  bond  market  tightened

17

18

19

OJ C 394 of 17.12.1998, p.6.
The Kyunghyang Shinmun Daily, 9 January 2001; The Joong’ang Daily, 7 January 2001.
DOC GOK Verification report, p.14.

14

                                                
considerably. This reflected the greater investor sensitivity to corporate  credit risk in
the face of the sharp downturn in economic growth and the overhang of bonds issued
in  1998  or  earlier  approaching  maturity.  This  resulted  in  a  widespread  ‘fight  for
quality’ in the local bond market20. GOK also stated in its questionnaire reply that the
very  reason  for  setting  up  the  KDB  Programme  was  to  help  some  companies  with
moderate  credit  ratings  to  refinance  their  maturing  bonds,  since  this  would  not  have
been possible for them in the market. In addition, it is noted that the rating of Hynix
was downgraded from the investment grade BBB- to the speculative grade BB+ on 22
January 2001, which made its position even more difficult in this respect.

(52)  The question as to whether Hynix could have refinanced its bonds in a foreign  bond
market  also  has  to  be  addressed.  However,  there  is  no  information  on  the  record
indicating that this would have been possible. During the investigation, Hynix has not
raised such a possibility nor has it ever suggested that it tried to refinance its bonds in
a foreign bond market. It is noted that the speculative rating B given to Hynix by the
international rating agency Standard and Poor’s in January 2001 does not support such
a possibility either.

(53)  Hynix had more than KRW 3 trillion worth of bonds maturing in 200121. It received a
syndicated  loan  of  KRW  800  billion  from  its  creditor  banks  in  January  2001.
However, it is noted that it had requested a loan of KRW 1 trillion, but the banks were
only  willing  to  grant  it  KRW  800  billion. Part  of  this  amount,  KRW  300  billion,  as
explained above under recitals (30) to (37), was given under GOK direction whereby it
ordered FSC to raise the legal lending limits of some banks who were not allowed to
lend money to Hynix without this GOK intervention. The same applies to these banks
also after the syndicated loan was granted: they were prohibited from lending money
to  Hynix,  unless  their  lending  limits  would  have  been  lifted  again  for  a  specific
transaction.  It is noted that among these three banks were the two major creditors of
Hynix,  KEB  and  KDB.  This  illustrates  that  Hynix  had  reached  the  limit  of  its
possibilities  for  receiving  bank  loans.  There  is  no  indication  that  Hynix  would  have
been  able  to  borrow  additional  funds  given  the  very  considerable  amount  it  would
have  needed  to  pay  its  maturing  bonds.  Indeed,  during  the  investigation  Hynix  has
never  raised  the  possibility  of  obtaining  or  even  having  tried  to  obtain  the  needed
financing  in  the  form  of  a  loan  from  other  banks  in  the  market  at  the  time  of  the
measures.

(54)  As regards the participation of the banks in the KDB Programme, it is noted that the
information on the record indicates that on 4 January 2001  FSC  granted  a  collective
waiver  of  the  lending  limits  to  all  banks  participating  in  the  KDB  Programme.  The
FCS stated that the January 2001 waiver given for participation in the KDB Fast Track
Programme was different from other waivers in that the FSC gave pre-approval for all
banks  based  on  a  blanket  application  filed  by  KDB,  a  GOK  entity.22  The  banks’
participation in the KDB programme was thereby only possible because of the waiver,
which in this particular case was granted by using great flexibility in interpreting the

20

21

22

Structural  Change  in  the  Corporate  Bond  Market  After  the  Currency  Crisis,  BIS  Papers  No.  11,
Sungmin Kim and Jae Hwan Park, June-July 2002.
It  is  interesting  to  note  that  the  investigated  measures  KRW  800  billion  syndicate  loan,  KRW  1,2
trillion refinanced by KDB Programme and KRW 1 trillion CB purchase by creditor banks in June 2001
result in KRW 3 trillion.
GOK Verification Report, at 16-17.

15

                                                
(55) 

text  of  the  Enforcement  Decree  which  enabled  the  FSC  to  waive  the  lending  limits
under certain conditions.

Information  available  also  indicates  that  the  banks  did  not  participate  on  the  KDB
Programme on the basis of commercial considerations, but were directed to do so by
GOK  who  was  concerned  at  the  macroeconomic  consequences  of  a  possible
bankruptcy of Hynix23. This can be shown at the example of KFB: KFB, 51% owned
by  US  Newbridge  Capital,  rejected  the  GOK's  call  for  participation  in  the  KDB
Programme on 4 January 2001. KFB assessed that increased credit to Hynix was not
commercially  warranted.  KFB's  CEO  stated  that  their  decision  was  based  on  strict
principles of profit making. The purchase of the bonds of insolvent firms would push
the bank into further managerial hardship24. The FSS stated that it would ask KFB to
undertake Huyndai's bonds one more time. If the bank was to reject again and this led
to  the  collapse  of  related  companies,  FSS  would  hold  the  bank  responsible25.  When
KFB  continued  to  resist,  FSS  warned  that  by  not  complying  KFB  might  be  putting
itself at risk of losing its clients.26 The next day after KFB rejected the GOK demand,
the  GOK  agency  pulled  USD  77  million  from  the  KFB  account27.  According  to
Bloomberg,  GOK  even  threatened  to  demand  that  KFB's  main  corporate  customers
cease doing the business with the bank28. Finally KFB gave in to the GOK demands
and participated in the measures. It is recalled that KFB has  not cooperated with the
investigation  by  not  allowing  on-spot  verification  of  its  replies  to  the  questionnaire
(see recital (18) above).

(56)  As  regards  the  GDR  issuance,  it  is  accepted  that  Hynix  raised  money  in  the  capital
market through this instrument in June 2001. However, by that time 80% of its bonds
financed via KDB Programme had already matured and they had been taken over by
KDB before  that  date. The GDR  issuance was  therefore  not  helpful  as  regards  these
bonds and  another  way had  to  be  found  for  their  financing,  already  as  from  January
2001.  As  such,  the  GDR  issuance  is  not,  therefore,  an  indication  that  Hynix  would
have had access to the capital markets in January 2001. Furthermore, without the KDB
Programme Hynix would already have been bankrupt due to failure to pay these bonds
by the time of the GDR issuance. It is also noted that as explained under recitals (73)
to  (76)  of  the  provisional  Regulation,  the  Hynix  stock  price  collapsed  almost
immediately  after  the  issuance  in  June  2001  and  the  investors  who  bought  Hynix
stocks  suffered  considerable  losses.  Therefore  its  possibilities  to  raise  money  such  a
way were ruled out, in particular considering that its total liabilities still reached KRW
7,2 trillion in July 2001.

(57) 

Indeed, the timing of the measures is an important factor. It needs to be stressed that
the decision of the investors to buy Hynix GDR in June might have been influenced by
the  very  fact  that  most  of  Hynix's  maturing  liabilities  were  abolished  by  the  GOK

23

24

25

26

27

28

In January 2001 a GOK official has been recorded as having stated the following: "Hyundai is different
from Daewoo. Its semiconductor and constructions are Korea's backbone industries. These firms  hold
large  market  shares  of  their  industries  and  these  businesses  are  deeply  linked  with  other  domestic
companies. Thus, these firms should not be sold off just to follow market principles."

Korea Times, January 29 2001.
Korea Economic Daily, 6 January 20o1.
Wall Street Journal, 29 January 2001.
Business Week Online, 9 April 2001.
Bloomberg, 31 January 2001.

16

                                                
inspired KDB Programme between January and June 2001. The KDB programme was
well  known  and  attracted  a  great  deal  of  public  comment.  The  Hynix  GDR  offering
memorandum  also  refers  to  the  "KRW  2,9  trillion  anticipated  continued  availability
under  the  KDB  Programme  to  provide  refinancing  for  maturing  bonds  in  2001".
Consequently, the investors' decision to invest in Hynix in June 2001 might well have
been  influenced  by  the  belief  that  the  GOK  would  continue  making  sure  that  Hynix
did not fail29. This point is referred to also in recital (44) of the provisional Regulation.
Therefore,  the  information  on  the  record  indicates  that  the  KDB  Programme  might
have influenced the decisions of the investors to invest in Hynix in June 2001.

(58)  As  regards  the  Hynix  argument  that  its  bonds  were  resold  into  the  CBO/CLO
programme on the same terms as other participating companies’ bonds, it is noted that
the  terms  of  the  existing  CBO/CLO30  programme  were  very  different,  and  were  not
available to Hynix.

(59)  The  CBO  programme  was  created  in  order  to  increase  the  bond  financing  going  to
relatively small firms with lower credit ratings. The programme  could not have been
available to Hynix because of its size. In addition, Hynix could not have sold the same
amount  of  bonds  to  the  programme  because  of  the  concentration  limits,  which  only
allowed a maximum of 10% of the pool of bonds backing any CBO/CLO to be from
any  one  company.  It  is  also  noted  that  KDB  bought  all  Hynix  bonds,  even  those
allegedly  intended  for  the  CBO  programme.  Even  after  the  KDB  Programme  ended,
KDB still held Hynix bonds designated for sale to CBO funds. KDB also delayed the
sale  of  the  bonds  into  CBO  funds  and  retained  control  over  the  bonds  in  the  KDB
Programme even after they were placed in CBO funds, and directed their roll-over into
new long term bonds when Hynix was unable to pay them upon maturity. The Korea
Credit Guarantee Fund (‘KCGF’)31 also increased the guarantee level on CBOs from
34%  to  53%  to  account  for  the  inclusion  of  the  KDB  Programme.  Consequently,  it
cannot  be  claimed  that  the  normal  terms  and  conditions  of  the  programme  were
applied to Hynix bonds. Indeed they were treated very differently.

(60)  The  way  the  KDB  Programme  was  carried  out  is  also  very  different  from  the  way
comparable transactions would have been carried out in the market. According to the
KDB Programme, KDB bought all the maturing bonds, converted them to much lower
interest  rates  than  that  held  by  the  original  bonds,  placed  20%  of  them  to  creditor
banks  and  70% 
the  conditions  applied  differed
significantly  from  those  of  the  CBO/CLO  programme,  including  the  application  of
increased  State  guarantees.  The  bonds  were  not  sold  by  public  offering  but  through
private  placement  to  existing  creditors.  This  does  not  correspond  to  refinancing  of
bonds under market terms.

to  CBOs/CLOs.  Moreover, 

(61)  KDB  also  argued  that  the  KDB  Programme  is  not  a  subsidy  since  KDB  makes  its
decisions  on  funding  and  fund  utilisation  on  a  commercial  basis  and  is  engaged  in
profit-earning business focused on corporate finance.

(62)  As regards the KDB argument  that the  KDB Programme  is  not  a  subsidy  due  to  the
nature of the activities of KDB, it is noted that recitals (55) to (59) of the provisional

29

30

31

Reuters English News Service, 13 June 2001.
"Collateralised bond obligations" and "collateralised loan obligations".
KCGF is a special institution owned by GOK.

17

                                                
Regulation  set  out  the  reasons  why  the  financing  provided  by  KDB  constitutes  a
financial contribution by a Government within the meaning of Article 2(1)(a)(i) of the
basic Regulation. Since KDB has not provided any new evidence in its comments that
would alter the assessment made in the provisional Regulation, the conclusions set out
in recitals (55) to (59) of the provisional Regulation are hereby confirmed.

(63)  Considering the explanations in recitals (50) to (62) above, the KDB Programme can
be seen to have conferred a benefit to Hynix also bearing in mind that no comparable
financing was available to it in the market. Hynix was not able to finance its maturing
bonds  through  bank  loans,  since  it  had  exhausted  its  possibilities  of  receiving  loans
due to its already high exposure in its creditor banks  and its weak  financial situation
which did not allow further credit to be granted to it by any other bank. Refinancing of
the bonds in the bond market was not possible due to its weak credit rating which did
not  allow  the  market  to  accept  its  maturing  bonds,  as  admitted  by  the  GOK  in  its
questionnaire response. For these reasons, the conclusions on the point of existence of
benefit,  and  thereby  the  existence  of  a  subsidy,  in  recital  (61)  of  the  provisional
Regulation are hereby confirmed.

(b) Specificity

(64)  Secondly, Hynix, GOK and KDB argued that the KDB Programme was not specific.
According to  Hynix,  the Commission  had not  explained by means  of  analysis of the
terms  and  conditions  of  the  programme,  why  it  considered  that  the  mere  fact  that
several Hyundai companies participated in the programme can be considered evidence
of specificity as regards Hynix. Hynix also argued that the KDB Programme was not
specific  since  Hynix  bonds  were  resold  into  the  CBO/CLO  programme  on  the  same
terms as other participating companies’ bonds.

(65)  As  explained  under  recitals  (62)  to  (64)  of  the  provisional  Regulation,  it  was
concluded  that,  whilst  the  KDB  Programme  was  not  specific  in  law  under  Article
3(2)(a)  of  the  basic  Regulation,  it  was  nevertheless  de  facto  specific  under  Article
3(2)(c) of the basic Regulation, since three of the four criteria of that provision were
fulfilled:  the  use  of  the  programme  by  a  limited  number  of  companies,  predominant
use  by  certain  companies  and  the  granting  of  disproportionately  large  amounts  of
subsidy  to  certain  companies.  Since  specificity  in  law  was  not  claimed,  further
analysis of the terms  and conditions of the programme is  not relevant. However, the
number of firms potentially eligible under such criteria is relevant. Regarding de facto
specificity, it is concluded that the programme was only used by six companies, four
of  which  belonged  to  Hyundai  Group,  and  that  Hynix  used  41%  of  the  funds  of  the
programme. It is noted that the information on the record indicates that more than 200
companies  in  Korea  would  have  fulfilled  the  selection  criteria  of  the  programme.
Against  the  background  of  this  group  of  potential  recipients,  the  large  proportion  of
Hyundai Group of companies in the participants, and the predominant use by Hynix of
the total funding of the programme, clearly fulfils the specificity criteria under Article
3(2)(c) of the basic Regulation.

(66)  GOK  and  KDB  also  argued  that  the  selection  of  participating  companies  was
conducted  in  a  transparent  and  objective  manner  and  the  large  number  of  Hyundai
companies participating in the programme was merely coincidental.

(67) 

In the questionnaires both GOK and KDB were requested to submit the minutes of the
meetings  in  which  the  selection  of  the  companies  to  the  programme  were  discussed

18

and  the  copy  of  the  decision  by  which  Hynix  was  selected,  stating  the  reasons  for
selecting  it.  Both  GOK  and  KDB  stated  that  no  such  documents  were  ever  prepared
and  that  therefore  they  were  not  available32.  Therefore  it  was  not  possible  to  verify
how  the  selection  process  was  conducted  and  how  the  selection  body,  Creditor
Financial  Institutions  Council33  (‘CFIC’)  used  its  discretion  when  selecting  the
participants.

(68) 

In fact the information on the record indicates that GOK discretion was openly used to
pre-select  Hynix  as  a  beneficiary  and  to  concentrate  the  benefit  on  Hyundai
companies.  It  is  noted  that  KDB  announced  in  a  press  release  that  it  would  buy
Hynix’s maturing bonds both in January and in the coming months even before Hynix
was officially selected to participate in the programme34. In addition, according to the
information  given  by  KDB,  a  decision  which  bonds  to  refinance  is  taken  separately
every  month  by  the  CFIC.  It  is  remarkable  that  KDB  could  announce  already  at  the
beginning of January that it would refinance Hynix bonds in the coming months.

(69)  After the participants to the programme were announced, a lot of criticism was voiced
concerning the lack of transparency and absence of review of eligibility as regards the
selection  process35.  Other  companies,  for  example  subsidiaries  of  the  Hanwha  and
Hanjin group and Dongkuk Steel, were in a similar situation to Hynix as regards credit
ratings (BBB) and the number of bonds maturing at the same time, but they were not
selected for the programme. No explanation or justification for this was given by the
selecting authorities.

(70)  For  the  reasons  explained  above,  it  is  concluded  that  in  addition  to  the  criteria  of
Article 3(2)(c) of the basic Regulation fulfilled in the present case as concluded by the
Commission  under  recitals  (63)  and  (64)  of  the  provisional  Regulation,  the  KDB
Programme  is  also  concluded  to  be  de  facto  specific  on  the  basis  of  an  additional
criterion of Article 3(2)(c), namely the manner in which discretion has been exercised
by the granting authority in the decision to grant a subsidy.

(c) Withdrawal of a subsidy

(71)  Thirdly,  Hynix  claims  that  since  the  KDB  programme  only  lasted  for  one  year,  this
constitutes a withdrawal of the programme and hence the programme cannot give rise
to  the  imposition  of  countervailing  duties  pursuant  to  Article  15(1)  of  the  basic
Regulation.

(72) 

It  is  noted  that  the  KDB  Programme  constitutes  a  one  time,  non-recurring  subsidy
which  benefits  the  company  as  such.  Hence  there  cannot  be  a  question  about
withdrawal  as  such  in  this  context.  In  the  case  PET  Chips  from  India36,  invoked  by
Hynix as a relevant precedent, the subsidy was a recurring subsidy tied to the export of
the product under investigation. When the export subsidy programme was terminated,

32

33

34

35

36

The document "Summary of the meeting of 4 January 2001 to discuss the KDB Fast Track Programme
describes the functioning of the programme. It does not explain how the  selection of participants  was
carried out and on what basis the companies were selected.
The Council consists of the representatives of KDB, The Korea Credit Guarantee Fund and the creditor
banks.
KDB to acquire Huyndai Electronics bonds, KDB press release, 3 January 2001.
Chosun Daily, 7 January 2001; The Kyunghyang Shinmun Daily, 9 January 2001.
Council Regulation 2603/2000 of 27 November 2000, OJ (2000) L 301 /1.

19

                                                
the  exported  product  did  not  benefit  from  the  subsidy  any  longer.  The  nature  of  the
subsidy  is  therefore  very  different  and  the  PET  Chips  case  is  not  relevant  for  the
assessment of the KDB Programme.

(73)  For the above reasons, given that the benefit conferred under the KDB Programme is a
non-recurring  subsidy  allocated  over  the  period  of  five  years,  the  subsidy  is  not
withdrawn in the meaning of Article 15(1) of the basic Regulation by the programme
being terminated, because it had already been  granted  and this grant will continue to
confer a benefit during the allocation period.

(d) Calculation of the subsidy

(74)  As  regards  the  calculation  of  the  subsidy,  both  Hynix  and  GOK  argued  that  the
Commission  should  have  compared  the  interest  rates  of  the  programme  with  the
market rates and not  treated loans as  grants. Secondly, Hynix argued that KDB only
assumed 10% of the  refinanced bonds and only those bonds should be considered as
subsidy.  In  addition,  since  the  KDB  bonds  were  later  restructured  in  October  2001,
these should not be counted twice in the subsidy amount.

(75)  As  regards  the  first  submission  concerning  the  comparison  of  interest  rates,  the
Commission explained under recital (66) of the provisional Regulation the reasons for
its conclusion not to use the interest rate comparison for determining the amount of the
subsidy. According to Article 5 of the basic Regulation, the subsidy is determined on
the basis of the benefit conferred on the recipient. As explained above  under  recitals
(50)  to  (63),  the  benefit  received  by  Hynix  was  not  conferred  by  the  interest  rates
applied  by  the  KDB  Programme,  but  the  fact  that  without  the  KDB  Programme  it
would have been forced to pay back its bonds and since it had no liquidity to do so, it
would have gone bankrupt. There was no other source of funding available to Hynix,
and according to the information on the record, this appears to be the reason for setting
up the KDB Programme in the first place. The benefit to Hynix was conferred by KDB
buying its maturing bonds in its place when no market operator was willing to provide
Hynix  the  means  to  finance  this  operation.  For  these  reasons  the  amount  of  KDB
financing for purchasing Hynix bonds is determined to constitute the subsidy.

(76)  As regards the treatment of loans as grants, the situation has to be assessed  from the
point of view of the granting authority at the time of the measures. Section E(b)(v) of
the  Guidelines  stipulates  that  if  at  the  time  of  the  granting  of  a  loan  it  is  already
evident to the granting authority that it will not recover its money, the loan should be
considered  as  a  grant.  In  the  present  case,  although  the  KDB  financing  under  the
Programme is not entirely the same as a "loan", it is a very similar transaction so that
the  same  principles  should  apply.  The  question  is  whether  KDB  had  a  reason  to
believe that it would recover its financing or not. The information on the record shows
that  at  the  time  KDB  assumed  the  Hynix  debt,  it  was  evident  that  KDB  would  not
recover the money it had spent on buying the Hynix bonds. In fact the information on
the  record  indicates  that  KDB  did  not  even  foresee  a  recovery  of  its  expenditure.
Indeed, the amount budgeted for the KDB total Programme was originally KRW 6,2
trillion,  of  which  KDB  had  already  allocated  nearly  half,  KRW  2,9  trillion,  for  the
purchase of Hynix bonds. The programme was not established on the basis of earning
profit or even breaking  even, but there was just  a considerable  amount of money set
aside  to  be  spent  on  the  purchasing  of  maturing  bonds  of  the  selected  companies.
Moreover, even if KDB would have expected to recover its expenditure, it was evident
at  the  time  the  financing  was  granted  that  Hynix  would  not  be  able  to  repay  the

20

amounts  to  KDB.  Hynix  had  already  huge  debts  and  the  reason  why  KDB  had  to
interfere  was  that  Hynix  had  no  money  to  pay  its  maturing  bonds  and  had  no
possibility to raise such amount in the market at the time when the maturity was due. It
also needs to be noted that the amount foreseen to be spent on Hynix bonds from the
start was considerable in comparison to Hynix's turnover; KRW 2,9 trillion was more
than 70% of the Hynix 2001 turnover.

(77)  That  Hynix  was  not  going  to  be  able  to  repay  this  new  financing,  became  evident
during  the  course  of  the  programme,  as  its  position  was  reviewed  monthly  in  the
context of decisions  by  the  banks  on  which  bonds  should  be  purchased  each  month.
Hynix's rating was already downgraded on 22 January 2001, immediately after it was
accepted to the programme and again in March, during the running of the programme.
The speculative grade given to Hynix at the end of January should have already been
taken  into  account  when  the  January  decision  on  purchasing  bonds  was  taken.  In
March  2001,  Hynix  was  downgraded  to  B-  which  in  fact  should  have  disqualified  it
from  the  KDB  Programme  according  to  the  criteria  of  the  Programme.  However,  in
both these months Hynix bonds were financed by KDB regardless of the deteriorating
situation of the company reflected in the decrease of its rating. Moreover, the record
contains  no  evidence  indicating  that  KDB  had  in  fact  recovered  more  than  those
amounts that Hynix was supposed to pay under the conditions of the programme37. In
the  provisional  findings  these  amounts  were  taken  into  account  and  deducted,  as
explained under recital (65) of the provisional Regulation.

(78) 

In respect of the second argument submitted, Hynix argued that KDB only held 10%
of the refinanced bonds and only those bonds should be considered as a subsidy. It is
recalled  that  subsidy  is  a  financial  contribution  from  a  government  which  confers  a
benefit  on  the  recipient.  As  already  indicated  under  recital  (48)  of  the  provisional
Regulation,  the  first  step  in  the  programme  is  that  KDB  buys  all  the  matured  bonds
falling  under  the  programme  directly38.  The  benefit  conferred  to  Hynix  by  this
financial contribution is bestowed in the  fact  that  KDB  buys  these  bonds  for  Hynix:
the  financial  contribution  of  KDB  should,  under  a  normal  market  transaction,  be
assumed by Hynix. The amount of the benefit determines the amount of the subsidy.
The  fact  that  according  to  the  terms  of  the  programme  KDB  itself  is  supposed  to
eventually  hold  only  10%  of  the  bonds,  cannot  change  this  conclusion,  since  KDB
provided  a  much  greater  amount  up-front  and  in  doing  so,  assumed  the  risks  and
liabilities connected with the buying of all the refinanced bonds.

(79)  Hynix  thirdly  argued  that  since  the  KDB  bonds  were  later  restructured  in  October
2001,  these  should  not  be  counted  twice  in  the  subsidy  amount.  It  is  noted  that
verification  of  the  information  on  the  record  indicated  that  KRW  59,4  billion  of  the
bonds falling under the programme were indeed included in the debt to equity swap.
This  amount  was  deducted  from  the  total  amount  of  the  October  200139measures  as
explained below in recital (166). Hynix also argued that part of the KDB bonds held
by banks were included in the CBs purchased by the banks in June 2001. The amount
of  KDB  bonds  should  therefore  be  deducted  from  the  CB  amount  in  order  to  avoid

37

38

39

The participating company had to repurchase 3%/5% of any CBO/CLO issued under  the  programme.
See recital (48) of the provisional Regulation.
Bonds falling under the programme are 80% of the bonds maturing under certain period. Hynix pays the
20% of its maturing bonds under the conditions of the programme.
The  information  on  the  record  also  indicates  that  in  June  2002  KDB  still  held  KRW  82,4  billion  of
bonds falling under the KDB Programme.

21

                                                
double-counting. It is noted that the total amount of CBs purchased in June 2001 was
swapped for equity in October 2001 and that the whole amount of the CBs, inclusive
of the KDB bonds, is therefore deducted from it, as explained below in recital (166).

(80)  For the reasons explained in recitals (50) to (79) above, it is concluded that the KDB
Programme  conferred  a  benefit  on  Hynix  since  a  comparable  financing  was  not
available to it in the market. Hynix was not able to finance its maturing bonds through
bank  loans,  since  it  had  exhausted  its  possibilities  for  receiving  bank  loans  and
refinancing  of  the  bonds  in  the  bond  market  was  not  possible  due  to  its  weak  credit
rating.  The  financing  provided  through  the  KDB  programme  therefore  constitutes  a
subsidy within the meaning of Article 2 of the basic Regulation. The subsidy is found
to  be  de  facto  specific  to  Hynix,  and  therefore  countervailable  pursuant  to  Article
3(2)(c)  of  the  basic  Regulation.  Pursuant  to  Article  5  of  the  basic  Regulation  the
amount  of  the  subsidy  is  the  amount  of  the  benefit,  which  is  the  amount  of  the
financing provided under the programme. Therefore, the conclusions and the subsidy
amount of 4,9% laid down in recital (67) of the provisional Regulation as regards the
KDB Programme are hereby confirmed.

6.

(81) 

Bond purchase by creditor banks in the amount of KRW 1 trillion and the first
roll-over of debt (May 2001)

In  the  provisional  Regulation,  it  was  provisionally  concluded  that  there  was
insufficient  evidence  to  make  a  positive  finding  of  a  subsidy  and  it  was  therefore
decided not to countervail this programme. Some interested parties disagreed with this
preliminary finding and asked for it to be reviewed.  One interested party  argued that
the conditions applied to Hynix were not in conformity with its financial situation at
the time and were therefore not market based. According  to it, GOK also influenced
the creditor banks and the success of the measures.

(82)  Another  interested  party  argued  that  Hynix  would  not  have  obtained  the  May  2001
bailout  without  GOK  intervention  due  to  its  weak  financial  condition  and  that  GOK
specifically directed Hynix's creditors to participate in  the  bond  purchase.  In support
of this claim,  this  party  referred  to  a  meeting  convened  by  GOK  on  10  March  2001
between GOK officials, presidents of the Hyundai creditor banks, officials of FSC and
the President of Hynix.

(83) 

In  the  questionnaires  sent  to  GOK,  it  was  asked  whether  GOK  or  any  other  public
body  was  involved  in  the  decision  process  of  the  banks  to  undertake  the  May  2001
measures. The same was asked in the questionnaires sent to the banks. The minutes of
any meetings attended by the GOK or other public officials were also requested. All
parties  replied  that  GOK  was  not  in  any  way  involved  in  the  May  restructuring
process.  Therefore,  information  relating  to  any  such  contacts  was  not  available  and
could neither be addressed during the investigation before the provisional findings nor
verified during the verification visits.

(84)  After the publication of the provisional findings, information from secondary sources,
including  press  articles,  indicating  that  such  contacts  indeed  had  taken  place  were
submitted by  interested  parties.  This  information  referred  to  meetings  that  had  taken
place on particular dates and to contacts between the banks and the FSS/FSC officials.
The  interested  parties,  Hynix  and  the  GOK  were  particularly  invited  to  review  this
information  and  comment  on  it.  The  parties  failed  to  rebut  this  new  information.  In
fact, both of them admitted expressly that the FSS representatives were indeed present

22

(85) 

in the meeting of  10 March 2001  and had  had  contacts  with  banks  in  the  context  of
these measures, as indicated by the new information.

It  is  noted  that  the  new  information,  and  the  confirmation  of  its  accuracy  by  the
interested parties, contradicted the statements given by GOK, officials of FSC and FSS
and the banks involved at the  earlier stages of the investigation. GOK and the  banks
have consistently argued that neither GOK nor other public officials were in any way
involved in the May 2001 measures and that FSC and FSS only carry out supervisory
functions  as regards  financial  institutions  and  did  not  intervene  in  the  daily  business
operations  of  the  banks.  Such  withholding  of  information  is  considered  to  have
impeded  the  investigation  within  the  meaning  of  Article  28  of  the  basic  Regulation,
which prescribes that in such circumstances findings may be based on best information
available.  The  parties  in  question  were  informed  of  the  consequences  of  their  non-
cooperation. It is also noted that the  financial  advisor of Hynix at the time, Citibank
Seoul, failed to fully cooperate with the investigation. Citibank has explained that this
non-cooperation  was  due  to  the  intervention  of  Hynix.  Citibank,  being  the  financial
advisor of Hynix at the time of the measures, possessed important information both on
the  financial  condition  of  Hynix  and  the  measures  under  investigation.  By  not
allowing  Citibank  to  cooperate,  thereby  preventing  the  investigation  to  examine  the
information  in  Citibank's  possession,  Hynix  itself  is  considered  as  having  seriously
impeded  the  investigation.  Given  the  non-cooperation  of  the  parties  as  regards
providing  information  on  the  May  2001  measures  and  the  new  information  obtained
after the provisional measures,  not rebutted  by them,  it is appropriate to reassess the
provisional  findings  in  light  of  the  new  information  and  on  the  basis  of  best  facts
available.

(86)  The  totality  of  the  facts  indicates  that  as  from  November  2000  GOK  had  been
directing  banks  and  other  institutions  to  take  measures  in  order  to  alleviate  the
liquidity problems of Hynix and to  promote  the  electronics industry policy.  This  has
been confirmed as regards  all  measures  dealt  with  above  in  the  previous  chapters  of
this Regulation. It is also noted that the further the year progressed, the worse became
the financial situation of Hynix despite of the measures taken. In March 2001 its rating
had  declined  to  B-.  Therefore,  there  is  no  reason  to  assume  that  GOK  would  under
these deteriorating circumstances suddenly stop its support to Hynix. On the contrary,
it  is  reasonable  to  believe  that  it  continued  to  support  Hynix,  in  particular  since  its
worsening  financial  situation  ensured  that  alternative  market  based  sources  of
financing were not available.

(87)  As  explained  already  above  in  the  context  of  the  assessment  of  the  three  previous
investigated measures, Hynix had exhausted its possibilities of receiving bank loans as
early  as  in January 2001 due to  its high  exposure  to  its  major  creditor  banks  and  its
weak  credit  rating.  By  March  2001  its  rating  had  been  downgraded  further  and  its
exposure  increased  due  to  the  GOK  directed  lifting  of  the  prudential  credit  limits  as
regards  some  banks.  It  had  not  serviced  its  syndicated  loan  granted  in  January  2001
and  its  liabilities  kept  cumulating  further,  despite  all  the  measures  taken  in  order  to
alleviate  its  situation.  Under  these  circumstances,  there  is  no  indication  that  Hynix
would  have  been  able  to  get  a  loan  from  the  market.  Hynix  did  not  raise  such  a
possibility during the procedure, neither did it indicate that it even tried to get further
loans either from the Korean or foreign markets.

(88)  The information on the record indicates that the banks did not appear to have had any
commercial grounds to purchase KRW 1 trillion worth of convertible bonds ('CBs') of

23

Hynix  in  June  2001.  The  evidence  on  the  record  indicates  that  the  bonds  were
purchased  in  order  to  provide  Hynix  with  cash  to  cover  its  existing  liabilities.  The
banks acknowledged the inability of Hynix to service its debts already at the beginning
of May 2001. In the Creditor Financial Institutions Council Resolution of 7 May 2001,
it is stated that Hynix could not fulfil its obligations as regards the syndicated loan for
the first quarter of 2001 and that it was highly likely that it would not be able to do so
also for the second quarter. This was stated to be a default under Article 12 of the loan
agreement. However, in order to prevent related problems like cross default, Article 11
of  the  loan  agreement  was  not  applied  for  the  first  and  second  quarter  of  2001.  The
banks thus effectively exempted Hynix from the consequences of the default under its
loan agreement. Nevertheless, they still granted new financing by purchasing the CBs
in June 2001.

(89)  Several Hynix creditor banks also increased their loan loss provisions with respect to
the Hynix debt.40 Prior to participation in June 2001 CB purchase, KorAm Bank, Hana
Bank, Shinhan Bank and Kookmin Bank increased their loan loss reserves for Hynix
by 25%. By the third quarter of 2001, these banks had classified 60% or more of their
loans  to  Hynix  as  non-performing.  It  is  recalled  that  three  of  these  banks  failed  to
cooperate with the investigation (see recital (18) above).

(90)  The banks purchased the CBs on 20 June 2001. It is noted that between mid-June and
the  20  of  June  2001,  the  Hynix  stock  price  had  sunk  considerably.  Despite  this,  the
banks purchased the CBs even though it must have been evident to them at that time
that they would not recover their money41. Within one month the banks had incurred
huge losses on the bonds. The Hynix stock price had declined sharply  and the banks
directed  certain  portions  of  the  acceptance  price  of  Hynix  CBs  as  losses  in  settling
their accounts at the end of June 2001.

(91)  The  information  received  after  the  publication  of  the  provisional  measures  and  not
rebutted  by  the  parties  indicates  that  contacts  between  the  creditor  banks  and  public
officials took place in March - May 2001. According to this information, the 10 March
2001 meeting referred to above in recital (82) was convened in order to get the banks
to support the Hyundai Group of companies42. When some banks indicated reluctance
in  providing  support  to  Hynix  since  they  were  concerned  about  the  downgrading  of
external  credibility  and  violation  of  credit  limits,  the  GOK  financial  officials  still
persuaded  the  banks  to  do  it.43  On  24  April  2001  it  was  reported  that  Hyundai
Creditors'  Association  decided  not  to  purchase  KRW  1  trillion  convertible  bonds
('CBs') requested by Hynix. Hynix  had  no  liquidity to  pay  off  its  maturing liabilities
and the proceeds of the CB issuance, KRW 1 trillion, were to be used for servicing its
existing debt. The presidents of the creditor banks, including KEB, KDB and Chohung
Bank  had  a  meeting  on  23  April  2001  in  which  most  participants  were  opposed  to
accepting  CBs  in  the  amount  of  KRW  1  trillion.44  On  the  same  day,  the  CEO  of
Citibank, Citibank being the financial advisor of Hynix at the time and the organiser of

40

41

42

43

44

Shinhan  Bank,  ING  Barings,  24  April  2001;  KorAm  Bank,  ING  Barings,  26  September  2001;  Hana
Bank, Morgan Stanley, Dean Witter, 30 October 2001; Kookmin Bank, Morgan Stanley, Dean Witter,
24 October 2001.
It is noted that the CBs purchased in May 2001 were swapped into equity or written off by the banks
only a couple of months later in the context of the October 2001 restructuring measures.
The Naeoe Economic Daily, 10.3.2001.
The Maeil Economic Daily, 11.3.2001.
Korea Times, 24.4.2001.

24

                                                
the May measures, formally requested financial support for Hynix from the GOK, and
the FSC Chairman expressed a positive position on it. Against this background, it was
reported  that  financial  support  to  Hynix,  including  acceptance  of  CBs,  had  become
more  likely.45  It  is  recalled  that  Citibank  has  also  failed  to  cooperate  with  the
investigation (see recital (18) above).

(92) 

It was  reported that KorAm  Bank,  one of the non-cooperating  with  the  investigation
banks,  refused  to  take  over  its  share  of  the  KRW  1  trillion  of  CBs  on  the  basis  that
Hynix  failed  to deliver  a  memorandum pledging to make its  best effort to reduce  its
debts.  It  is  observed  that  there  were  reports  indicating  that  as  a  response  to  this,  the
FSS stated that it would not forgive the bank if it would not participate, adding that it
will  take  stern  measures  against  the  bank,  such  as  disapproving  new  financial
instruments and subjecting the bank to a tighter audit. Following this warning, KorAm
reversed its decision and participated in the purchase of CBs.46

(93)  Considering  that  in  the  absence  of  cooperation  by  the  parties  the  final  conclusions
need  to  be  based  on  best  facts  available,  further  information,  even  if  extracted  from
secondary  sources,  should  be  observed  in  this  context.  It  is  noted  that  one  of  the
measures  originally  investigated  was  an  alleged  SGICO  (Seoul  Guarantee  Insurance
Corporation)  guarantee  for  KRW  600  billion  of  Hynix  CBs  to  be  purchased  by
investment trust  companies.  It  was  confirmed  during  the  investigation  that  this  bond
purchase never took place and therefore no guarantee was provided47. The reasons for
the failed transaction, however, were not explained. It is observed that there are reports
indicating  that  the  banks  at  the  time  required  that  in  order  for  them  to  purchase  the
CBs, the investment trust companies also needed to do so since the banks did not want
to bear all the financial burden themselves. The investment trust companies refused to
buy Hynix bonds since they claimed it was  common  knowledge  that the bonds  were
insolvent bonds and that they were not able to sell  them at  the time  when  they  were
struggling  to  recover  the  confidence  of  the  market.  According  to  the  reports,  the
investment trust companies stated that they would not be able  to  avoid criticism  that
they were investing their customers' money in an insolvent company, which could lead
to  lawsuits  against  them.  If  the  investment  trusts  were  forced  by  the  financial
authorities to accept the new corporate bonds in the amount of several billions of won
under these circumstances, the whole investment trust circle may become insolvent48.
On  the  basis  of  the  above  it  appears  that  the  banks  were  participating  in  all  the
discussions on the May 2001 measures since early March 2001 and that they were well
aware  of  the  arguments  of  the  investment  trusts  and  the  reasons  these  refused  to
subscribe  the  bonds.  The  banks  themselves  had  also  decided  not  to  accept  the  CB
purchase some weeks earlier and had acknowledged the inability of Hynix to service
its existing debt.

(94)  Following  the  disclosure  of  this  information  to  the  interested  parties,  the  parties
admitted that an FSS official was present in one meeting and that subsequent contacts
between FSC/FSS and the banks took place. It was explained that the FSS official was
only present as an observer to act as a witness for the creditors' prior commitments of
funding,  and  not  to  influence  the  creditor  banks  or  their  decision  to  extend  further

45

46

47

48

Maeil Economic, 24.4.2001.
Korea Times, 21.6.2001; Dow Jones International News, 20.6.2001.
Recital (39) of the provisional Regulation.
Donga daily, 4.5.2001; Korea Economic Daily, 3.5.2001; Maeil Economic, 7.5.2001.

25

                                                
credits to Hyundai companies. It was also explained that the "follow up phone  calls"
with the FSS/FSC officials and the creditor banks were only conducted in the exercise
of the normal prudential supervisory role of FSC/FSS. However, considering that the
parties  have  been  withholding  important  information  until  confronted  with  it  and
impeding the investigation by instructing other parties not to cooperate, it is difficult to
find  these  explanations  fully  convincing.  In  addition,  information  on  the  record
indicates that the official attending the meeting of 10 March 2001 was the FSC Vice
Chairman, i.e. a high ranking official. In these circumstances, pursuant to Article 28 of
the basic Regulation which allows the conclusions to be based on best facts available
in  cases  of  non-cooperation  by  the  parties,  it  is  concluded  that  the  banks  were  not
freely  and  independently  deciding  on  the  issue  of  the  CB  purchase  on  the  basis  of
commercial  considerations,  but  were  directed  to  buy  the  bonds  by  the  GOK.  The
information from the secondary sources referred to above supports this conclusion.

(95) 

In its comments on the final disclosure GOK  argued that account should be taken of
the fact that private investors had bought Hynix GDRs worth USD 1,25 billion in June
2001  and  that  therefore  the  banks'  decision  to  buy  Hynix  CBs  was  in  line  with
commercial considerations. It is noted that these investors must have been influenced
by  the  anticipated  continuous  availability  of  the  GOK  directed  KDB  Programme  to
refinance Hynix's maturing liabilities. Moreover, these investors did not have the same
insight in the situation of Hynix as the creditor banks. Therefore, it is not unreasonable
to conclude that  the  decision  of  the  banks  to  invest  should  have  been  different  from
that of the GDR investors.

(96)  On the basis of the best facts available it is therefore concluded that the decision of the
banks  to  purchase  KRW  1  trillion  of  Hynix  CBs  was  not  taken  on  the  basis  of
commercial  considerations,  but  was  taken  due  to  direction  by  GOK  pursuing  public
policy goals. The amount of the CBs purchased is therefore a financial contribution by
a  government  within  the  meaning  of  Articles  2(1)(a)(iv)  and  (i)  of  the  basic
Regulation.  This  purchase  conferred  a  benefit  to  Hynix  in  the  amount  of  KRW  1
trillion, the purchase price of the bonds, since comparable funds were not available to
it  in  the  market.  Hynix's  situation  had  deteriorated  further  from  January  2001  and  it
had no possibility to receive an equivalent loan from the market. For these reasons, the
amount  of  the  CB  purchase  of  KRW  1  trillion  is  considered  as  a  subsidy  in  the
meaning of Article 2 of the basic Regulation. Since this is an ad hoc subsidy provided
to only one company, it is specific pursuant to Article 3 of the basic Regulation and
therefore countervailable.

(97)  According  to  Article  5  of  the  basic  Regulation,  the  amount  of  countervailable
subsidies  shall  be  calculated  in  terms  of  the  benefit  conferred  on  the  recipient.  The
CBs purchased by the creditor banks had an interest rate and were to be paid back at
their maturity by Hynix. They are therefore comparable to a loan. According to Article
6(b)  of  the  basic  Regulation  the  first  point  to  examine  is  whether  a  comparable
commercial  loan  was  available  in  the  market  and  if  so,  the  benefit  would  be  the
difference between the interest rates applied. As explained above in recital (87) there
were no comparable loans available to Hynix in May 2001. For this reason, the benefit
conferred by the bond purchase needs to be determined on another basis.

(98)  According  to  Section  E(b)(v)  of  the  Guidelines  the  amount  of  the  loan  forgiven  or
defaulted on, will be treated as a grant. This means that if at the time of the granting of
a loan it is already evident for the granting authority that it will not recover its money,
the loan should be considered as a grant. In the present case, as explained above under

26

recitals (88) to (90), it was obvious for the banks at the time of the purchasing of the
bonds that they would not recover the money they had spent on purchasing the Hynix's
CBs. Therefore the benefit to Hynix and the amount of countervailable subsidy is the
purchase price of the bonds, KRW 1 trillion. Using the calculation method explained
in recitals (67) and (108) of the provisional Regulation, the subsidy amounts to 5,4%.

7.

The October 2001 rescue package, consisting of debt to equity swap, the second
roll-over of debt and the provision of a new loan of KRW 658 billion

(99)  Following  the  publication  of  the  provisional  Regulation,  Hynix,  GOK,  KEB,  Woori
Bank, Chohung Bank ('CHB'), Citibank Seoul and National Agricultural Cooperation
Federation  ('NACF')  submitted  comments  concerning  the  provisional  findings  as
regards the October 2001 rescue package.

(100)  The  comments  of  the  parties  are  listed  and  assessed  below.  However,  since  the
calculation  of  the  amount  of  the  countervailable  subsidy  is  an  important  question  as
regards  the  October  2001  measures,  it  is  considered  useful  to  explain  how  and
following which principles the assessment  of the amount  of subsidy  is  conducted, in
particular  considering that the October 2001 measures were granted to a company in
financial difficulties.

(a) Introduction

(101)  In the provisional Regulation, the October 2001 measures, namely the  debt-to-equity
swap, the new loan of KRW 658 billion and the extension of maturities and roll-over
of  debt,  were  considered  as  grants.  This  was  based  on  Section  E(b)(v)  of  the
Guidelines, which provides that a loan will be considered as a grant if it is forgiven or
defaulted  on.  Recitals  (104)  to  (107)  of  the  provisional  Regulation  provisionally
concluded that due to the financial situation of Hynix, no corresponding financing was
available to it in the market and that the banks knew at the time of the October 2001
measures that they would not recover their money invested/lent to Hynix.

(102)  The  first  point  to  examine  when  assessing  the  calculation  of  the  subsidy  in  cases  of
provision of financing to a company in difficulty, is the credit rating of the company at
the  time  of  the  measures.  The  rating  is  indicative  of  the  financial  situation  of  the
company  and  its  ability  to  attract  investments  or  receive  financing  at  the  given  time
since the potential investors/lenders base their decisions above all on the rating given
to the company by an independent international rating agency.

(103)  It is noted that the rating given to Hynix in October 2001 by Standard  & Poor's was
SD  -  "selective  default".  This  is  the  second  worse  rating  possible,  the  worst  being
"default", which according to Standard & Poor's criteria is not prospective, as the other
ratings, but used only when the default has actually occurred. SD is assigned when an
issuer can be expected to default selectively, that is, continue to pay certain issues or
classes of obligations while not paying others. Consequently, the rating of Hynix at the
time of the measures was very alarming to any investor/lender and did not support a
decision to grant further financing to it under commercial considerations.

(104)  The  second  point  to  examine  would  be  the  history  of  the  company  in  servicing  its
existing debts and the rating given to it by the lenders concerned.  If a company with
even a moderate rating continued to service its existing debt to some of its lenders, it
would  not  be  completely  unreasonable  for  these  lenders  to  take  this  into  account  in

27

their  internal  rating  of  the  company  concerned  and  also  consider  this  fact  positively
when  assessing  whether  further  lending  to  the  company  concerned  could  be
considered.  In  the  present  case,  however,  it  is  noted  that  Hynix  had  not  serviced  its
existing  debts  in  2001,  and  had  even  defaulted  on  the  interest  payments  of  the
syndicated loan granted in January 2001. As explained above in recital (88), the banks
announced  the  default  already  in  May  2001,  but  decided  not  to  take  the  appropriate
measures  to  address  the  situation.  Several  banks  raised  their  loan-loss  provisions  as
regards Hynix already in May 2001  and  again in October 2001 before the measures,
indicating that the further financing was already considered a loss. The internal ratings
of  the  banks  concerned  reflected  this  assessment.  The  six  banks  concerned  by  the
October  2001  measures  rated  Hynix  internally  from  "precautionary"  to  "doubtful".
Such  situation  does  not  support  a  decision  to  grant  further  financing  to  a  company
concerned.

(105)  The  third  point  to  examine  would  be  the  general  financial  situation  of  the  company
concerned.  If  the  company  is  experiencing  temporary  liquidity  problems  but  has
healthy fundamentals, it is justified for potential lenders to take this into account when
taking their credit decisions.

(106)  It  is  noted  that  the  overall  financial  situation  of  Hynix  had  been  critical  for  a  long
period.  At  the  end  of  2000,  Hynix  had  accumulated  more  than  USD  9,46  billion  of
liabilities. This was almost twice its net worth and more than four times the value of
market capitalisation of the company.49 In October 2001, Hynix's debts were six times
its equity. This situation was also well known by the banks concerned. As explained
above in recital (44), KEIC already stated in November 2000 that Hynix was in a state
of technical insolvency. Similar statements can be found in the internal reports of the
banks concerned which refer to Hynix having negative capital and excessive lending.

(107)  The financial ratios of Hynix according to so called Altman Z-score model, designed
specifically to predict the likely failure of Korean companies, were in  1999-2001  far
worse  than  other  Korean  companies  that  actually  did  fail.  The  Hynix  scores  were
700%  higher  than  the  threshold  level  of  a  company  in  severe  financial  distress.50
Hynix's current and quick ratios were indicative of a company with totally inadequate
liquidity to cover obligations51. Hynix's net profit margin, return on assets, and return
on  equity  were  negative  in  nearly  every  year  since  1997,  with  net  margins  reaching
minus 24,3% in 2000 and a minus 93,83% in 2001. In any year from 1997 to 1999, the
company's  cash  flow  from  operations  was  not  enough  to  cover  even  one  sixth  of  its
debt or total liabilities.

(108)  The 2001 financial accounts also discounted the possibility of future financial success
of Hynix, stating that the entire normalisation of the company's operation required the
continuous  support  from  creditor  banks  until  the  selling  price  of  semiconductor
products  sufficiently  recovered.  These  facts  indicate  that  both  the  history  and  the
future of Hynix was characterised with its dependency of financial assistance from its
creditors. Hynix had reached a point where it was unable to finance its operations by
the returns generated by its activities.

49

50

51

Hynix business plan for 2001 filed with the FSC, 21 March 2002.
Saunders Report, 30-35.
Saunders Report, 20-21.

28

                                                
(109)  The next point in the assessment of the basis of calculation of the subsidy would be to
see  whether  other  loans  from  commercial  sources  had  been  granted  to  the  company
concerned,  and  if  so,  under  which  conditions.  If  such  loans  were  granted,  the  terms
and  conditions  of  such  loans  could  serve  as  a  benchmark  for  measuring  the  benefit
conferred  to  Hynix  by  the  measures  concerned,  and  thereby  also  the  amount  of
subsidy.

(110)  In the present case, it is noted that Hynix could not obtain any commercial loans at any
time  in  2000  and  2001.  Hynix's  borrowing  was  exclusively  concentrated  on  GOK-
provided, GOK-directed and GOK-guaranteed loans. The largest creditor of Hynix at
the  time  of  the  measures  was  KDB,  which  held  44%  of  the  total  of  Hynix  loans  in
December 2001.52

(111)  Prior to 1998,  Hynix  had  received  loans  from  French  and  Japanese  banks,  including
the Bank of Tokyo, Societe Generale and Credit Lyonnaise. Since then, however, none
of  these  banks  has  participated  in  the  restructuring  of  Hynix.  The  outstanding  loans
from  foreign  banks,  including  those  from  Citibank  Seoul,  accounted  for  only  5%  of
the  total  Hynix  loans  in  2000-200153.  It  is  noted  that  the  assessment  of  the  role  of
Citibank is explained in recitals (130) to (133) below.

(112)  The  lack  of  participation  of  foreign  banks  suggests  that  further  investment  in  Hynix
was  not  considered  to  be  rational  and  economically  justified.  It  is  noted  that  the
outstanding  amount  of  KRW  37,5  billion  of  the  syndicated  loan  from  foreign
borrowers granted in 1996 and led by Societe Generale, was declared for default and
cross default in 2001.

(b) Financial contribution by government

(i) Comments of the parties

(113)  Hynix  and  GOK  both  argued  that  the  October  2001  package  did  not  constitute  a
subsidy since the financing provided was not granted by the GOK. Hynix argued that
as regards Citibank and KEB, no evidence was provided showing that GOK had used
its  influence  to  force  the  banks  to  accept  the  October  2001  measures.  As  regards
Woori Bank, CHB and NACF, Hynix argued that the GOK shareholding should not be
confused  with  government  control  of  credit  decisions.  It  was  further  argued  that  the
credit  decisions  were  based  on  commercial  considerations  by  each  of  the  banks
concerned.

(114)  KEB argued that GOK had played no role in the restructuring programmes in relation
to  KEB’s  commercial  decisions.  It  argued  that  GOK  has  no  special  right  either
contractually  or  under  Korean  law  that  would  allow  it  to  either  block  or  influence
KEB's  commercial  decisions.  According  to  KEB,  the  same  applies  also  to  FSS.  In
relation  to  FSS's  management  recommendations  for  the  KEB  business  operations  it
was argued that these actions fall within the scope of its ordinary activities pursuant to
the  Banking  Act  and  the  banking  Regulations  and  were  not  to  be  understood  as
meaning  any  kind  of  interference  or  involvement  on  the  part  of  FSS  or  any  other
financial supervisory authority.

52

53

Hynix business plan for 2001 filed with the FSC, 21 March 2002.
Hynix business plan for 2001 filed with the FSC, 21 March 2002.

29

                                                
(115)  Woori  Bank  argued  that,  despite  its  position  as  the  largest  shareholder,  GOK  was
prohibited  from  exercising  any  influence  over  the  Woori  bank's  decision  making
process.

(116)  CHB argued that GOK has no direct or indirect influence on its management activities.
Even if Korea Deposit Insurance Corporation ('KDIC') has a substantial shareholding
in CHB, CHB allegedly remained a commercial bank and its decisions were taken on
the  basis  of  purely  commercial  considerations.  It  argued  that  the  Memorandum  of
Understanding  ('MOU')  referred  to  in  the  provisional  Regulation  only  concerned  the
various restructuring measures imposed by the GOK in response to the 1997 financial
crisis.

(117)  Hynix and CHB also argued that other banks (Industrial Bank of Korea ('IBK'), Seoul
Bank,  Kwangju  Bank  and  Kyongam  Bank)  where  GOK  also  had  a  substantial
shareholding did  not participate in the  October  2001 package,  and  this  demonstrated
that GOK had not interfered in the business activities of any of the banks involved.

(118)  NACF argued that it was formed for the purpose of improving economical, social and
cultural status of farmers and quality of their lives. KDIC as a preferred investor was
not allowed by law  to  participate in decision  making  of  NACF.  As  such,  it  mandate
did not include implementation of public policy goals.

(119)  Citibank  Seoul  denied  being  in  any  way  affiliated  with  GOK  and  explained  that  it

participated in the investigated measures solely in pursuit of its commercial interests.

(ii) Assessment of the Comments

(120)  It is noted that it has been provisionally concluded on the basis of the principles set out
in recitals (10) to (14) above that KDB is a public body. As regards the other banks,
these were not found to be public bodies but were found to be directed by the GOK to
carry out the measures in question.

(121)  In  terms  of  demonstrating  direction,  the  fact  that  GOK  was  the  only  or  the  major
shareholder  in  some  of  the  banks,  is  an  important  point  that  needs  to  be  taken  into
account in the assessment of the situation. The amount of a shareholding by GOK, or
other  shareholders,  determines  the  extent  to  which  they  can  influence  the  decision
making process set out in company law and the articles of association of the company
concerned.  In  this  respect  it  is  important  to  refer  to  the  Korean  Prime  Ministerial
Decree  No.  408  adopted  in  November  2001,  which  addresses  management
responsibilities  in  companies  where  the  government  has  a  shareholding.  Though
Article  6  of  the  Decree  emphasises  the  importance  of  allowing  such  companies  to
manage themselves, it crucially allows the state to fulfil its full rights as a shareholder.

(122)  The  information  on  the  record  also  indicates  that  the  state  as  a  majority  shareholder
can  appoint  directors  of  financial  institutions.  As  such,  GOK  regularly  nominates  or
carries  influence  in  the  selection  of  a  CEO  and  other  members  of  a  bank's
management.54  Through  its  voting  power,  the  GOK  is  therefore  in  a  position  to
influence  the  operations  of  the  KEB,  Woori  and  the  CHB,  where  it  is  the  largest
shareholder. For example, information on the record indicates that state influenced the

54

Private Financial Experts Verification Report, Meeting 1 at 2; Meeting 2 at 6, Meeting 4 at 9, meeting 5
at 11.

30

                                                
decision  to  change  KEB's  CEO  following  poor  performance  with  Hynix  and  certain
credit card companies.55

(123)  Moreover,  it  should  be  noted  that  the  provisional  Regulation  did  not  rely  solely  on
GOK’s  shareholdings  to  prove  direction.  Recitals  (88)  to  (98)  of  the  provisional
Regulation  explained  extensively  as  regards  each  bank  the  reasons  for  which  it  was
found that GOK had exercised direction with regard to the October 2001 measures. In
addition to the explanations provided in the provisional Regulation, these findings are
now  further  reinforced  by  additional  information,  some  of  which  has  been  received
after the publication of the provisional measures.

(124)  As explained under recitals (32), (42) and (43), the records contain evidence that GOK
gave  direct  instructions  to  financial  institutions  concerning  some  of  the  measures
under  investigation.  This  information  also  indicates  that  FSS  was  involved  in  the
measures. The record also indicates that GOK coerced these institutions to participate
in some measures by threatening to impede their business operations56. It is noted that
the Commission had on several occasions asked both GOK and banks concerned about
such  involvement,  yet  all  parties  have  consistently  denied  that  there  was  any  state
involvement in relation to the measures in question.

(125)  On  3  August  2001,  briefly  before  the  October  2001  measures,  the  Korean  Deputy
Prime Minister stated in the seminar meeting of the Newspaper and Broadcast Editors
Association that in the event that the creditor group was unable to resolve the Hynix
issue, the GOK would come  forward to  make  a quick decision.  If  the  creditor  group
could not make a decision on  additional  financing  to Hynix, the  financial authorities
should decide.

(126)  As  to  the  KEB  argument  that  GOK  has  no  legal  or  contractual  right  to  influence  its
commercial decisions, it is noted that the findings of the provisional Regulation on the
GOK direction were not based on such contractual or legal rights. The findings on this
point sought to demonstrate, how GOK was able to use its power to direct KEB in a
more subtle way, for example through its position as a major shareholder. Moreover,
the  preliminary  conclusions  on  this  point  are  reinforced  by  new  evidence  received
after the publication of the provisional Regulation where GOK ministers intervened to
instruct  KEB  in  relation  to  some  measures  investigated  -  see  recitals  (32),  (42)  and
(43) above.

(127)  As  regards  FSS  and  FSC,  evidence  obtained  since  the  provisional  measures  also
demonstrates that FSS was involved in the decisions on measures providing financing
to  Hynix,  e.g.  the  letter  from  Korean  ministers  to  KEB  referred  to  in  recital  (126)
above.  As  regards  the  FSS/FSC's  role  of  carrying  out  its  supervisory  activities  in
relation to the on-going restructuring of KEB, the evidence on the record  shows that
FSC  approved  the  extension  of  KEB  lending  limits,  a  fact  which  ran  counter  to  the
restructuring  plan  which  demanded  a  reduction  of  its  excessive  credit  exposure  to
Hynix. Moreover, in the KEB financial accounts a considerable amount of Hynix debt
to  equity  swap  was  not  included  in  the  loss  calculation  of  the  troubled  loans.
Consequently, The comments of KEB on the provisional Regulation have not provided

55

56

Private Financial Experts Verification Report, Meeting 1 at 2, Meeting 2 at 6, Meeting 4 at 9.
As regards KorAm being directed to participate in the CB purchase in June 2001, Korea Times, 21 June
2001; As regards Korea First bank being directed to participate in the KDB Debenture programme, Far
Eastern Economic Review, 15 February 2001.

31

                                                
any new substantial evidence that would alter the assessment set out in recitals (90) to
(91) of the provisional Regulation. These conclusions are therefore confirmed.

(128)  As  regards  NACF,  recitals  (96)  to  (98)  of  the  provisional  Regulation  explained  the
grounds on which it was provisionally concluded that NACF was directed by the GOK
in  participating  in  the  October  2001  measures.  Even  though  the  form  of  NACF  as  a
cooperative is fully recognised, its cooperative goals to improve the economic, social
and cultural status and quality of life of farmers are also economic policy objectives to
support agriculture. It is further noted that NACF is jointly managed by the Ministry
of  Finance  and  Economy  and  the  Ministry  of  Agriculture  and  Forestry.  It  has
specialised functions as an agricultural policy bank, such as implementation of Korea's
agricultural  policy  and  provision  of  GOK  funds  for  the  agricultural  sector.  The  new
Agricultural Cooperative Law of August 1999 provides for GOK grants/support when
necessary (Article  9), allows GOK  to  take  an  equity  stake  (Articles  147  to  151)  and
enables NACF to issue Agricultural Finance Bond and requires the GOK to guarantee
it (Articles 153 and 156). The credit rating given by NACF to Hynix at the time of the
measures,  namely  857,  did  not  justify  granting  further  financing  to  Hynix.  The
comments  of  NACF  on  the  provisional  Regulation  have  not  provided  any  new
substantial evidence that would alter the assessment set out in recitals (96) to (98) of
the provisional Regulation. These conclusions are therefore confirmed.

(129)  As  regards  the  Woori  Bank  and  the  CHB58,  recitals  (88)  and  (89)  of  the  provisional
Regulation explained the reasons on the basis of which it was provisionally concluded
that Woori Bank and CHB were directed by GOK to participate in the October 2001
measures59 These conclusions on direction are reinforced by the information received
after the imposition of provisional measures and which is referred to in recitals (91) to
(94)  and  (124)  to  (125)  above.  Woori  Bank  and  CHB  have  not  provided  any  new
evidence in their comments which would alter the Commission’s conclusion as set out
in recitals (88) and (89) of the provisional Regulation. These conclusions are therefore
confirmed.

(130)  As  regards  Citibank,  as  explained  in  recitals  (93)  and  (95)  of  the  provisional
Regulation, it failed to fully cooperate with the investigation. In these circumstances,
findings with regard to its involvement in this financial package  to  Hynix  have been
established in accordance with Article 28 of the basic Regulation, i.e. on the basis of
facts available.

(131)  In  terms  of  its  role  as  a  lender  in  this  investigation  it  should  be  noted  that  the  non-
cooperation  of  Citibank  prevented  any  reliable  information  being  obtained  on  the
precise functions and practices of Citibank in relation to the financial package given to
Hynix. Thus, Citibank’s  assertions that it was not acting under GOK direction could
not be verified via a proper response to a questionnaire and a subsequent verification
visit. The same applies to the lending practices of Citibank. It should also be noted that
the failure of Citibank to co-operate significantly impeded the investigation, not just in

57

58

59

The scale being 1 to 10.
GOK owned 100 of Woori Bank and 80% of CHB.
It is also noted that an internal Woori Bank document recommending participation in the October 2001
measures states the following: "Should Hynix  go to Court receivership or be liquidated, the  effect  on
the national economy will be immense. The company accounts for 4% of the total exports and 150.000
workers, including the company itself and its upstream and downstream companies." This indicates that
public interest considerations were taken into account.

32

                                                
terms of identifying Citibank’s precise functions in relation to its role as a lender, but
also in respect to its role as the financial advisor to Hynix. Due to the non-cooperation
the true status of Citibank as regards Hynix and the nature and intensity of its overall
relationship to GOK remain unknown. The importance of cooperation and verification
visits is demonstrated by the fact that as regards some of the other banks involved in
the case, it was proper cooperation and verification that was instrumental in allowing
definitive conclusions to be drawn as regards the  relations between them, Hynix and
GOK.  What  the investigation has however  shown  due  to  information  given  by  other
parties, is that Citibank was a central figure in discussions between GOK, Hynix and
other parties involved in this case.  Indeed, Hynix stated that Citibank  should  not co-
operate in the investigation because "such disclosure may divulge information relating
to Hynix's cost, finance or accounting". It is recalled that Hynix was majority-owned
by GOK via the banks at the time of this intervention.

(132)  In these circumstances, the final findings had to be based on the facts available  with
regard  to  whether  Citibank  as  a  lender  acted  under  GOK  direction  and  whether  the
benefit to Hynix equated to the full financial contribution made by Citibank to Hynix.
In  this  respect,  it  is  uncontested  that  unlike  the  other  participants  in  these  measures,
Citibank’s first intervention as a creditor bank of Hynix was in January 2001 when the
financial situation of Hynix was already sufficiently bad to deter any other new bank
from  getting  financially  involved.  Citibank's  own  rating  for  Hynix  in  October  2001
was D  "doubtful".  Nevertheless, Citibank provided financing to Hynix. Citibank was
requested to explain their general lending policy and whether it was normal to provide
financing to doubtful companies. As already explained, Citibank did not provide any
details which would have explained their  motivation  in  participating in  the measures
investigated.

(133)  As  to  the  GOK  direction,  information  on  the  record  indicates  that  there  were
considerable  links  between  GOK,  Hynix  and  Citibank.  For  GOK  and  Citibank  these
went beyond the loans investigated. Such links can be interpreted in two ways. Firstly,
they  can  be  interpreted  as  indicating  that  Citibank  may  well  have  had  commercial
reasons  for  providing  financing  to  Hynix,  or  as  alleged  by  one  of  the  parties,  they
could  be  interpreted  as  placing  Citibank  in  a  vulnerable  position  with  regards  to
direction by GOK. Due to the non-cooperation it was not possible to establish whether
Citibank  acted  on  coercion  or  whether  this  was  in  accordance  with  their  normal
business practice. In this respect, it is recalled that the reason for non-cooperation was
to prevent access to Hynix's cost, finance and accounting data. In the absence of any
other  explanation,  this  can  reasonably  be  taken  as  an  indication  that  this  data  in
Citibank's  possession  contain  information  revealing  that  there  were  no  commercial
reasons to provide the financing in question, and that the financing was provided due
to GOK direction. This reason is also the one suggested in the complaint. In addition,
as  explained  in  recital  (94)  of  the  provisional  Regulation,  Citibank  has  had  an
unusually  close  and  symbiotic  relationship  with  GOK  since  1967,  when  it  was
authorised to operate in Korea. This close relationship between GOK and Citibank is
witnessed in the role played by Citibank in assisting GOK to extricate itself from the
Korean financial crisis of 1997. Citibank led and successfully completed Korea's bank
debt restructuring for a total of 21,75 billion USD in 1998. Moreover, Citibank helped
GOK and government related institutions to access capital markets during the Korean
financial crisis by successfully sponsoring a  4 billion  USD global  bond offering.  All
these  facts  confirm  that  Citibank  has  a  very  close  relationship  to  the  GOK.  On  the
basis of these facts, and of the refusal of Citibank to grant access to the information in

33

its possession, and failing any other verifiable evidence being available, the conclusion
to be drawn in accordance with Article 28(6) of the basic Regulation is that GOK was
involved and directed Citibank to provide the financing in question.

(134)  As  to  the  argument  that  not  all  banks  where  GOK  had  a  substantial  shareholding
participated in the October 2001 measures and that this disproved that GOK direction
was taking place, it is noted that Kwangju Bank and Kyongam Bank were about to be
merged into Woori Financial Holding at the time of the measures. As Woori Bank was
already  one  of  the  major  creditor  banks  in  the  October  2001  restructuring,  it  is
understandable  that  it  was  not  necessary  for  Kwangju  and  Kyongam  Banks  to
participate  in  the  measures  separately.  The  same  situation  applies  to  Seoul  Bank,
which GOK was planning to sell to Hana Bank following the recommendations of the
IMF. In anticipation of this sale, a rise in speculative loans on the books of the Seoul
Bank was not seen to be beneficial.

(135)  As  regards  IBK,  it  is  noted  that  IBK  is  a  specialised  bank  whose  mandate  is  to
promote  the  development  of  small  and  medium  sized  enterprises.  Its  operations  are
underwritten  by  GOK.  By  extending  further  lending  to  Hynix,  IBK  would  have
exceeded  its  mandate  in  a  very  apparent  way  which  would  have  been  extremely
difficult  to  justify.  In  fact,  by  granting  the  D/A  facility  and  participating  in  the  CB
purchase  as  regards  Hynix,  IBK  had  already  breached  its  mandate  and  further
exposure to a large company in difficulties would not have been in line with its policy
goals.

(c) Benefit conferred by the measures

(136)  KEB, Woori Bank, CHB, NACF and Citibank Seoul all argued that they participated
in the October 2001 package since they wanted to maximise their recovery rate for the
loans  already  granted  to  Hynix.  They  considered  that  the  value  of  Hynix  as  a  going
concern  was  higher  than  the  immediate  liquidation  value.  They  argued  that  their
participation in the October 2001 package was determined on the basis of their credit
evaluation  of  Hynix,  supported  by  analysis  from  outside  consultants.  It  should  be
noted, however, that Hynix has refused to provide a copy of the analysis determining
the  liquidation  value  on  the  basis  that  it  was  confidential.  Consequently,  it  has  not
been possible to assess its merits and, therefore, final findings in this regard have been
determined in accordance with Article 28 of the basic Regulation.

(137)  It  is  also  noted  that  the  position  of  the  decision  of  these  banks  to  participate  in  the
measures  is  not  consistent  with  their  own  evaluation  of  the  financial  situation  of
Hynix, and in particular with the credit rating they gave it. The banks in question rated
Hynix  at  the  time  of  the  measures  between  "precautionary"  and  "doubtful".  No
satisfactory  explanation  has  been  provided  as  to  why  in  spite  of  the  very  critical
situation of Hynix they still decided to continue with financial support.

(138)  It is noted  that  independent  banks  operating  under  market  principles  are  required  by
their shareholders to evaluate the repayment probability of the loans they make and to
take their decisions on whether to grant the loans or not on this basis. Such banks are
required  to  follow  objective  lending  criteria  and  must  answer  to  shareholders  when
losses occur, as was the case with the Hynix loans. With respect to banks participating
in the October 2001 measures, this can therefore only be explained by the fact that the
decision makers were shielded from these consequences because of the high level of
GOK ownership and factual control of the lending decisions. It should be further noted

34

that  the  argument  defending  the  merits  of  continuous  lending  to  a  heavily  indebted
company is particularly difficult to justify considering that the banks were at the same
time  swapping  debt  to  equity,  providing  new  financing  and  also  raising  the  loss
provisions  for  Hynix  loans.  This  was  based  on  their  experience  during  2001,  when
Hynix  did  not  service  its  debts,  as  explained  above  in  recital  (88).  This  indicates
clearly  that  the  banks  although  aware  that  they  would  not  recover  their  funding,
provided  it.  This  is  not  in  line  with  lending  practices  based  on  commercial
considerations.

(139)  Hynix  and  GOK  argued  that  Hynix’s  credit  rating  of  "selective  default"  was  only  a
consequence  of  the  restructuring  programme  and  should  not  have  been  taken  into
account by the banks.

(140)  This argument does not appear to have any basis in fact. It is not reasonable to insist
that  a  firm’s  credit  rating  is  not  the  determining  factor  for  potential  investors.
Moreover,  the  rating  itself  is  more  important  than  the  reasons  for  it.  Any  potential
investor planning to invest into a company examines its rating. In addition, following
the  logic  argued  by  Hynix,  the  rating  of  Hynix  should  have  been  raised  after  the
October  2001  restructuring  measures  were  carried  out.  It  never  did  however,  and
remained  at  "selective  default".  This  still  remains  the  case  today.  Clearly  the  rating
agencies  considered  the  whole  situation  of  Hynix  and  investors  operating  under
market  conditions  would  have,  and  should  have,  taken  into  account  the  credit  rating
that applied to Hynix at the time of the October 2001 measures.

(d) Calculation of the subsidy

(i) Comments of the parties and assessment of the comments

(141)  As  regards  the  calculation  of  the  subsidy,  Hynix  raised  five  points  in  its  comments.
Firstly,  Hynix  argued  that  the  debt-to-equity  swap  should  not  be  included  in  the
subsidy  calculation.  In  addition,  the  amount  of  debt-to-equity  swap  of  KRW  2,994
trillion included the loans of all fifteen banks, not only the loans of the six banks found
to have provided a subsidy. Therefore, the share of the banks not providing a subsidy
should be deducted from the total amount of the debt-to-equity swap. This point was
also raised by GOK and Shinhan Bank.

(142)  After the verification of this point, it was concluded that the share of those banks not
participating  in  the  Option  1  measures  should  indeed  be  deducted.  According  to  the
information in the records, the amount to be deducted was KRW 511 billion. The total
amount of the debt to equity swap considered as subsidy was corrected accordingly to
KRW 2,483 trillion.

(143)  The  second  point  raised  by  Hynix  is  that  the  value  of  extension  of  maturities  and
reduction  of  interest  rates,  KRW  1,586  trillion,  is  not  correct,  since  it  comprised
alleged debt forgiveness and interest rate reduction of banks which were not found to
provide  a  subsidy.  The  share  of  these  banks  should  therefore  be  deducted  from  the
total amount. This point was also raised by Shinhan Bank.

(144)  It  is  noted  that  an  error  has  occurred  on  this  point  of  calculation  of  the  subsidy.
According  to  information  on  the  record  the  amount  of  loans  subject  to  maturity
extensions was KRW 1,825 trillion.

35

(145)  Thirdly, Hynix argued that the allocation method of the subsidy was incorrect. Since
the  October  2001  package  only  referred  to  the  last  three  months  of  year  2001,  this
should be taken into account when allocating the benefit over time.

(146)  The subsidy granted to Hynix in the context of the October 2001 package was a non-
recurring subsidy. The amount of countervailable subsidy was  calculated pursuant to
Article  7(3)  of  the  basic  Regulation  by  allocating  the  amount  of  subsidy  over  the
period  of  time  which  reflects  to  normal  life  of  the  assets  in  the  industry  concerned.
According to point F(a)(ii) of the Guidelines, the allocation is done using the straight
line method, which results in equal portions of a subsidy falling on each year, one of
which being the investigation period.

(147)  The method advocated by Hynix is not reasonable, as it would artificially reduce the
benefit conferred by the subsidy. If the amount of subsidy was allocated starting from
October  2001  onwards,  the  duty  would  be  in  force  for  a  longer  period  of  time  than
when it is calculated under the normal calculation method laid down in the Guidelines,
i.e.  the  beginning  of  the  investigation  period.  A  method  referred  to  by  Hynix  would
also lead to a situation in which each and every non-recurring subsidy granted during
the  investigation  period  would  have  its  own  individual  countervailing  duty  period.
This would be impossible to implement. In  addition, if the numerator - the subsidy -
covered  only  three  months,  the  denominator  -  the  recipient's  turnover  -  would  be
reduced to cover the corresponding period. In this case, given the low level of sales in
value terms in the last quarter of 2001, this could well increase the ad valorem rate of
the subsidy. For these reasons, there is no grounds for changing the allocation method
used in the provisional Regulation. Therefore, the conclusions set out in recital (108)
of  the  provisional  Regulation  on  the  allocation  of  subsidy  over  time  pursuant  to  the
Guidelines are hereby confirmed.

(148)  The  fourth  argument  of  Hynix  was  that  the  interest  rate  added  to  the  amount  of
subsidy  was  wrongly  calculated.  The  interest  rate  should  only  have  been  added  as
regards the three last months of the year 2001, October-December, since this was the
time when the benefit was available to Hynix.

(149)  The  reasoning  rejecting  the  argument  of  Hynix  concerning  the  allocation  of  the
subsidy  over  years  in  recital  (147)  above  applies  also  here.  The  linear  allocation
method  distributes  the  benefit  of  all  non-recurring  subsidies  received  during  the
investigation  period  equally  over  the  number  of  years  in  the  allocation  period.  The
annual commercial interest rate is added to this amount pursuant to point F(a)(ii) of the
Guidelines,  in  order  to  have  an  equal  denominator  for  the  interest  rate  for  all  cases.
Since the subsidy is allocated equally over the years, the interest rate follows the same
method  and  an  equal  interest  rate  is  calculated  for  all  portions  of  subsidy  resulting
from the allocation. Any issue relating to timing of the grant during the investigation
period  is  compensated  by  the  fact  that  the  subsidy  is  being  allocated  over  the  entire
year’s sales in order to determine the subsidy amount. For these reasons, there are no
grounds  for  changing  the  calculation  method  for  the  interest  rate  used  in  the
provisional  Regulation.  Therefore,  the  conclusions  set  out  in  recital  (108)  of  the
provisional Regulation on the calculation of the interest rate pursuant to the Guidelines
are hereby confirmed.

(150)  As regards the amount of the countervailable subsidies, Hynix argued that the subsidy
amounts  should  be  allocated  on  the  consolidated  turnover  of  Hynix  instead  of  the

36

turnover of Hynix Semiconductor Inc., since the subsidies benefited Hynix and all its
subsidiaries.

(151)  The practice of the European Community in anti-subsidy investigations is to allocate
the subsidies over the turnover of the company investigated. The company is defined
as  a  separate  accounting  entity.  This  is  important,  since  the  investigation  targets
subsidies  granted  in  the  exporting  country  benefiting  a  specific  product  or  products.
Only the information relevant for this product in the exporting country is investigated
and  verified  by  the  investigating  authorities.  The  European  Community  does  not
consider the consolidated turnover an appropriate basis, since it does not relate to the
product  concerned  and  often  includes  subsidiaries  situated  outside  the  exporting
country which have not been investigated. It is noted that in the present  case,  all the
Hynix  subsidiaries  included  in  the  consolidated  turnover  are  situated  outside  of  the
Republic of Korea.

(152)  For these reasons, the subsidy amount shall be allocated on the turnover of Hynix and
the conclusion on this point in recitals (67) and (108) of the provisional Regulation is
hereby confirmed.

(ii) Final findings on the calculation of the subsidy of the October 2001 measures

New loan

(153)  In  recital  (105)  of  the  provisional  Regulation,  the  loan  of  KRW  658  billion  was
provisionally considered to  be  a  grant  pursuant to Section  E(b)(v) of  the  Guidelines,
since  the  providers  of  the  loan  did  not  expect  to  recover  the  loan  at  the  time  of
granting  it.  Hynix's  credit  rating  in  October  2001  was  "selective  default",  it  had  a
history  of  not  having  serviced  its  debt  during  2001  and  its  liabilities  exceeded  six
times its equity. In accordance with Article 6(b) of the basic Regulation, no alternative
sources of  financing were  available in the market and Hynix had never even evoked
such a possibility during the procedure. Under these circumstances it must have been
evident to the banks concerned that they would not recover their money. The benefit to
Hynix and the amount of countervailable subsidy is therefore the amount of the loan,
KRW  658  billion.  The  conclusion  of  the  provisional  Regulation  in  recital  (105)  as
regards the amount of the countervailable subsidy is therefore confirmed.

Extension of maturities and interest rate cuts of remaining loans

(154)  As regards assessing the benefit and the amount of subsidy granted by the roll-over of
debt and the maturity extensions, it is firstly noted that according to the information on
the record, roll-overs of debt are considered as new loans in Korea. The assessment of
the situation should therefore be  similar than  that of the case of  a new  loan.  In  such
case,  the  financial  situation  of  the  company  and  its  payments  history  would  be  the
decisive criteria. If it was obvious for the bank  at the time of the maturity extension
that it will not recover its loan, regardless of the maturity extension, the loan subject to
a maturity extension would be considered  as a grant, as  would  a new  loan under the
same circumstances.

(155)  In the present case, the maturities of loans were extended by three years. As explained
in  recital  (107)  above,  the  situation  of  Hynix  in  October  2001  was  so  alarming  that
none of the lending banks had a reason to believe that they would ever recover their
money.  Due  to  this  very  critical  situation  of  Hynix,  considering  the  maturity

37

extensions as grants appears to be the appropriate method of calculating the amount of
subsidy.

(156)  Another  possibility  to  calculate  the  amount  of  subsidy  would  be  to  compare  the
interest rate the company actually pays for the extended credit period to the rate it is
supposed to pay in case it is granted an extension of maturity. It is noted that normally
the  interest  rate  is  always  increased  if  the  maturity  is  extended.  This  reflects  the
increased risk of the lender and the fact that it needs to be compensated for  granting
the extension. However, the reason why this method is not appropriate in the present
case  is  the  fact  that  for  companies  in  severe  difficulties,  there  is  no  reliable  market
benchmark interest rate: the lender is free to charge any interest rate it wants in case it
decides to extend a maturity for such a borrower instead of executing its mature claim.
Even infinite interest rates can be used.

(157)  In  the  present  case  the  interest  rate  was  lowered  to  6%  for  all  loans  subject  to  a
maturity  extensions.  This  was  extremely  low,  considering  in  particular  that  the
syndicated loan granted to Hynix in January 2001 when it had the rating of BBB-, had
an  interest  rate  close  to  13%.  Considering  the  fact  that  in  October  2001  Hynix  was
rated SD and that it is normal practice of commercial banks to increase the interest rate
in  case  of  maturity  extension,  it  can  be  concluded  that  a  normal  commercial  lender
could  have  very  well  used  an  infinite  interest  rate  if  it  ever  considered  extending  a
maturity under such circumstances. Hynix could not have been able to sustain the cost
of such interest rate. Since all the evidence in the record indicated that Hynix had no
alternative  sources  of  financing  in  the  market  than  the  October  2001  measures,  the
amount of loans subject to maturity extension, KRW 1,825 trillion, are considered as a
grant  pursuant  to  Article  6(b)  of  the  basic  Regulation  and  Section  E(b)(v)  of  the
Guidelines.  The  benefit  to  Hynix  and  the  amount  of  countervailable  subsidy  is
therefore the amount of the loans subject to maturity extensions, KRW 1,825 trillion.

(158)  It  is  noted  that  the  accuracy  of  this  conclusion  is  confirmed  by  the  events  that  took
place  subsequently  outside  the  investigation  period,  in  2002.  In  June  2002  CHB  set
aside  loss  reserves  equivalent  to  80%  of  its  exposure  to  Hynix  and  planned  to  fully
provide  for  its  exposure  to  Hynix  by  the  end  of  year  2002.60  Other  Hynix  creditor
banks also increased their loan loss reserves from 80 to 100% of outstanding loans to
Hynix, clearly indicating that Hynix loans were unrecoverable61. The further bailout of
Hynix which was carried out in December 2002, only a little more than a year after the
October  2001  measures,  confirmed  these  predictions.  A  further  KRW  1,9  trillion  of
debt was swapped into equity in December 2002. It is noted that the amount of debt
subject  to  maturity  extension  in  October  2001  almost  equals  to  this  amount,  being
KRW 1,825 trillion.

Debt to equity swap

(159)  In recital (105) of the provisional Regulation the debt to equity swap was concluded to
be considered as a grant pursuant to Section E(b)(v) of the Guidelines, since no market
investor would have invested in Hynix shares at the time of the measure. In addition,

60

61

However, UBS Warburg stated in 18 September 2002 that given the high share of GOK ownership in
the bank, additional exposure in the future might prove unavoidable.
Korea Times, 25 November 2002.

38

                                                
the  GOK-directed  banks  had  also  forgiven  the  same  amount  of  outstanding  debt  to
Hynix.

(160)  According  to  Article  5  of  the  basic  Regulation,  the  amount  of  countervailable
subsidies shall be calculated in terms of the benefit to the recipient which is found to
exist during the investigation period of subsidisation. It is noted that the debt to equity
swap  was  immediately  booked  in  the  Hynix's  2001  financial  accounts  wiping  out  a
considerable amount of its debt. It is therefore reasonable to conclude that the benefit
to  Hynix  equated  to  the  full  amount  by  which  its  debt  was  reduced.  Its  financial
situation was immediately improved by that amount, a fact which can have a number
of beneficial consequences, e.g. the removal of the cost of the servicing of the debt and
using  the  saved  money  in  investments  instead.  The  same  applies  even  if  the
intervention of the banks is viewed as a type of equity infusion. The benefit to Hynix
is the full amount of that capital.

(161)  Apart  of  the  question  what  was  the  benefit  conferred  to  Hynix  by  the  measure,  the
situation from the point of view of the banks who transformed their loans into equity
in the transaction should also be analysed. According to Section E(f) (i) and (ii) of the
Guidelines,  government  provision  of  equity  capital  is  not  considered  as  conferring  a
benefit, unless the investment decision can be regarded as inconsistent with the usual
investment  practice  of  private  investors  in  the  exporting  country  concerned.  The
criterion to assess the benefit is whether a private investor would have put money into
the company in the same situation in which the government provided equity.

(162)  It is  noted  that  Hynix's  rating  was  at  selective  default  and  its  financial  situation  was
critical. Furthermore, the DRAM prices had plummeted from June 2001 onwards and
in  October  2001  they  were  in  their  lowest  point  ever.  The  stock  price  of  Hynix  had
also  fallen  72%  from  June  to  September.  This  development  just  before  the  October
2001 measures indicated clearly that investment in Hynix shares was extremely risky
and  likely  to  result  in  considerable  losses.  Under  these  circumstances,  it  can  be
concluded  that  no  normal  market  investor  would  have  invested  in  Hynix  shares  in
October 2001.

(163)  According  to  Section  E(f)(vii)  of  the  Guidelines,  the  equity  provided  can  be
considered as a grant where it can be determined that the government had no intention
of receiving any return on its investment and was in effect giving a disguised grant to
the  company  in  question.  In  the  present  case  the  GOK-directed  banks  forgave  a
considerable  amount  of  their  outstanding  loans  to  Hynix,  a  measure  considered  as  a
grant pursuant to Section E(b)(v) of the Guidelines. This measure conferred a benefit
to  Hynix  which  equals  to  the  amount  of  loans  forgiven.  The  fact  that  the  banks
received equity in the transaction, does not change this assessment, since considering
both  the  market  situation  and  the  situation  of  Hynix  at  the  time  of  the  measures,  no
other  investor  would  have  bought  Hynix  shares  and  the  banks  could  not  expect  to
receive any return to their investment under those circumstances.

(164)  For the reasons explained above, the amount of debt to equity  swap provided  by the
GOK  directed  banks  is  considered  as  grant  pursuant  to  Articles  6  (a)  and  (b)  of  the
basic regulation and Sections E(f)(v) and (vii) of the Guidelines. The benefit conferred
to Hynix by this measure, and the amount of countervailable subsidy, is the amount of
the debt to equity swap provided by the GOK directed banks, KRW 2,483 trillion.

39

(165)  It  is  noted  that  the  accuracy  if  this  conclusion  is  confirmed  by  the  events  that  took
place  subsequently  outside  the  investigation  period,  in  2002.  In  December  2002  the
Hynix  creditor  banks  carried  out  the  third  bailout  of  the  company  in  two  years.  The
measures included roll-over of KRW 3,2 trillion of debts and debt to equity swap of
KRW  1,9  trillion.  The  Hynix’s  total  liabilities  had  increased  to  more  than  USD  7,9
trillion despite  the  two  earlier  bailouts.  The  capital  write-down  plan  combined  every
21  shares  into  1  share.  This  was  done  to  mitigate  for  the  capital  erosion  of
approximately  KRW  22  trillion  that  had  resulted  from  accumulated  deficit  and
discount on capital stocks62. The banks pointed out that they had already set aside loan
loss reserves equivalent to 80-100% of the loans extended to Hynix.63 This situation,
and in particular the magnitude of the capital write-down of 21:1, clearly indicates that
Hynix equity can be considered worthless and the investment in it as loss.

(166)  The  calculation  of  the  amount  of  subsidy  has  been  revised  on  the  basis  of  the
comments of the parties and the new information that has given rise for changing the
provisional findings as regards some investigated measures. In order to avoid double-
counting,  those  subsidies  which  were  included  in  the  October  2001  measures  have
been  deducted from  them.  The  net  subsidy  amount  of  the  October  2001  measures  is
therefore  19,4%  ad  valorem.  Considering  also  the  conclusions  in  recitals  (47),  (80)
and (98) above, the total amount of the subsidy is the following:

Type of
Subsidy

D/A
Extension

KDB
Debenture
Programme

CB
purchase

October
2001
Measures

TOTAL

5,1%

4,9%

5,4%

19,4%

34,8%

E. DEFINITION OF THE COMMUNITY INDUSTRY

(167)  Following the imposition of provisional measures no comments were received on the
definition  of  the  Community  industry  as  set  out  in  recitals  (110)  and  (111)  of  the
provisional Regulation. It is therefore confirmed that the two co-operating Community
producers  representing  100%  of  the  total  Community  production  of  the  product
concerned  during  the  IP  constitute  the  Community  industry  within  the  meaning  of
Article 9(1) of the basic Regulation.

1.

Preliminary remarks

F. INJURY

(168)  As set out in recital (115) of the provisional Regulation, for reasons of confidentiality,
indices  are  used  where  necessary  to  show  the  evolution  of  trends.  Following  the
publication of the provisional Regulation Hynix claimed that whilst the use of indices
to describe its  data  is  justified  for  confidentiality  reasons,  the  mere  disclosure  in  the
provisional  Regulation  of  indices  in  the  analysis  of  the  situation  of  the  Community
industry  did  not  allow  Hynix  to  assess  with  a  sufficient  degree  of  certainty  the
situation of the Community industry. Hynix further argued that there were no reasons
of  confidentiality  not  to  disclose  to  it  the  actual  figures  of  the  Community  industry,

62

63

Public  Notice  on  other  Major  Management  Topics,  decision  made  by  Hynix  CFIC  meeting,  30
December 2002.
Korea Times, 26 November 2002.

40

                                                
since the Community industry comprises two companies. It is noted that Hynix's claim
was of a general nature, without specifying which data it would like to review in order
to allow it to assess the situation of the Community industry.

(169)  However, Article 29(5) of the basic Regulation prohibits disclosure of information for
which confidential treatment has been requested and  good  cause  has been shown  for
such  treatment.  Furthermore,  since  the  Community  DRAM  market  is  highly
concentrated  with  very  few  producers  controlling  the  market,  it  would  be  easy  for
Hynix to deconstruct any cumulative figures disclosed to it so as to acquire an accurate
understanding of confidential  business  information  of  the  two  Community  producers
composing the Community industry. Such information would be of great commercial
value  to  Hynix  and  knowledge  of  it  by  third  parties  could  harm  the  Community
industry. Finally, the use of indices to show the development of the injury indicators
over  time  is  appropriate  in  a  market  in  which  there  are  only  two  producers.  These
indices  allow  Hynix,  on  the  basis  of  its  own  Community  market  knowledge  and  the
information  placed  in  the  file  available  for  inspection  by  interested  parties  to
accurately analyse the information provided and determine with a sufficient degree of
certainty  the  situation  of  the  Community  industry.  Accordingly,  it  is  considered  that
Hynix's claim in this respect is not justified and is therefore rejected.

(170)  No further comments were received on the preliminary  remarks  as set  out  in recitals
(112)  to  (115)  of  the  provisional  Regulation.  Those  preliminary  remarks  are  hereby
confirmed.

2.

Community consumption

(171)  The total figure for Community consumption of the product concerned corresponds to
the  total  imports  plus  all  sales  in  the  Community  produced  by  the  Community
industry.

(172)  In  the  absence  of  any  new  information,  the  provisional  findings  concerning
Community  consumption  as  described  in  recital  (117)  of  the  provisional  Regulation
are confirmed. Throughout the period under consideration Community consumption of
DRAMs increased by 316% as follows:

Consumption

1998

1999

2000

2001 (IP)

In ‘000 Mbits

DRAMs

16.593.400

28.961.100

45.873.600

68.967.600

Index

100

175

276

416

3.

Imports of the product concerned into the Community

(a) Volume of imports from Korea

(173)  Following the publication of the provisional Regulation, Hynix claimed that its import
volume of the product concerned expressed in '000 Mbits increased at  a much lower
pace than was described in recital (118) of the provisional Regulation. Hynix argued
that  imports  and  market  share  (see  below)  should  be  based  on  the  total  sales  of  its
subsidiaries  in  the  Community  (resales)  of  the  product  concerned  to  unrelated
customers  in  the  Community  during  the  period  under  consideration  and  not  on  the

41

volume of its imports of DRAMs produced in Korea. It is noted that these resales as
reported by Hynix were significantly higher (up to 60%) than the actual imports also
reported  by  Hynix  during  the  first  two  years  of  the  period  under  consideration.  No
satisfactory  explanation  was  given  for  this  big  discrepancy.  It  is  considered  that
imports should comprise all sales of DRAMs produced by Hynix in Korea and sold to
its subsidiaries in the Community, plus some minor sales to unrelated customers in the
Community via a third country.

(174)  Hynix, supported by the GOK, also argued that in establishing the trend of its imports
into  the  Community  over  the  period  under  consideration,  the  imports  of  the  product
concerned  into  the  Community  from  LG  Semicon  Co.,  Ltd.  that  occurred  before  the
date  of  the  merger  of  this  company  with  Hyundai  Electronics  Industries  Co.,  Ltd.
(Hynix since 29 March 2001) should have been included in its import data. Hynix and
the  GOK  provided  certain  ad  hoc  data  in  this  respect,  i.e.  two  figures  concerning
imports in Mbits  from  LG  Semicon Co.,  Ltd  in 1998 and 1999.  In  the  alternative,  it
was  claimed  that  imports  form  Hynix  should  be  considered  for  injury  purposes  only
following the date of its merger with LG Semicon Co., Ltd in 1999.

(175)  However, LG Semicon Co., Ltd. was a distinct legal entity before Hyundai Electronics
Industries Co., Ltd. acquired it from LG Electronics Inc. and its related companies on
7 July 1999. After the acquisition, LG Semicon Co., Ltd. was renamed Hyundai Micro
Electronics  Co.,  Ltd.  and  this  company  merged  with  Hyundai  Electronics  Industries
Co., Ltd. on 13 October 1999. The acquisition of LG Semicon Co., Ltd. was therefore
a new investment for Hyundai Electronics Industries Co., Ltd. without any retroactive
effects on its  position  on  the  market.  In  other  words,  Hyundai  Electronics  Industries
Co., Ltd., predecessor of Hynix, which was the only company found to have benefited
from  subsidies,  increased  its  production  capacity.  Furthermore,  no  party,  including
Hynix, has reported any imports from LG Semicon Co., Ltd. for 1998 and 1999 in its
questionnaire response or any other submission and as such  were  not  verified by  the
Commission. LG Semicon Co., Ltd. data cannot constitute part of Hynix's subsidised
imports.  For  the  reasons  set  out  above,  the  claim  made  by  Hynix  and  the  GOK  is
rejected.

(176)  The  volume  of  imports  from  Korea  as  described  in  recital  (118)  of  the  provisional
Regulation was established on the basis of the aggregation of duly verified import data
provided  by  Samsung  and  Hynix  in  their  respective  questionnaire  responses.  The
volume of imports from Korea thus established increased by 331% during the period
under consideration. It is confirmed that imports from Hynix increased faster, i.e. by
361% during the period under consideration.

(177)  Even if import data of LG Semicon Co., Ltd. for 1998 and 1999 as provided ad hoc by
Hynix and the GOK, and which could not  be verified,  were  taken into  account, they
should  be  added  to  the  volume  of  imports  from  Korea  and  not  to  the  volume  of
imports from Hynix. The volume of imports from Korea would then have increased by
219% during the period under consideration.

Imports

1998

1999

2000

2001 (IP)

Index Korea
of which:

Index Samsung

100

100

128

110

185

181

319

414

42

Index Hynix

Index  LG  Semicon
(data not verified)

100

100

194

90

372

0

461

0

(b) Prices of imports from Korea and Hynix

(178)  Import prices were calculated using data on import quantities and values provided in
the questionnaire responses of the exporting producers in Korea. Since no  comments
were  received  on  import  prices  following  the  publication  of  the  provisional
Regulation,  the  provisional  findings  concerning  import  prices  as  described  in  recital
(119)  of  the  provisional  Regulation  are  confirmed.  Throughout  the  period  under
consideration import prices developed as follows:

Average
import price

Index Korea

Index Hynix

1998

1999

2000

2001 (IP)

100

100

105

91

99

77

23

20

(179)  With  regard  to  the  provisional  findings  on  price  undercutting  as  described  in  recital
(122) of the provisional Regulation, Hynix and the GOK claimed that the reference to
the  fact  that  price  undercutting  took  place  for  some  transactions  is  irrelevant  since
price  undercutting,  in  accordance  with  usual  practice,  is  determined  on  a  weighted
average  basis.  Hynix  further  argued  that  in  order  to  conclude  whether  its  prices
undercut  a  number  of  specific  transactions  of  the  Community  industry,  either  a
transaction  by  transaction  comparison  should  be  made  or  a  daily  comparison  taking
also into account, where possible, the time within the day.

(180)  However,  there  is  no  provision  in  the  basic  Regulation,  which  stipulates  that  price
undercutting should  be calculated on a  weighted average or  any other  specific  basis.
According  to  Article  8(3)  of  the  basic  Regulation  it  should  be  considered  whether,
when assessing the effect of subsidised imports on prices, price undercutting has been
"significant".  It  does  not  set  out  any  requirement  relating  to  the  calculation  of  the
margin  of  undercutting,  neither  does  it  provide  for  a  particular  methodology  to  be
followed in this respect. Moreover, according to the same Article, price undercutting is
not alone determinative in an injury determination, rather, it forms part of the overall
assessment  of  injury  to  the  Community  industry  and  is  conducted  so  as  to  provide
guidance in the context of the assessment of injury and causation.

(181)  Furthermore, it is noted that the DRAM market is very transparent and  characterised
by substantial price  competition.  Indeed  fixed  costs  are  very  high.  Suppliers  need  to
develop  sufficient  economies  of  scale  and  strive  to  maintain  market  shares.  Price
undercutting will occur in specific competitive situations with specific customers. But,
if one supplier offers a price to a Community  customer that undercuts the price of a
DRAM sold by a Community producer, competitive pressure quickly eliminates such
undercutting.  Thus  in  such  market,  big  customers  can  force  competing  suppliers  to
meet  any  lower  price offering.  It  is  therefore  difficult  to  establish  price  undercutting
over  a  given  period.  Such  price  depressing  situation  prevented  the  Community
producers from increasing prices, something which would otherwise have occurred.

43

(182)  Nevertheless, the Commission established significant price undercutting ranging from
12% to  32%  for the  different  DRAM densities  on a substantial portion (41%) of  the
Community producers transactions, representing 32% of their sales value. In order to
eliminate the effect of the sharp drop in prices during the IP, the calculation was based
on the monthly average Hynix prices to independent customers by product type. Even
if the daily average Hynix prices (by product type) were used, and taking account of
the fact that the number of comparable transactions would be substantially reduced (by
38%), there would be significant undercutting within the range set out above on 29%
of  the  total  Community  producers  transactions.  It  is  also  noted  that  irrespective  of
whether  monthly  or  daily  average  of  Hynix  prices  was  used  in  the  calculation,  the
proportion  of  the  Community  producers  undercut  transactions  in  relation  to  the  total
comparable transactions remained the same, i.e. around 47%. It is noted that a typing
error occurred at the end of the penultimate sentence of recital (122) of the provisional
Regulation where the reference to Hynix sales should read Community industry sales.
In the absence of further comments on price undercutting, the provisional findings as
set out in recitals (119) to (123) of the provisional Regulation are hereby confirmed.

(c) Market share of imports from Korea

(183)  Hynix, supported by the GOK, claimed that contrary to the upward trend of its market
share  as  described  in  recital  (124)  of  the  provisional  Regulation  its  market  share
decreased during the period under consideration. This claim is not warranted since the
market share figures provided by Hynix to justify its claim were initially based on the
total sales of its subsidiaries in the Community of the product concerned to unrelated
customers  in  the  Community  during  the  period  under  consideration  and  not  on  the
volume of its imports of DRAMs produced in Korea. After it was clarified to Hynix
that  its  market  share  as  described  in  recital  (124)  of  the  provisional  Regulation  was
calculated on the basis of duly verified import data which it had itself reported in its
questionnaire  response,  Hynix  indicated  that  in  establishing  the  trend  of  its  market
share during the period under consideration, imports from LG Semicon Co., Ltd. that
occurred  before  the  date  of  the  merger  of  this  company  with  Hyundai  Electronics
Industries Co., Ltd. should have been included in its import data. Hynix and the GOK
provided certain ad hoc data in this respect.

(184)  For the reasons set out in recital (175) above this claim is rejected and the provisional
findings  concerning  market  shares  as  described  in  recital  (124)  of  the  provisional
Regulation are confirmed.

(185)  Even if import data of LG Semicon Co., Ltd. for 1998 and 1999 as provided ad hoc by
Hynix and the GOK, and which could not  be verified,  were  taken into  account, they
should be added to the market share of imports from Korea and not to the market share
of  imports  from  Hynix.  The  market  share  of  imports  from  Korea  would  then  have
decreased by 21% during the period under consideration.

Market shares

1998

1999

2000

2001 (IP)

Index Korea
of which:

Index Samsung

Index Hynix

Index  LG  Semicon
(data not verified)

100

100

100

100

73

63

111

52

68

65

136

0

79

100

120

0

44

4.

Situation of the Community industry

(186)  In  the  absence  of  any  new  information,  the  provisional  findings  concerning  the
situation  of  the  Community  industry  as  set  out  in  recitals  (125)  to  (138)  of  the
provisional Regulation are confirmed.

5.

Conclusion on injury

(187)  Following the publication of the provisional Regulation, Hynix and the GOK claimed
that most of the injury indicators show that the situation of the Community industry is
improving. Therefore, no material injury could have been suffered by the Community
industry.

(188)  However, no arguments which could alter the conclusions as set out in recitals (139) to
(141) of the provisional Regulation were made. In accordance with the provisions of
Article 8(5) of the basic Regulation, these conclusions were based on the evaluation of
all  relevant  economic  factors  and  indices  having  a  bearing  on  the  state  of  the
Community  industry.  The  details  are  set  out  in  recitals  (125)  to  (138)  of  the
provisional Regulation and they have not been challenged. Though the position of the
the  period  under
Community 
consideration because of the growing market for DRAMs, this was more than offset by
the  very  substantial  injury  caused  by  the  drastic  drop  in  sales  prices  and  the
consequent  heavy  losses  suffered  by  the  Community  producers  during  the  IP.  These
losses  had  a  negative  effect  on  their  return  on  investments  and  their  cash  flow.
Consequently,  taking  into  account  all  the  factors,  the  conclusions  reached  in  recitals
(139) to (141) of the provisional Regulation that the Community industry has suffered
material  injury  within  the  meaning  of  Article  8  of  the  basic  Regulation  are  hereby
confirmed.

in  certain  respects  during 

improved 

industry 

G. CAUSATION OF INJURY

1.

Introduction

(189)  As set out in recitals (143) to (157) of the provisional Regulation, it was examined, in
accordance with Article 8(6) and 8(7) of the basic Regulation, whether the subsidised
imports  of  the  product  concerned  originating  in  Korea  have  caused  injury  to  the
Community  industry  to  a  degree  that  enables  it  to  be  classified  as  material.  Known
factors  other  than  the  subsidised  imports,  namely  the  general  economic  downturn
during  the  IP,  imports  from  other  countries,  exports  of  the  Community  industry  and
overcapacity, which could at the same time be injuring the Community industry, were
also examined one by one to ensure that possible injury caused by these other factors
was not attributed to the subsidised imports.

(190)  Following the  imposition of  provisional  measures,  Hynix  and  the  GOK  claimed  that
Hynix's imports could not have caused injury to the Community industry because their
market share was decreasing during the period under consideration and their prices did
not undercut the Community industry's prices. They further argued that any injury was
self-inflicted and caused by the investments the Community industry made during the
period under consideration, which have largely contributed to the overcapacity during
the IP. They also argued that the analysis in the provisional Regulation failed to take
into account the severe cyclical downturn for the IT during this period. It is noted that
the  comments  of  Hynix  concerning  causation  referred  to  only  one  of  the  two

45

Community producers composing the Community industry, i.e. Infineon. The analysis,
which follows, concerns the Community industry as a whole.

2.

Effect of the subsidised imports

(191)  As set out in recitals (176) and (177) above, subsidised imports from Hynix increased
during  the  period  under  consideration  even  at  a  higher  pace  than  the  Community
consumption. Over  the same period, the  development of their market share  followed
the same trend, i.e. increased (see recitals (184) and (185) above) and reached a very
substantial  level  during  the  IP.  Even  if  the  alleged  volume  of  imports  from  LG
Semicon Co., Ltd. was to be added to that of Hynix for the years 1998 and 1999, such
imports trend towards the IP would still be increasing (increase of 155% between 1998
and  the  IP).  It  was  found  that  the  volume  of  Hynix's  subsidised  imports  and  their
market  share  during  the  IP  were  sufficiently  important  in  themselves  to  adversely
affect the Community market and in particular the prices of the Community industry.
Market  analysts64  believed  that  Hynix  was  technically  bankrupt  and  that  it  was  kept
thus  maintaining  artificially
alive  only 
oversupply on the market. In this context, it should be noted that any additional supply
not  met  by  demand  leads  prices  down.  And  Hynix,  as  set  out  in  recital  (148)  of  the
provisional Regulation, was desperate to sell during the IP even below cost. No further
comments which could alter the findings concerning the effect of  Hynix's subsidised
imports  on  the  injurious  situation  of  the  Community  industry  as  set  out  in  recitals
(144)  to  (148)  of  the  provisional  Regulation  were  made.  These  findings  are  hereby
confirmed.

through  debt  restructuring  programs, 

(192)  It is therefore concluded that the subsidisation alone, by enabling pricing irrespective
of cost and by contributing substantially to the oversupply characterising the DRAM
market,  has  led  in  a  very  substantial  way  to  the  very  low  price  levels  on  the
Community market. Without the subsidies in question it is reasonable to assume that
the prices of the Community industry would have been higher, not only because Hynix
would not have been able to charge the very low prices that they practised in the  IP,
but  also  because  global  supply  would  have  been  lower.  Moreover,  the  magnitude  of
the volume of Hynix's low-priced subsidised imports had itself a significant negative
impact on the situation of the Community industry.

3.

Impact of other factors

(a) General economic downturn during the IP

(193)  Hynix and the GOK argued that the Commission did not take into account the impact
of the cyclicality of the DRAM market. They further argued that world-wide demand
for DRAMs grew in 2001 only by 59% whilst the average year on year rate was 75%.
It  is  noted  that  these  alleged  world-wide  growth  rates  are  highly  subjective  and
contradict other information available on the record. As set out in recital (150) of the
provisional Regulation, it is recognised that the general economic downturn of the PC
and  telecommunication  markets  in  2001  may  have  had  some  downward  effect  on
prices. However, it was found that DRAM consumption in the Community continued
its  upward  trend  through-out  the  period  under  consideration.  The  increased
consumption  in  terms  of  Mbits  during  the  IP  stemmed  to  a  large  degree  from  the

64

Morgan Stanley, Hynix Semiconductor - September 25, 2002.

46

                                                
introduction of Microsoft XP, which has much higher Mbit requirements than previous
systems, and increased sales of “upgrade” product generated by the low prices. In fact,
the consumption in Mbits in the Community increased almost at the same rate between
the year 1999 and the good year 2000 (57%) as compared to the increase between the
good  year 2000 and the bad  year 2001 - the  IP (51%). It is therefore concluded that,
whilst the economic downturn may have had some downward effect on prices, it can
be assumed that, with consumption rising, this effect was not substantial.

(b) Imports of the product concerned from other countries than Korea

(194)  Following  the  imposition  of  provisional  measures,  no  comments  were  received
concerning  other  imports.  However,  following  final  disclosure  Hynix  argued  that  in
accordance  with  data  in  the  complaint  imports  from  other  countries  than  Korea
(mainly Taiwan) and imports from Samsung have increased more than Hynix' imports,
in particular between 2000 and the IP, and thus any injury suffered by the Community
industry  could  not  have  been  caused  by  Hynix's  imports.  With  regard  to  Samsung's
imports  see  recital  (200)  below.  With  regard  to  imports  from  all  other  countries
(including Taiwan), the investigation found that in Mbit terms they decreased between
2000 and the IP by 4,2%. In fact, their market share decreased from 31,4% in 2000 to
20% during the IP. During the same period Hynix's subsidised imports in Mbit terms
increased by 24%. Therefore, the argument is considered groundless and the findings
set out in recital (151) of the provisional Regulation that imports from other countries
than Korea have  not contributed  in any significant  way  to  the  injury  suffered  by  the
Community industry are hereby confirmed.

(c) Export activity of the Community industry

(195)  Following  the  imposition  of  provisional  measures,  no  comments  were  received
concerning  the  export  activity  of  the  Community  industry.  The  findings  set  out  in
recital (152) of the provisional Regulation are hereby confirmed.

(d) Overcapacity

(196)  Following  the imposition  of  provisional  measures,  Hynix  and  the  GOK  claimed  that
any injury suffered by the Community industry during the IP was self-inflicted by its
investments  made  during  the  period  under  consideration.  They  further  claimed  that
these investments have largely contributed to the overcapacity during the IP.

(197)  As  set  out  in  recital  (153)  of  the  provisional  Regulation,  the  world-wide  DRAM
market  still  suffered  during  the  IP  from  structural  over-capacity  resulting  from  the
expectations of the  late  1990s  that  the  market  would  continue  its  rapid  growth.  This
overcapacity  can  be  said  to  have  contributed  to  the  severity  of  the  current  downturn
from  which  this  industry  is  suffering.  However,  it  is  noted  that  the  capacity  of  the
Community industry in Mbit terms did not reach the consumption in the Community
during  the  IP.  Furthermore,  it  is  generally  recognised  that  the  DRAMs  industry
constantly needs high level of investments, in particular on research and development,
to  keep  abreast  with  leading-edge  technology.  The  investments  of  the  Community
industry during the period under consideration can therefore be viewed as reasonable
and were undertaken in order to maintain its competitiveness in a growing market. In
this  respect,  it  is  noted  that  both  Korean  producers  made  significant  investments
during  the  period  under  consideration.  In  fact,  the  world-wide  investments  of  the
Community industry were less than half the investments of the two Korean producers

47

during that period. It is therefore reasonable to assume that any overcapacity was not
created by the Community industry alone. To the contrary, it was the Korean industry
which has mainly contributed to such overcapacity world-wide. It is also reasonable to
assume  that,  had  the  Korean  government  not  intervened  with  the  subsidies,  the
situation  in  both  the  Community  and  world-wide  as  regards  overcapacity  would  not
have been so pronounced.

(e) Stocks

(198)  Following  the  imposition  of  provisional  measures,  Hynix  also  argued  that  another
reason for the declining prices of DRAMs during the  IP was a significant "inventory
burn".  It  was  argued  that  during  the  "near  record  year"  2000  when  DRAM  prices
increased  significantly,  many  customers  (e.g.  distributors)  built-up  their  DRAM
inventory because users feared shortages. During the IP, when it became clear that the
collapse  of  the  PC  and  telecommunications  markets  would  depress  demand,  these
inventories  were  disposed  quickly  and  further  exacerbated  the  already  declining
prices.

(199)  However, first of all this argument is not supported by any factual evidence. Secondly,
it  is  based  on  a  wrong  premise:  during  the  IP  DRAMs  consumption  continued  to
increase  in  the  Community.  Finally,  it  is  not  plausible:  no  company  will  build-up
stocks when the prices are high, in particular  when a product like DRAMs has  short
life  cycle;  to  the  contrary  they  may  build-up  stocks  when  the  prices  are  low.  In  this
respect,  it  is  recalled  that  the  stocks  of  the  Community  industry  as  a  percentage  of
production in Mbits declined during the good year 2000 as well as during the bad IP.
This  has  been  confirmed  by  the  sole  cooperating  distributor  which  stated  in  its
response  to  the  questionnaire  that  "at  present  manufacturers  move  to  just  in  time
ordering". The same distributor indicated during a hearing that its DRAMs stocks are
renewed four  times  a  month.  Therefore,  no  link  can  be  made  in  this  regard  between
stocks and prices, and accordingly, this argument has to be rejected.

(f) Samsung's imports

(200)  It was also examined whether factors other than those already considered above could
have contributed to the material injury suffered by the Community industry during the
IP. In this respect the imports from Samsung were examined. During the period under
consideration, Samsung's imports have also increased but at a lower pace than Hynix's
imports and in any event slower than the increase of Community consumption. It was
also found that during the IP Samsung's prices were on  average higher  than  those of
Hynix.  Furthermore,  Samsung's  prices  decreased  less  than  Hynix's  prices  during  the
period under  consideration.  It was therefore  concluded  that  though Samsung imports
may  have  caused  some  injury  to  the  Community  industry,  this  was  not  sufficient  to
break  the  causal  link  between  Hynix's  subsidised  imports  and  the  material  injury
suffered by the Community industry.

4.

Conclusion on causation

(201)  The  arguments  brought  forward  by  the  interested  parties  on  causation  following  the
imposition of provisional measures have not altered the overall conclusions reached in
the provisional Regulation.

48

(202)  Factors other than the subsidised imports originating in Korea, such as other imports,
the general economic downturn, the export activity of the Community industry and the
pre-existing  over-capacity  in  the  market,  may  well  have  contributed  to  the  injury
suffered  by  the  Community  industry  during  the  IP.  However,  their  injurious  effect,
both individually and collectively, was considered of some importance but insufficient
to undermine the material injury attributable to subsidised imports.

(203)  The  reduced  prices  of  the  Community  industry's  export  sales  may  have  also
contributed  to  the  injury.  However,  given the  lower  volume  of  exports  in  relation  to
the  volume  of  sales  in  the  Community  during  the  IP,  the  injury  suffered  by  the
Community industry cannot be attributed to its exports.

(204)  As far as overcapacity is concerned, this world-wide situation existed during a number
of years including the period under consideration. Therefore, this overcapacity cannot
be considered alone as the cause of the very significant sudden drop in prices that led
to the injury suffered by the Community industry. Furthermore, subsidised imports are
themselves a substantial cause of oversupply.

(205)  Indeed, the investigation has shown that during the period under consideration Hynix's
subsidised  imports  were  sold  on  the  Community  market  at  volume  and  prices  that
caused very considerable injury to the Community industry. These imports were found
to be a substantial cause of prices in the Community falling dramatically to levels that
generated  huge  losses.  This  situation  had  grave  consequences  on  the  profitability  of
the Community industry and its ability to maintain the necessary investment levels. In
view of the analysis, which has properly distinguished and separated the effects of all
known factors on the situation of the Community industry from the injurious effects of
the subsidised imports, it is hereby concluded that these other factors are not such as to
break  the  causal  link  between  subsidisation  and  injury.  Accordingly,  it  is  concluded
that these imports have caused material injury to the Community  industry  within the
meaning of Article 8(6) of the basic Regulation.

H. COMMUNITY INTEREST

(206)  No  user,  importer  or  distributor  submitted  any  comments  concerning  Community
interest or any other aspect of the investigation following the imposition of provisional
measures.  Even  the  few  co-operating  users  did  not  submit  any  comments  on  the
provisional  findings.  The  Community  industry  expressed  its  support  for  the
provisional determination on Community interest.

(207)  Hynix,  although  not  directly  concerned,  argued  following  the  imposition  of
provisional measures that the  Community  industry  has  not  the  capacity  to  supply  its
clients, and that Hynix's disappearance from the Community market could only result
in an increased market share of other non-Community producers.

(208)  The argument put forward by Hynix is not persuasive. It contradicts Hynix's previous
argument that the Community industry has created itself an overcapacity situation. The
fact is  that  the  Community  industry  still  has  significant  spare  capacity  available  that
can be used if the market conditions allow fair competition. On the other hand, the aim
of  the  measures  is  not  to  eliminate  Hynix  from  the  Community  market,  but  to
countervail  the  subsidisation  to  the  extent  it  has  benefited  Hynix's  imports  to  the
detriment of other suppliers on the market.

49

(209)  In the  absence of  any  comments from  the directly  interested  parties the  findings and
conclusions set out in recitals (158) to (174) of the provisional Regulation are hereby
confirmed.  It  is  therefore  concluded  that  the  imposition  of  definitive  countervailing
measures would not be against the Community interest.

I. DEFINITIVE COURSE OF ACTION

(210)  In  view  of  the  conclusions  reached  regarding  subsidies,  injury,  causation  and
Community interest, it is considered that definitive countervailing measures should be
taken  in  order  to  prevent  further  injury  being  caused  to  the  Community  industry  by
subsidised imports from the Republic of Korea.

1. Injury elimination level

(211)  For the purpose of establishing the level of the definitive measures, account has been
taken  of  both  the  subsidy  amount  found  and  the  amount  of  injury  sustained  by  the
Community industry.

(212)  The definitive measures should be imposed at a level sufficient to eliminate the injury
caused  by  these  imports  without  exceeding  the  subsidy  amount  established.  When
calculating  the  amount  of  duty  necessary  to  remove  the  effects  of  the  injurious
subsidies, it was considered that any measures should allow the Community industry
to  cover  its  costs  and  obtain  overall  a  profit  before  tax  that  could  be  reasonably
achieved  under  normal  conditions  of  competition,  i.e.  in  the  absence  of  subsidised
imports, on the sales of the like product in the Community. The pre-tax profit margin
used for this calculation was 15% on turnover, which is necessary for the industry to
maintain reasonable levels of investment. This profit margin was the average realised
by the Community industry during the last two years before the IP.

(213)  Following  the imposition of  provisional  measures,  Hynix  argued  that  the  15%  profit
was not in line with the 9,5% profit margin used in earlier anti-dumping proceedings
concerning  DRAMs  originating  in  Korea  and  Japan.  It  is  noted  that  these  anti-
dumping  proceedings  referred  to  more  than  10  years  ago,  when  the  market
circumstances and the product itself were different. In any event, given the magnitude
of the losses suffered by the Community industry during the IP, even a profit margin at
this level will result to an injury elimination level that would still be higher than the
subsidy amount established.

(214)  Considering  the  above,  the  methodology  used  for  establishing  the  injury  elimination
level as described in recitals (177) to (179) of the provisional Regulation is confirmed.

2. Form and level of the duty

(215)  Since  the subsidy amount for Hynix Semiconductor  Inc. has  been  found  to  be lower
than  the  injury  elimination  level,  the  rate  of  the  definitive  countervailing  duty  to  be
imposed  should  correspond  to  the  subsidy  amount  established,  in  accordance  with
Article  15(1)  of  the  basic  Regulation,  i.e.  34,8%.  Given  the  de  minimis  subsidy
finding, no countervailing duty should be imposed on Samsung Electronics Co., Ltd.

(216)  The  individual  company  countervailing  duty  rates  specified  in  this  Regulation  were
established  on  the  basis  of  the  findings  of  the  present  investigation.  Therefore,  they
reflect  the  situation  found  during  that  investigation  with  respect  to  these  companies.
These  duty  rates  (as  opposed  to  the  countrywide  duty  applicable  to  ‘all  other

50

companies’)  are  thus exclusively applicable  to imports of  products  originating  in  the
country  concerned  and  produced  by  the  companies  and  thus  by  the  specific  legal
entities mentioned. Imported products produced by any other company not specifically
mentioned in the operative part of this Regulation with its name and address, including
entities  related  to  those  specifically  mentioned,  cannot  benefit  from  these  rates  and
shall be subject to the duty rate applicable to ‘all other companies’.

(217)  Any claim requesting the application of these individual company countervailing duty
rates (e.g. following a change in the name of the entity or following the setting up of
new production or  sales entities) should  be addressed to  the Commission65 forthwith
with  all  relevant  information,  in  particular  any  modification  in  the  company’s
activities  linked  to  production,  domestic  and  export  sales  associated  with  e.g.  that
name change or that change in the production and sales entities. The Commission, if
appropriate, will, after consultation of the Advisory Committee, amend the Regulation
accordingly by updating the list of companies benefiting from individual duty rates.

J. COLLECTION OF THE PROVISIONAL DUTY

(218)  In  view  of  the  amount  of  the  countervailable  subsidies  found  for  the  exporting
producers  and  in  light  of  the  seriousness  of  the  injury  caused  to  the  Community
industry,  it  is  considered  necessary  that  the  amounts  secured  by  way  of  provisional
countervailing  duty  under  Regulation  (EC)  No  708/2003  be  definitively  collected  to
the extent of the rate of the definitive duty imposed or the rate of the provisional duty
if the latter was lower,

HAS ADOPTED THIS REGULATION:

1.

2.

65

Article 1

A definitive countervailing duty is  hereby  imposed on  imports of certain electronic
microcircuits known as Dynamic Random Access Memories (DRAMs), of all types,
densities  and  variations,  whether  assembled,  in  processed  wafer  or  chips  (dies),
manufactured  using  variations  of  Metal  Oxide-Semiconductors  (MOS)  process
technology,  including  complementary  MOS  types  (CMOS),  of  all  densities
(including  future  densities),  irrespective  of  access  speed,  configuration,  package  or
frame  etc.  This  also  includes  DRAMs  presented  in  (non-customized)  memory
modules  or  (non-customized)  memory  boards,  or  in  some  other  kind  of  aggregate
form,  provided  the  main  purpose  of  which  is  to  provide  memory,  currently
classifiable within CN codes 8542  21  11,  8542 21  13, 8542  21 15, 8542  21 17, ex
8542 21 01 (TARIC code 8542 21 01 10), ex 8542 21 05 (TARIC code 8542 21 05
10), ex 8548 90 10 (TARIC code 8548 90 10 10), ex 8473 30 10 (TARIC code 8473
30  10  10)  and  ex  8473  50  10  (TARIC  code  8473  50  10  10),  originating  in  the
Republic of Korea.

The rate of the definitive duty applicable to the net free-at-Community-frontier price,
before duty, shall be as follows:

European  Commission  -  Directorate  General  for  Trade  -  Directorate  B  -  J-79  5/17  -  Rue  de  la
Loi/Wetstraat 200 - B-1049 Brussels

51

                                                
Korean Exporters

Rate of Duty (%)

Taric additional code

Samsung  Electronics  Co.,  Ltd.
24th  Fl.,  Samsung  Main  Bldg.
Taepyeong-Ro,
2-Ga, 
250, 
Jung-Gu, Seoul

0%

A437

All other companies

34,8%

A999

3.

Unless otherwise  specified,  the  provisions  in  force  concerning  customs  duties  shall
apply.

Article 2

The  amounts  secured  by  way  of  the  provisional  countervailing  duty  pursuant  to  Regulation
(EC)  No  708/2003  on  imports  of  DRAMs  originating  in  the  Republic  of  Korea  shall  be
collected at the rate of the duty definitively imposed or the rate of the provisional duty if the
latter was lower. Amounts secured in excess of the definitive rates of the countervailing duty
shall be released.

This  Regulation  shall  enter  into  force  on  the  day  following  that  of  its  publication  in  the
Official Journal of the European Union.

Article 3

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels,

For the Council
The President

52