Council Regulation (EC) No 1480/2003 of 11 August 2003 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: 2003-08-11
Institutions: Council of the European Union
Subjects: South Korea, countervailing charge, electronic component, import, originating product

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I

(Acts whose publication is obligatory)

COUNCIL REGULATION (EC) No 1480/2003
of 11 August 2003
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 Community (1), and in
particular Article 15 thereof,

Having regard to the proposal submitted by the Commission
after consulting the Advisory Committee (2),

(4)

(5)

The Commission continued to seek and verify all infor-
mation deemed necessary for the definitive findings.

the essential

All parties were informed of
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.

Whereas:

(6)

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

(1)

(2)

(3)

A. PROVISIONAL MEASURES

to Commission Regulation (EC) No 708/
Pursuant
2003 (3), (hereinafter referred to as ‘the provisional Regu-
lation’), 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 consid-
eration’).

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 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) OJ L 288, 21.10.1997, p. 1. Regulation as amended by Regulation

(EC) No 1973/2002 (OJ L 305, 7.11.2002, p. 4).

(2) Proposal of 25 July 2003 (not yet published in the Official Journal).
(3) OJ L 102, 24.4.2003, p. 7.

C. PRODUCT UNDER CONSIDERATION AND LIKE

PRODUCT

(7)

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 Regula-
tion are confirmed.

D. SUBSIDIES

(8)

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
subsidies. The
as
Commission's
findings
syndicated loan of
commented are
measures

regards
the

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KRW 800 billion, the KEIC guarantee for export credits
in the amount of USD 600 million, the KDB Debenture
Programme, purchase by the creditor banks of KRW 1
trillion worth of 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.

In
unless convincing evidence to the contrary exists.
both of these cases, the company would be considered
to be a private body, and ‘direction’ from the govern-
ment to provide financial contributions would have to
be shown under Article 2(1)(a)(iv) of the basic Regula-
tion.

1. INTRODUCTION

(13)

(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 contribu-
tion 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.

(11) Government ownership, even 100 % ownership, does
not in itself mean that a company concerned is consid-
ered to be a ‘public body’. Nor does government owner-
ship, at whatever level, create a ‘rebuttable presumption’
of a public body. However, the level of government
in some cases the most
ownership is an important,
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,

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

that

(14)

The relevant criteria which can be taken into account in
determining whether a given company does indeed
qualify as a public body include:

for instance, a requirement

(a) the pursuance of public policy objectives which go
beyond the normal remit of a private organisation
and include,
to take
account of national or regional economic interests,
promotion of social objectives, etc. These criteria
may be non-commercial,
they
compromise the normal objective of profit maximi-
sation;

in the sense that

(b) 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 busi-
ness 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.

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(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 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-the-spot verifica-
tion. The GOK has been made aware of the conse-
quences of non-cooperation in accordance with Article
28(1) and (6) of the basic Regulation. In view of this lack
in addition to
it has been necessary,
of cooperation,
taking account of relevant GOK documents submitted
by other parties,
to use information from secondary
sources, including from the Korean press. Such informa-
tion has been viewed with special circumspection, the
GOK and Hynix given the opportunity to comment on
it, and, where practicable, it has been cross-checked with
other independent sources.

(17)

In its comments on the final disclosure the GOK
objected to the conclusions made that it had withheld
important information in relation to certain documents
and meetings and had not fully cooperated with the
investigation. The 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 ques-
tionnaires as regards each individual measure investi-
gated 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 the GOK that
they did not consider this information to be covered by
the questions asked is not found to be convincing.

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-the-spot verification
of their responses to the questionnaire. All banks were
informed that their non-cooperation might have adverse
effects on the outcome of the investigation with regard
to their client Hynix and that any findings might 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 adviser to cooperate seriously impeded the
investigation.

(iii) Financial situation of Hynix

(19) As a general remark it is recalled that the financial situa-
tion 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 (1). Moreover, the
majority of these liabilities were maturing throughout
2001 when the company was facing serious liquidity
in
Even the GOK recognised
problems.
November 2000 ‘the cash crunch of Hyundai Electro-
nics’. At the beginning of 2001, investment analysts like
Morgan Stanley and UBS Warburg predicted that the
company would not be able to 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.

already

(20)

The financial ratios of Hynix according to the so-called
Altman Z-score model, designed specifically to predict
the likely failure of Korean companies, were in 1999 to
2001 far worse than other Korean companies that actu-
ally did fail. The Hynix scores were 700 % higher than
the threshold level of a company in severe financial
distress (2). Hynix's current and quick ratios were indica-
tive of a company with totally inadequate liquidity to

(18)

It is also recalled that a number of Korean banks failed
to cooperate with the Commission in the investigation.
In particular, KorAm Bank and Citibank failed to

(1) Hynix business plan for 2001 filed with the FSC, 21 March 2002.
(2) Expert Report of Professor Anthony Saunders in the Matter of the
Countervailing Duty Petition on behalf of Petitioner: Micron Tech-
nology, 10 March 2003 (‘Saunders Report’), p. 30-35.

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cover obligations (1). Hynix's net profit margin, return
on assets, and return on equity were negative in nearly
every year since 1997, with net margins reaching nega-
tive 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 repay-
ment 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

The 2001 financial accounts also discounted the possibi-
lity of future financial success for Hynix, stating that the
company's operation
‘entire normalisation of
requires the continuous support
from creditor banks
until the selling price of semiconductor products suffi-
ciently recovers’. These facts indicate that both the
history and the future of Hynix was characterised by 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.

financial commitments. Ratings BB, B, CCC, CC and C
are regarded as having significant speculative characteris-
tics. 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 currently vulner-
able to non-payment and dependent on favourable busi-
its
financial and economic conditions to meet
ness,
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 debt (2).

(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 specula-
tive grade B by Standard and Poor's. The Korean agen-
cies 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.

(iv) Public interest considerations

(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
and
adverse
economic conditions, but the capacity to meet financial
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

in circumstances

effects of

changes

(1) Saunders Report, p. 20-21.

(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 subse-
quent 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.
The GOK felt
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

that

(2) Standard and Poor's, Corporate Ratings Criteria, www.standardand-

poors.com.

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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 contrib-
uted to the ever-worsening financial situation of Hynix.
As Hynix situation worsened further after the merger, it
was widely perceived that the GOK felt compelled to
protect Hynix from failure since it had a responsibility
to take care of the ‘big deal’ companies (1).

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 reci-
tals 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 defi-
nitive 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 provi-
sionally 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 inter-
ested 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.

they argued,

the loan conferred a benefit

(29) One interested party argued that Hynix was not credit-
worthy 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,
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's (3) (‘FSC’) selective waiver of legal lending
limits. The GOK directed the FSC to raise the legal
lending limits of certain banks to ensure the existence of
enough participants to raise the KRW 800 billion loan.

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

(25)

The information on the record also indicates that the
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 (2).
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 troubled
businesses. Nevertheless, the administration forced finan-
cial institutions to extend loans to the Hyundai Group
and mobilised GOK-invested banks and other GOK-
funded or invested institutions to 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 Hynix's
later difficulties to the GOK-forced merger of Hynix and
LG Semicon, an action, which according to it was under-
In
taken with total disregard for market principles.
defending the GOK measures to finance Hynix, a GOK

(1) Private financial experts Verification Report, Meeting 6, point 14.
(2) Public Fund Mismanagement Report, Special Committee on Parlia-
mentary Inspection of Public Fund Administration, Grand National
Party, November 2002.

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(30)

Since the publication of the provisional Regulation, new
information of the GOK directing the FSC 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 informa-
tion. The interested parties, Hynix and the GOK, were
specifically invited to comment on the new information
and their comments have been taken into account in the
reassessment of this measure.

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 provi-
sion allows FSC to extend the ceilings ‘when it recog-
nises 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.

financial

(31) According to Article 35 of the Banking Act of Korea,
institution shall extend credits exceeding
‘no financial
institution's equity
the relevant
25/100 of
capital to the same individual, corporation and person,
or 20/100 to the same individual or corporation’ (1). The
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 discus-
sion on ‘alleviating the cash crunch of Hyundai Electro-
nics’ (2), 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 the
measures 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
institutions, which
on behalf of the creditor financial
according to the results of
the Economic Ministers'
discussions would be subject to special approval by the
FSC. The Minister thereby imposed an obligation on KEB
to apply for the extension and on the FSC to approve
such an application.

(33)

In December 2000, KEB filed the request for approval of
for Hynix financing and
this extended credit
submitted similar requests for Korea First Bank (‘KFB’)
and KDB. In the FSC decision it was explained that these

limit

(1) English Translation of the Korean text.
(2) The name of Hyundai Electronics was changed to Hynix Semicon-

ductor on 29 March 2001.

(34)

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 %
the
the world semiconductor market and 4 % of
of
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 loan and D/A financing would improve
Korea's international competitiveness. Therefore, for the
promotion of the electronics industry policy, the FSC
finds it in the best interest to increase the ceiling’ (3).

(35)

It is noted that without the extension of the credit ceil-
ings 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 the 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
It was
been able to do under Korean banking laws.
evident that the credit limits needed to be lifted in order
to provide the financing to Hynix.
Indeed, when the
GOK and Hynix were invited specifically to comment on
the new 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.

(3) GOK Verification Report, p. 16-17.

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(36)

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 syndi-
cated loan for an amount of KRW 100 billion each is
considered to be directed by the 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. 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.

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

Instead the party argued that

(40)

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 guar-
anteed 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 the GOK had been requested to give
details of the involvement of the 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 Service (1) (‘FSS’) in the process. The same
questions were put to the GOK, the FSC/FSS and the
KEIC during the verification visit. In their replies these
parties explained that neither the GOK nor the FSC/FSS
were allowed to interfere in the decision-making process
on underwriting the Hynix guarantee.

(1) The 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.

(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 parti-
cipation 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.
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 counter-
vailed in this context.

It

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

findings as

regards

meeting where the measures were discussed. KEIC
supported these measures only due to the GOK direc-
tion. 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 guar-
antee.

(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 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.

(45)

(43) A further letter was sent to the same persons, the Presi-
dent of the KEIC and the President of the KEB, on 10
January 2001. This letter was signed by three Korean
the Minister of Finance and Economy, the
Ministers:
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 capa-
city of the KEIC fund that might occur in relation to this
matter, support will be provided from a separate source
of
to
funding’. The GOK thereby committed itself
compensate KEIC in case it needed to pay out the guar-
antee and could not do so out of its own risk reserves.

showed that

Thus the guarantee was given by KEIC due to specific
GOK direction in pursuing the public policy goal of alle-
viating 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 guar-
antee 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
the
premium paid by Hynix could not cover the risk under-
taken 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 provi-
sions 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 exten-
sion 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.

(44)

Information on the record indicates that the KEIC posi-
tion at the time was that Hynix was in a state of a tech-
nical 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’ (1). Consequently,
several Ministers ordered KEIC to ensure the D/A exten-
sion. In recital 35 the public policy reasons of this deci-
sion are explained, as expressed by the FSC in the

(1) The Korea Economic Daily, 28 August 2001, following the disclo-
the National

sure of official correspondence by Members of
Assembly of Korea.

(46)

In its comments on the final disclosure the 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

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the whole amount of the loans which would not have
been granted in whole or in part without the KEIC guar-
antee which was underwritten by the GOK. There was
no indication that an alternative financing without guar-
antee 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 the GOK. Under
the
benefit for Hynix is considered to be the full amount of
the guarantee underwritten by the GOK.

these circumstances,

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.

(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 Guide-
lines for the Calculation of the amount of Subsidy in
Countervailing Duty Investigations (‘the Guidelines’) (1).
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 %.

issued under

(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
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,
the issuing
reflecting the higher anticipated risk of
company concerned to honour them (2). Consequently,
the evidence on the record indicates that the interest
rates applied for the KDB programme were not
in
conformity with market rates.

5. KDB DEBENTURE PROGRAMME (JANUARY 2001)

(48)

Following the publication of the Regulation imposing
the provisional countervailing duty, Hynix, the 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, the 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

(1) OJ C 394, 17.12.1998, p. 13.

(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
instruments and
bonds and loans are very different
cannot be directly compared. The Korean bond market
applied extremely strict conditions in 2001 and compa-
nies with moderate credit ratings were not able to refi-
nance their bonds in the market. As explained in recital
the GOK itself
61 of
acknowledged this in its questionnaire reply. This fact is
also evidenced by other documents on the record (3).
From July 2000 onwards financing conditions in the
bond market tightened 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 market (4). The GOK also stated in its

the provisional Regulation,

(2) The Kyunghyang Shinmun Daily, 9 January 2001; The Joong'ang

Daily, 7 January 2001.

(3) GOK Verification report, p. 14.
(4) Structural Change in the Corporate Bond Market After the Currency
Crisis, BIS Papers No 11, Sungmin Kim and Jae Hwan Park, June-
July 2002.

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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.

it

is noted that

(54) As regards the participation of the banks in the KDB
programme,
the information on the
record indicates that on 4 January 2001 the FSC granted
a collective waiver of the lending limits to all banks
participating in the KDB programme. The FSC 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 (2). The
the KDB
programme was thereby only possible because of the
waiver, which in this particular case was granted by
using great
the
Enforcement Decree which enabled the FSC to waive the
lending limits under certain conditions.

flexibility in interpreting the text of

participation

banks'

in

(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 refi-
nance its bonds in a foreign bond market. It is noted
that the speculative rating B given to Hynix by the inter-
national rating agency Standard and Poor's in January
2001 does not support such a possibility either.

(55)

increased credit

consequences of

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 the GOK which was concerned at the macroeco-
nomic
a possible bankruptcy of
Hynix (3). 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
to
January 2001. KFB assessed that
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 hard-
ship (4). The FSS stated that it would ask KFB to under-
take Huyndai's bonds one more time. If the bank was to
reject again and this led to the collapse of related compa-
nies, FSS would hold the bank responsible (5). When KFB
continued to resist, FSS warned that by not complying
KFB might be putting itself at risk of losing its clients (6).
The next day after KFB rejected the GOK demand, the
GOK agency pulled USD 77 million from the KFB
account (7). According to Bloomberg,
the GOK even
threatened to demand that KFB's main corporate custo-
mers cease doing business with the bank (8). 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-the-spot verification
of its replies to the questionnaire (see recital 18 above).

(2) GOK Verification Report, p. 16-17.
(3) 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.’

this

it KRW 800 billion. Part of

(53) Hynix had more than KRW 3 trillion worth of bonds
maturing in 2001 (1). 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
amount,
KRW 300 billion, as explained 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
were lifted again for a specific transaction. It is noted
that among these three banks were the two major cred-
itors 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.

(1) It is interesting to note that the investigated measures KRW 800
billion syndicate loan, KRW 1,2 trillion refinanced by the KDB
programme and KRW 1 trillion CB purchase by creditor banks in
June 2001 result in KRW 3 trillion.

(4) Korea Times, 29 January 2001.
(5) Korea Economic Daily, 6 January 2001.
(6) Wall Street Journal, 29 January 2001.
(7) Business Week Online, 9 April 2001.
(8) Bloomberg, 31 January 2001.

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(56) As regards the GDR issuance, it is accepted that Hynix
raised money in the capital market through this instru-
ment in June 2001. However, by that time 80 % of its
bonds financed via the 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
the KDB
in January 2001.
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
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 in such a way were ruled
out, in particular considering that its total liabilities still
reached KRW 7,2 trillion in July 2001.

the provisional Regulation,

Furthermore, without

(57)

the timing of

Indeed,
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
that most of Hynix's
influenced by the very fact
maturing liabilities were abolished by the GOK-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 antici-
pated 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 fail (1). This point is referred to also in
recital 44 of the provisional Regulation. Therefore, the
information on the record indicates
the KDB
programme might have influenced the decisions of the
investors to invest in Hynix in June 2001.

that

(58) As regards the Hynix argument

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/CLO (2) programme were
very different, and were not available to Hynix.

that

(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
the CBO
bonds, even those allegedly intended for
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
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’) (3) also
increased the guarantee level on CBOs from 34 % to
the KDB
the
53 % to account
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.

inclusion of

the bonds

for

(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 % to CBOs/CLOs. Moreover, 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.

(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
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 provi-
sional Regulation are hereby confirmed.

(1) Reuters English News Service, 13 June 2001.
(2) ‘Collateralised bond obligations’ and ‘collateralised loan obligations’.

(3) KCGF is a special institution owned by the GOK.

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(63)

Considering the explanations in recitals 50 to 62, the
KDB programme can be seen to have conferred a benefit
to Hynix also bearing in mind that no comparable finan-
cing 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. Refi-
nancing of
the bonds in the bond market was not
possible due to its weak credit rating which did not
allow the market
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
the provisional Regulation are hereby
recital 61 of
confirmed.

to accept

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
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 specifi-
city criteria under Article 3(2)(c) of the basic Regulation.

the programme. Against

(66)

The 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.

(b) Specificity

(64)

Secondly, Hynix, the 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
that several Hyundai
companies participated in the programme can be consid-
ered 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.

the mere fact

(65) As explained under recitals 62 to 64 of the provisional
the KDB
it was concluded that, whilst
Regulation,
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 condi-
tions of the programme is not relevant. However, the
number of firms potentially eligible under such criteria

(67)

(68)

In the questionnaires both the GOK and KDB were
requested to submit the minutes of
the meetings in
which the selection of the companies to the programme
were discussed and the copy of the decision by which
Hynix was selected, stating the reasons for selecting it.
Both the GOK and KDB stated that no such documents
were ever prepared and that therefore they were not
available (1). Therefore it was not possible to verify how
the selection process was conducted and how the selec-
Institutions Council (2)
tion body, Creditor Financial
(‘CFIC’) used its discretion when selecting the partici-
pants.

In fact the information on the record indicates that GOK
discretion was openly used to preselect Hynix as a bene-
ficiary 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
the
programme (3). In addition, according to the information
given by KDB, a decision on which bonds to refinance is
taken separately every month by the CFIC. It is remark-
able that KDB could announce already at the beginning
of January that it would refinance Hynix bonds in the
coming months.

participate

officially

selected

to

in

(1) 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 partici-
pants was carried out and on what basis the companies were
selected.

(2) The Council consists of the representatives of KDB, The Korea

Credit Guarantee Fund and the creditor banks.

(3) KDB to acquire Huyndai Electronics bonds, KDB press release, 3

January 2001.

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(69) After

the

the

participants

programme were
in
announced, a lot of criticism was voiced concerning the
lack of transparency and absence of review of eligibility
as regards the selection process (1). 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 provi-
sional 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 with-
drawal as such in this context. In the case of PET Chips
from India (2), invoked by Hynix as a relevant precedent,
the subsidy was a recurring subsidy tied to the export of
investigation. When the export
the product under
subsidy programme was
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.

terminated,

the

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 the 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 refi-
nanced bonds and only those bonds should be consid-
ered 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 compar-
ison 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 deter-
mined on the basis of the benefit conferred on the reci-
pient. As explained 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 is 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 finan-
cing for purchasing Hynix bonds is determined to
constitute the subsidy.

(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

(1) Chosun Daily, 7 January 2001; The Kyunghyang Shinmun Daily, 9

January 2001.

(2) Regulation (EC) No 2603/2000, OJ L 301, 30.11.2000, p. 1.

(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
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

the time of

if at

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the

entirely the same as a ‘loan’, it is a very similar transac-
tion so that the same principles should apply. The ques-
tion 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
its expenditure.
did not even foresee a recovery of
Indeed,
the KDB total
amount budgeted for
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 had expected to recover its expenditure, it
was evident at the time the financing was granted that
Hynix would not be able to repay the 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 fore-
seen to be spent on Hynix bonds from the start was
considerable
turnover;
KRW 2,9 trillion was more than 70 % of the Hynix
2001 turnover.

in comparison to Hynix's

(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 spec-
ulative grade given to Hynix at
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

the end of

its rating. Moreover,

the
reflected in the decrease of
record contains no evidence indicating that KDB had in
fact recovered more than those amounts that Hynix was
supposed
the
programme (1). In the provisional findings these amounts
were taken into account and deducted, as explained
under recital 65 of the provisional Regulation.

conditions of

to pay

under

the

(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
directly (2). The benefit conferred to Hynix by this finan-
cial 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 hold
eventually 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 liabil-
ities 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 2001 (3) measures 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 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,
is therefore
inclusive of the KDB bonds,
deducted from it, as explained below in recital 166.

(1) The participating company had to repurchase 3 %/5 % of any CBO/
CLO issued under the programme. See recital 48 of the provisional
Regulation.

(2) 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.

(3) The information on the record also indicates that in June 2002 KDB
the KDB

still held KRW 82,4 billion of bonds falling under
programme.

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(80)

through bank loans,

it is
For the reasons explained in recitals 50 to 79,
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
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 consti-
tutes 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 Regula-
tion as
are hereby
confirmed.

the KDB programme

regards

(83)

it was asked
In the questionnaires sent to the GOK,
whether the 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 ques-
tionnaires sent to the banks. The minutes of any meet-
ings attended by the GOK or other public officials were
also requested. All parties replied that the 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.

6. BOND PURCHASE BY CREDITOR BANKS

IN THE
AMOUNT OF KRW 1 TRILLION AND THE FIRST ROLL-
OVER OF DEBT (MAY 2001)

(84) After the publication of the provisional findings, infor-
mation 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 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.

(81)

to countervail

it was provisionally
In the provisional Regulation,
concluded that there was insufficient evidence to make a
positive finding of a subsidy and it was therefore decided
not
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 this party, the GOK also
influenced the creditor banks and the success of the
measures.

(85)

(82) Another interested party argued that Hynix would not
have obtained the May 2001 bailout without GOK inter-
vention due to its weak financial condition and that the
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 the GOK on 10
March 2001 between GOK officials, presidents of the
Hyundai creditor banks, officials of the FSC and the
President of Hynix.

It is noted that the new information and the confirma-
tion of its accuracy by the interested parties contradicted
the statements given by the GOK, officials of the FSC
and FSS and the banks involved at the earlier stages of
the investigation. The GOK and the banks have consis-
tently argued that neither the GOK nor other public offi-
cials were in any way involved in the May 2001
measures and that the FSC and FSS only carry out super-
visory 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 adviser of Hynix at the
time, Citibank Seoul, failed to fully cooperate with the

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investigation. Citibank has explained that this non-coop-
eration was due to the intervention of Hynix. Citibank,
being the financial adviser 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 reas-
sess the provisional findings in light of the new informa-
tion and on the basis of best facts available.

(86)

in order

to take measures

The totality of the facts indicates that as from November
2000 the GOK had been directing banks and other insti-
tutions
to alleviate the
liquidity problems of Hynix and to promote the electro-
nics 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 the financial situation of Hynix
became despite the measures taken. In March 2001 its
rating had declined to B-. Therefore, there is no reason
to assume that the 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 finan-
cial
situation ensured that alternative market-based
sources of financing were not available.

(87) As explained already above in the context of the assess-
ment of the three previous investigated measures, Hynix
had exhausted its possibilities of receiving bank loans as
early as 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 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 from
either the Korean or foreign markets.

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’) from 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 liabil-
ities. 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 agree-
ment 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 agree-
ment. Nevertheless, they still granted new financing by
purchasing the CBs in June 2001.

Several Hynix creditor banks also increased their loan
loss provisions with respect to the Hynix debt (1). Prior
to participation in the 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).

The banks purchased the CBs on 20 June 2001. It is
noted that between mid-June and 20 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 money (2). 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.

(88)

(89)

(90)

(1) 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.

(2) 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.

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(91)

limits,

the banks to support

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 to May 2001.
According to this information,
the 10 March 2001
meeting referred to in recital 82 was convened in order
to get
the Hyundai Group of
companies (1). When some banks indicated reluctance in
providing support to Hynix since they were concerned
about the downgrading of external credibility and viola-
the GOK financial officials still
tion of credit
persuaded the banks to do it (2). On 24 April 2001 it
reported that Hyundai Creditors' Association
was
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 servi-
cing 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 (3). On the same day, the CEO of Citi-
bank, Citibank being the financial adviser of Hynix at
the time and the organiser of
the May measures,
formally requested financial support for Hynix from the
GOK, and the FSC Chairman expressed a positive posi-
tion on it. Against this background, it was reported that
financial support to Hynix, including acceptance of CBs,
had become more likely (4). It is recalled that Citibank
has also failed to cooperate with the investigation (see
recital 18).

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 provided (6). 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 confi-
dence of
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 insolvent (7). 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 argu-
ments 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.

the market. According to the reports,

(92)

It was reported that KorAm Bank, one of the banks not
cooperating with the investigation, 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 (5).

(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

(1) The Naeoe Economic Daily, 10 March 2001.
(2) The Maeil Economic Daily, 11 March 2001.
(3) Korea Times, 24 April 2001.
(4) Maeil Economic, 24 April 2001.
(5) Korea Times, 21 June 2001; Dow Jones International News, 20 June

2001.

(94)

Following the disclosure of this information to the inter-
ested 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 cred-
itor banks or their decision to extend further credits to
Hyundai companies.
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 the FSC/FSS.
However, considering that the parties have been with-
holding important information until confronted with it

It was also explained that

(6) Recital 39 of the provisional Regulation.
(7) Donga daily, 4 May 2001; Korea Economic Daily, 3 May 2001;

Maeil Economic, 7 May 2001.

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In these circumstances, pursuant

and impeding the investigation by instructing other
parties not to cooperate, it is difficult to find these expla-
nations 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-
to
ranking official.
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 the 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' deci-
sion to buy Hynix CBs was in line with commercial
considerations. It is noted that these investors must have
been influenced by the anticipated continuous avail-
ability of the GOK-directed KDB programme to refi-
nance Hynix's maturing liabilities. Moreover, these inves-
tors did not have the same insight in the situation of
Hynix as the creditor banks. Therefore, it is not unrea-
sonable to conclude that the decision of the banks to
invest should have been different from that of the GDR
investors.

tion. 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 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 under 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 %.

(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 the 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 Regula-

(99)

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

Following the publication of the provisional Regulation,
Hynix,
the GOK, KEB, Woori Bank, Chohung Bank
(‘CHB’), Citibank Seoul and National Agricultural Coop-
comments
eration
Federation
the
concerning the provisional
October 2001 rescue package.

submitted
findings as

(‘NACF’)

regards

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L 212/19

(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 in/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 inde-
pendent 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-worst 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 consid-
erations.

(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

further

it would not be
existing debt to some of its lenders,
completely unreasonable for these lenders to take this
into account in their internal rating of the company
concerned and also consider this fact positively when
lending to the company
assessing whether
In the present case,
concerned could be considered.
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 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 ‘precau-
tionary’ to ‘doubtful’. Such a situation does not support
a decision to grant further financing to the company
concerned.

(105) The third point to examine would be the general finan-
cial 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 deci-
sions.

(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 (1). In October 2001, Hynix's debts were six
times its equity. This situation was also well known by
the banks concerned. As explained 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 exces-
sive lending.

(107) The financial ratios of Hynix according to the so-called
Altman Z-score model, designed specifically to predict
the likely failure of Korean companies, were in 1999 to
2001 far worse than other Korean companies that actu-
ally did fail. The Hynix scores were 700 % higher than
the threshold level of a company in severe financial
distress (2). Hynix's current and quick ratios were indica-
tive of a company with totally inadequate liquidity to

(1) Hynix business plan for 2001 filed with the FSC, 21 March 2002.
(2) Saunders Report, p. 30-35.

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cover obligations (1). 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.

cated loan from foreign borrowers granted in 1996 and
led by Société Générale was declared for default and
cross default in 2001.

the

(108) The 2001 financial accounts also discounted the possibi-
lity of future financial success of Hynix, stating that the
entire normalisation of
company's operation
required the continuous support from creditor banks
until the selling price of semiconductor products suffi-
ciently recovered. These facts indicate that both the
history and the future of Hynix was characterised by 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.

(109) The next point in the assessment of the basis of calcula-
tion 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 (2).

(111) Prior to 1998, Hynix had received loans from French
and Japanese banks,
including the Bank of Tokyo,
Société Générale and Credit Lyonnaise. Since then,
however, none of these banks has participated in the
restructuring of Hynix. The outstanding loans from
including those from Citibank Seoul,
foreign banks,
accounted for only 5 % of the total Hynix loans in 2000
to 2001 (3). It is noted that the assessment of the role of
Citibank is explained in recitals 130 to 133.

(b) Financial contribution by government

(i) Comments of the parties

(113) Hynix and the 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 the 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 commer-
cial considerations by each of the banks concerned.

to block or

(114) KEB argued that the GOK had played no role in the
restructuring programmes in relation to KEB's commer-
cial decisions. It argued that the GOK has no special
right either contractually or under Korean law that
influence KEB's
would allow it either
commercial decisions. According to KEB,
the same
applies also to the FSS. In relation to the FSS's manage-
ment 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 the FSS or any other financial supervisory
authority.

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

(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 syndi-

(1) Saunders Report, p. 20-21.
(2) Hynix business plan for 2001 filed with the FSC, 21 March 2002.
(3) Hynix business plan for 2001 filed with the FSC, 21 March 2002.

(116) CHB argued that the GOK has no direct or indirect influ-
ence on its management activities. Even if Korea Deposit
Insurance Corporation (‘KDIC’) has a substantial share-
holding in CHB, CHB allegedly remained a commercial
bank and its decisions were taken on the basis of purely
commercial considerations. It argued that the Memor-
andum 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.

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(117) Hynix and CHB also argued that other banks (Industrial
Bank of Korea (‘IBK’), Seoul Bank, Kwangju Bank and
Kyongam Bank) where the GOK also had a substantial
shareholding did not participate in the October 2001
package, and this demonstrated that the 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 the economic, social and cultural status of
farmers and quality of their lives. KDIC as a preferred
investor was not allowed by law to participate in NACF
decision-making. As such, its mandate did not include
implementation of public policy goals.

(119) Citibank Seoul denied being in any way affiliated with
the GOK and explained that it participated in the investi-
gated measures solely in pursuit of its commercial inter-
ests.

(122) The information on the record also indicates that the
State as a majority shareholder can appoint directors of
financial institutions. As such, the GOK regularly nomi-
nates or carries influence in the selection of a CEO and
other members of a bank's management (1). 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 the State influ-
enced the decision to change KEB's CEO following poor
performance with Hynix and certain credit-card compa-
nies (2).

(123) Moreover, it should be noted that the provisional Regu-
lation did not rely solely on the 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 the GOK had
exercised direction with regard to the October 2001
measures. In addition to the explanations provided in
these findings are now
the provisional Regulation,
further reinforced by additional
information, some of
which has been received after the publication of the
provisional measures.

(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.

(124) As explained under recitals 32, 42 and 43, the records
contain evidence that the GOK gave direct instructions
to financial institutions concerning some of the measures
under investigation. This information also indicates that
the FSS was involved in the measures. The record also
indicates that
the GOK coerced these institutions to
participate in some measures by threatening to impede
their business operations (3). It is noted that the Commis-
sion had on several occasions asked both the GOK and
banks concerned about such involvement, yet all parties
have consistently denied that there was any State invol-
vement in relation to the measures in question.

(121)

In terms of demonstrating direction, the fact that the
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 the GOK, or other share-
holders, determines the extent to which they can influ-
ence 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 responsi-
bilities in companies where the government has a share-
holding. 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.

(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,
should
decide.

the financial authorities

(1) Private financial experts Verification Report, Meeting 1, point 2,

Meeting 2, point 6, Meeting 4, point 9, Meeting 5, point 11.

(2) Private financial experts Verification Report, Meeting 1, point 2,

Meeting 2, point 6, Meeting 4, point 9.

(3) As regards KorAm being directed to participate in the CB purchase
in June 2001, Korea Times, 21 June 2001; as regards Korea First
in the KDB Debenture
Bank being directed to participate
programme, Far Eastern Economic Review, 15 February 2001.

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(126) As for the KEB argument that the 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 contrac-
tual or legal rights. The findings on this point sought to
demonstrate how the 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 preli-
minary 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.

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 the
GOK to take an equity stake (Articles 147 to 151) and
enables NACF to issue Agricultural Finance Bonds 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 8 (1), 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.

(127) As regards the FSS and FSC, evidence obtained since the
provisional measures also demonstrates that the FSS was
involved in the decisions on measures providing finan-
cing 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 ongoing restructuring of KEB,
the
evidence on the record shows that the 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 calcula-
tion of the troubled loans. Consequently, the comments
of KEB on the provisional Regulation have not provided
any new substantial evidence that would alter the assess-
ment set out in recitals 90 to 91 of the provisional
Regulation. These conclusions are therefore confirmed.

(129) As regards the Woori Bank and the CHB (2), 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
in the October 2001
the GOK to participate
measures (3). These conclusions on direction are rein-
forced by the information received after the imposition
of provisional measures and which is referred to in reci-
tals 91 to 94, 124 and 125. 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 cooperate fully
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.

(128) As regards NACF, recitals 96 to 98 of the provisional
Regulation explained the grounds on which it was provi-
sionally 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 recog-
its cooperative goals to improve the economic,
nised,
social and cultural status and quality of life of farmers
are also economic policy objectives to support agricul-
ture. 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

(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 rela-
tion to the financial package given to Hynix. Thus, Citi-
bank's assertions that it was not acting under GOK direc-
tion could not be verified via a proper response to a

(1) The scale being 1 to 10.
(2) The GOK owned 100 % of Woori Bank and 80 % of CHB.
(3) It is also noted that an internal Woori Bank document recom-
mending 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.

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preted as placing Citibank in a vulnerable position with
regards to direction by the GOK. Due to the non-coop-
eration 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
the reason for non-cooperation was to
recalled that
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 finan-
cing 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
the GOK since 1967, when it was authorised to operate
in Korea. This close relationship between the GOK and
Citibank is witnessed in the role played by Citibank in
assisting the 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
USD 21,75 billion in 1998. Moreover, Citibank helped
the GOK and government-related institutions to access
capital markets during the Korean financial crisis by
successfully sponsoring a USD 4 billion 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 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 the GOK was involved and directed
Citibank to provide the financing in question.

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 coop-
erate significantly impeded the investigation, not just in
terms of identifying Citibank's precise functions in rela-
tion to its role as a lender, but also in respect to its role
as the financial adviser to Hynix. Due to the non-coop-
eration the true status of Citibank as regards Hynix and
the nature and intensity of its overall relationship to the
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 instru-
mental in allowing definitive conclusions to be drawn as
regards the relations between them, Hynix and the GOK.
What the investigation has, however, shown, due to
information given by other parties, is that Citibank was
a central figure in discussions between the GOK, Hynix
and other parties involved in this case. Indeed, Hynix
stated that Citibank should not cooperate in the investi-
gation because ‘such disclosure may divulge information
relating to Hynix's cost,
It is
recalled that Hynix was majority-owned by the GOK via
the banks at the time of this intervention.

finance or accounting’.

(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 contribu-
tion 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 situa-
tion of Hynix was already sufficiently bad to deter any
other new bank from getting financially involved. Citi-
bank'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 for the GOK direction,

information on the record
indicates that there were considerable links between the
GOK, Hynix and Citibank. For the GOK and Citibank
these went beyond the loans investigated. Such links can
be interpreted in two ways. Firstly, they can be inter-
preted 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 inter-

(134) As for the argument that not all banks where the 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 the GOK
was planning to sell to Hana Bank following the recom-
mendations 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.

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(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 under-
written by the 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 parti-
cipating 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.

shielded from these consequences because of the high
level of GOK ownership and factual control of
the
lending decisions. It should be further noted 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 in recital 88. This indi-
cates 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.

(c) Benefit conferred by the measures

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

(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 consid-
ered that the value of Hynix as a going concern was
than the immediate liquidation value. They
higher
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.

(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. More-
over, the rating itself is more important than the reasons
for it. Any potential
investor planning to invest in 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 was, 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.

(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.

(d) Calculation of the subsidy

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

(138)

is noted that

It
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
this can therefore only be
October 2001 measures,
explained by the fact that the decision makers were

(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 15 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 the GOK and Shinhan Bank.

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(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 accord-
ingly 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
to maturity
the record the amount of
extensions was KRW 1,825 trillion.

loans subject

(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 2001, this
should be taken into account when allocating the benefit
over time.

subsidy was

countervailable

(146) The subsidy granted to Hynix in the context of the
October 2001 package was a non-recurring subsidy. The
amount of
calculated
pursuant to Article 7(3) of the basic Regulation by allo-
cating 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
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
the subsidy. For these reasons, there are no
rate of
grounds for changing the allocation method used in the

to implement.

In addition,

impossible

if

the conclusions set
provisional Regulation. Therefore,
out in recital 108 of the provisional Regulation on the
allocation of subsidy over time pursuant to the Guide-
lines 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 to
December, since this was the time when the benefit was
available to Hynix.

(149) The

the

interest

rejecting

reasoning

argument of Hynix
concerning the allocation of the subsidy over years in
recital 147 applies also here. The linear allocation
method distributes the benefit of all non-recurring subsi-
dies received during the investigation period equally over
the number of years in the allocation period. The annual
rate is added to this amount
commercial
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 allo-
cated 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. There-
fore, the conclusions set out in recital 108 of the provi-
sional 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 allo-
cated on the consolidated turnover of Hynix instead of
the 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 turn-
over of
the company investigated. The company is
defined as a separate accounting entity. This is impor-
tant, 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 appro-
priate basis, since it does not relate to the product
concerned and often includes
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 the Republic of Korea.

subsidiaries

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(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 Regula-
tion is hereby confirmed.

(155)

the maturities of

loans were
In the present case,
extended by three years. As explained in recital 107, 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
extensions as grants appears to be the appropriate
method of calculating the amount of subsidy.

(ii) Final

findings on the calculation of the subsidy of the

October 2001 measures

N e w lo a n

(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 liabil-
ities 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.

E x te nsi on of matu r i ti e s a nd i nte r e st r a te c u ts
of r e ma i n i ng lo a ns

(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 infor-
mation on the record, roll-overs of debt are considered
as new loans in Korea. The assessment of the situation
should therefore be similar to that of the case of a new
the
loan.
company and its payments history would be the decisive
criteria. If it was obvious to the bank at the time of the
maturity extension that it would 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.

In such cases,

the financial

situation of

(156) Another possibility to calculate the amount of subsidy
would be to compare the interest rate the company actu-
ally 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
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 diffi-
culties, 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 maturity extensions. This was
extremely low, considering in particular that the syndi-
cated 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 for commer-
cial 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 would not have been able to
sustain the cost of such interest rate. Since all
the
evidence in the record indicated that Hynix had no alter-
native sources of
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 Regula-
tion 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.

financing in the market

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(158)

is noted that

this conclusion is
the accuracy of
It
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 provide fully for its
exposure to Hynix by the end of year 2002 (1). 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 unreco-
verable (2). 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.

De bt -to-e q u i t y sw a p

(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, 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 Hynix's 2001 financial accounts, wiping out
a considerable amount of its debt. It is therefore reason-
able 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 conse-
quences, 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.

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 invest-
ment 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 govern-
ment 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 at 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 ques-
tion. 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.

(161) Apart

from the question of 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.

(1) 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.

(2) Korea Times, 25 November 2002.

(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.

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22.8.2003

(165)

is noted that

this conclusion is
the accuracy of
It
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. 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 one share. This was
done to mitigate the capital erosion of approximately
KRW 22 trillion that had resulted from accumulated
deficit and discount on capital stocks (1). The banks
pointed out that they had already set aside loan loss
reserves equivalent
the loans
extended to Hynix (2). 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.

to 80 % to 100 % of

(166) The calculation of

as

regards

findings
In order

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
investigated
provisional
measures.
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 there-
fore 19,4 % ad valorem. Considering also the conclusions
in recitals 47, 80 and 98,
the
subsidy is the following:

to avoid double-counting,

the total amount of

some

Type of
Subsidy

D/A
Exten-
sion

KDB
Deben-
ture
Progra-
mme

CB
purchase

October
2001
measures

TOTAL

5,1 %

4,9 %

5,4 %

19,4 %

34,8 %

F. INJURY

1. PRELIMINARY REMARKS

(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 justi-
fied 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, since the Community industry comprises two
companies.
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.

It

(169) However, Article 29(5) of the basic Regulation prohibits
disclosure of information for which confidential treat-
ment has been requested and good cause has been
shown for
since the
such treatment. Furthermore,
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 Commu-
nity 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 analyse accurately 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 justi-
fied and is therefore rejected.

E. DEFINITION OF THE COMMUNITY INDUSTRY

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

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

(1) Public Notice on other major management topics, decision made by

Hynix-CFIC meeting, 30 December 2002.

(2) Korea Times, 26 November 2002.

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.

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L 212/29

(172)

In the absence of any new information, the provisional findings concerning Community consump-
tion 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 in '000
Mbits

1998

1999

2000

2001 (IP)

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 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. Otherwise, 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 acquisi-
tion, 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,
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.

increased its production capacity. Furthermore, no party,

(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 estab-
lished 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.

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(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

Index Korea

of which:

Index Samsung

Index Hynix

Index LG Semicon

(data not verified)

1998

100

100

100

100

1999

128

110

194

90

2000

185

181

372

0

2001 (IP)

319

414

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 question-
naire 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

100

100

1999

105

91

2000

2001 (IP)

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 under-
cutting 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, when assessing the effect of subsidised imports on
prices, whether price undercutting has been ‘significant’. It does not set out any requirement relating
to the calculation of the margin of undercutting, nor 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 assess-
ment of injury and causation.

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(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 elimi-
nates such undercutting. Thus, in such markets, 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 situations prevented the Community producers from increasing prices,
something which would otherwise have occurred.

(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 trans-
actions, 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 the
monthly or daily average of Hynix prices was used in the calculation, the proportion of the Commu-
nity 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 provi-
sional 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 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.

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Market shares

Index Korea

of which:

Index Samsung

Index Hynix

Index LG Semicon

(data not verified)

1998

100

100

100

100

1999

73

63

111

52

2000

68

65

136

0

2001 (IP)

79

100

120

0

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 Community industry improved in certain respects during the period under 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 Commu-
nity 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.

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
the basic Regulation, whether the subsidised imports of the product
Article 8(6) and (7) of
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 attrib-
uted to the subsidised imports.

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(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 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 IT during this period. It is noted that the
comments of Hynix concerning causation referred to only one of the two Community producers
composing the Community industry, i.e. Infineon. The analysis which follows concerns the Commu-
nity industry as a whole.

2. EFFECT OF THE SUBSIDISED IMPORTS

(191) As set out in recitals 176 and 177, 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)
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 an 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 suffi-
ciently important in themselves to adversely affect the Community market and in particular the
prices of the Community industry. Market analysts (1) believed that Hynix was technically bankrupt
and that it was kept alive only through debt-restructuring programs, thus maintaining artificially
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.

(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 cycli-
cality of the DRAM market. They further argued that worldwide demand for DRAMs grew in 2001
only by 59 % whilst the average year on year rate was 75 %. It is noted that these alleged worldwide
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

(1) Morgan Stanley, Hynix Semiconductor — September 25, 2002.

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throughout the period under consideration. The increased consumption in terms of Mbits during
the IP stemmed to a large degree from the introduction of Microsoft XP, which has much higher
Mbit requirements than previous systems, and increased sales of ‘upgrade’ products 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's 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. 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 Regula-
tion 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 worldwide DRAM market still suffered
during the IP from structural overcapacity 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 Commu-
nity during the IP. Furthermore, it is generally recognised that the DRAMs industry constantly needs
a high level of investment, in particular in 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 invest-
ments during the period under consideration. In fact, the worldwide investments of the Community
industry were less than half the investments of the two Korean producers during that period. It is
therefore reasonable to assume that any overcapacity was not created by the Community industry
alone. On the contrary, it was the Korean industry which has mainly contributed to such overcapa-
city worldwide. It is also reasonable to assume that, had the Korean government not intervened with
the subsidies, the situation in both the Community and worldwide as regards overcapacity would
not have been so pronounced.

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(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. distri-
butors) 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 of 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 a short life cycle; on 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 ques-
tionnaire that ‘at present manufacturers move to just-in-time ordering’. The same distributor indi-
cated 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 contrib-
uted 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 Commu-
nity 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.

(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 overcapa-
city 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
injury attributable to subsidised
to undermine the material
imports.

insufficient

(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.

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(204) As far as overcapacity is concerned, this worldwide 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 Commu-
nity 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 neces-
sary 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
cooperating 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 disappear-
ance 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.

(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.

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(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 reasonably be achieved under normal conditions of competition, i.e. in the absence of subsi-
dised 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 reason-
able 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 origi-
nating 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 in 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 Elec-
tronics 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 coun-
trywide duty applicable to ‘all other 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 Commission (1) forthwith with all relevant information, in parti-
cular any modification in the company's activities linked to production, domestic and export sales
associated with, for example, 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.

(1) European Commission — Directorate General for Trade — Directorate B — J-79 5/17 — Rue de la Loi/Wetstraat

200 — B-1049 Brussels.

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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:

Article 1

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-Semiconduc-
tors (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-customised) memory modules or (non-customised) memory boards, or in some
other kind of aggregate form, provided the main purpose of which is to provide memory, currently classifi-
able within CN codes 8542 21 11, 8542 21 13, 8542 21 15, 8542 21 17, ex 8542 21 01 (TARIC code
(TARIC code
8542 21 01 10),
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.

8542 21 05 10),

ex 8548 90 10

ex 8542 21 05

(TARIC code

The rate of the definitive duty applicable to the net free-at-Community-frontier price, before duty,

2.
shall be as follows:

Korean Producers

Rate of Duty (%)

TARIC additional code

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

All other companies

0 %

34,8 %

A437

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, 11 August 2003.

For the Council
The President
F. FRATTINI