70 FR 54523, September 15, 2005
DEPARTMENT OF COMMERCE
International Trade Administration
[C-580-851]
Dynamic Random Access Memory Semiconductors from the Republic of
Korea: Preliminary Results of Countervailing Duty Administrative Review
AGENCY: Import Administration, International Trade Administration,
Department of Commerce.
SUMMARY: The Department of Commerce is conducting an administrative
review of the countervailing duty order on dynamic random access memory
semiconductors from the Republic of Korea for the period April 7, 2003,
through December 31, 2003. We preliminarily find that certain
producers/exporters under review received countervailable subsidies
during the period of review. If the final results remain the same as
these preliminary results, we will instruct U.S. Customs and Border
Protection (``CBP'') to assess countervailing duties as detailed in the
``Preliminary Results of Review'' section of this notice.
Interested parties are invited to comment on these preliminary
results (see the ``Public Comment'' section of this notice, below).
EFFECTIVE DATE: September 15, 2005.
FOR FURTHER INFORMATION CONTACT: Daniel J. Alexy, Cole Kyle, Natalie
Kempkey or Marc Rivitz, Office of Antidumping/Countervailing Duty
Operations, Office 1, Import Administration, U.S. Department of
Commerce, Room 3069, 14th Street and Constitution Avenue, NW.,
Washington, DC 20230; telephone: (202) 482-1540, (202) 482-1503, (202)
482-1698 or (202) 482-1382, respectively.
SUPPLEMENTARY INFORMATION:
Case History
On August 11, 2003, the Department of Commerce (``the Department'')
published a countervailing duty order on dynamic random access memory
semiconductors (``DRAMS'') from the Republic of Korea (``ROK''). See
Notice of Countervailing Duty Order: Dynamic Random Access Memory
Semiconductors from the Republic of Korea, 68 FR 47546 (August 11,
2003) (``CVD Order''). On August 3, 2004, the Department published a
notice of ``Opportunity to Request Administrative Review'' for this
countervailing duty order. On August 31, 2004, we received requests for
review from Hynix Semiconductor, Inc. (``Hynix''), Infineon
Technologies North America Corp., and Micron Technology, Inc.
(``Micron''). In accordance with 19 CFR 351.221(c)(1)(i) (2004), we
published a notice of initiation of the review on September 22, 2004.
See Initiation of Antidumping and Countervailing Duty Administrative
Reviews and Request for Revocation in Part, 69 FR 56745 (September 22,
2004) (``Initiation Notice'').
On October 19, 2004, we issued countervailing duty questionnaires
to the Government of the Republic of Korea (``GOK'') and Hynix
(formerly, Hyundai Electronics Industries Co., Ltd. (``HEI''). We
received responses to these questionnaires in December 2004.
On November 30, 2004, we initiated an investigation of new subsidy
allegations within the context of the first administrative review of
the countervailing duty order on DRAMS from Korea. See New Subsidy
Allegations Memorandum from Ryan Langan to Susan Kuhbach, dated
November 30, 2004, available at the Central Records Unit (``CRU''),
Room B-099 of the main Department building.
On March 25, 2005, we published a postponement of the preliminary
results in this review until August 31, 2005. See Dynamic Random Access
Memory Semiconductors from the Republic of Korea: Extension of Time
Limit for Preliminary Results of Countervailing Duty Review, 70 FR
15293 (March 25, 2005).
We issued supplemental questionnaires to the GOK and Hynix in May
and June 2005, and received responses to these supplemental
questionnaires in June and July 2005. Hynix and Micron submitted pre-
preliminary results comments and rebuttal comments in July and August
2005.
Scope of the Order
The products covered by this order are DRAMS from the Republic of
Korea, whether assembled or unassembled. Assembled DRAMS include all
package types. Unassembled DRAMS include processed wafers, uncut die,
and cut die. Processed wafers fabricated in the ROK, but assembled into
finished semiconductors outside the ROK are also included in the scope.
Processed wafers fabricated outside the ROK and assembled into finished
semiconductors in the ROK are not included in the scope.
The scope of this order additionally includes memory modules
containing DRAMS from the ROK. A memory module is a collection of
DRAMS, the sole function of which is memory. Memory modules include
single in-line processing modules, single in-line memory modules, dual
in-line memory modules, small outline dual in-line memory modules,
Rambus in-line memory modules, and memory cards or other collections of
DRAMS, whether unmounted or mounted on a circuit board. Modules that
contain other parts that are needed to support the function of memory
are covered. Only those modules that contain additional items which
alter the function of the module to something other than memory, such
as video graphics adapter boards and cards, are not included in the
scope. This order also covers future DRAMS module types.
The scope of this order additionally includes, but is not limited
to, video random access memory and synchronous graphics random access
memory, as well as various types of DRAMS, including fast page-mode,
extended data-out, burst extended data-out, synchronous dynamic RAM,
Rambus DRAM, and Double Data Rate DRAM. The scope also includes any
future density, packaging, or assembling of DRAMS. Also included in the
scope of this order are removable memory modules placed on
motherboards, with or without a central processing unit, unless the
importer of the motherboards certifies with CBP that neither it, nor a
party related to it or under contract to it, will remove the modules
from the motherboards after importation. The scope of this order does
not include DRAMS or memory modules that are re-imported for repair or
replacement.
The DRAMS subject to this order are currently classifiable under
subheadings 8542.21.8005 and 8542.21.8020 through 8542.21.8030 of the
Harmonized Tariff Schedule of the United States (``HTSUS''). The memory
modules containing DRAMS from the ROK, described above, are currently
classifiable under subheadings 8473.30.10.40 or 8473.30.10.80 of the
HTSUS. Removable memory modules
[[Page 54524]]
placed on motherboards are classifiable under subheadings 8471.50.0085,
8517.30.5000, 8517.50.1000, 8517.50.5000, 8517.50.9000, 8517.90.3400,
8517.90.3600, 8517.90.3800, 8517.90.4400, and 8543.89.9600 of the
HTSUS.
Scope Rulings
On December 29, 2004, the Department received a request from Cisco
Systems, Inc. (``Cisco''), to determine whether removable memory
modules placed on motherboards that are imported for repair or
refurbishment are within the scope of the CVD Order. The Department
initiated a scope inquiry pursuant to 19 CFR 351.225(e) on February 4,
2005. On June 16, 2005, the Department issued a preliminary scope
ruling, finding that removable memory modules placed on motherboards
that are imported for repair or refurbishment are within the scope of
the CVD Order. See Preliminary Scope Ruling Memorandum from Julie H.
Santoboni to Barbara E. Tillman, dated June 16, 2005. On July 5, 2005,
and July 22, 2005, comments on the preliminary scope ruling were
received from Cisco. On July 6, 2005, and July 15, 2005, comments were
received from Micron. The final ruling is currently pending.
Period of Review
The period for which we are measuring subsidies, i.e., the period
of review (``POR''), is April 7, 2003, through December 31, 2003.
Changes in Ownership
Effective June 30, 2003, the Department adopted a new methodology
for analyzing privatizations in the countervailing duty context. See
Notice of Final Modification of Agency Practice Under Section 123 of
the Uruguay Round Agreements Act, 68 FR 37125 (June 23, 2003)
(``Modification Notice''). The Department's new methodology is based on
a rebuttable ``baseline'' presumption that non-recurring, allocable
subsidies continue to benefit the subsidy recipient throughout the
allocation period (which normally corresponds to the average useful
life (``AUL'') of the recipient's assets). However, an interested party
may rebut this baseline presumption by demonstrating that, during the
allocation period, a change in ownership occurred in which the former
owner sold all or substantially all of a company or its assets,
retaining no control of the company or its assets, and that the sale
was an arm's-length transaction for fair market value.
The Modification Notice explicitly addresses full privatizations,
noting that the Department would not make a decision at that time as to
whether the new methodology would also be applied to other types of
ownership changes and factual scenarios, such as partial privatizations
or private-to-private sales. 68 FR at 37136. However, starting with
Certain Pasta from Italy, Final Results of the Fifth Countervailing
Duty Administrative Review, 67 FR 52452 (August 6, 2002), we applied
this methodology to a private-to-private sale of a company (or its
assets) as well.
According to Hynix, in 2002, six different Hynix creditors that
converted Hynix debt to equity as part of the October 2001
restructuring of the company, as well as Pusan Bank, sold all of that
equity on the open market. Hynix reports that these shares accounted
for 13.8 percent of Hynix outstanding shares as of the end of 2002, and
17.1 percent of the equity created as a result of Hynix's October 2001
restructuring plan. Hynix argues that the sale of this equity
constitutes a change in ownership that rebuts the Department's baseline
presumption that alleged non-recurring subsidies continue to benefit
the recipient over the allocation period.
We preliminarily find that the percentage of ownership transferred
as a result of the sale of these shares does not constitute a sale of
all or ``substantially all'' of the company or its assets. Therefore,
we find that Hynix has not rebutted the baseline presumption that the
non-recurring, allocable subsidies received prior to the sale of the
equity continue to benefit the company throughout the allocation
period.
Subsidies Valuation Information
Allocation Period
Pursuant to 19 CFR 351.524(b), non-recurring subsidies are
allocated over a period corresponding to the AUL of the renewable
physical assets used to produce the subject merchandise. Section
351.524(d)(2) of the Department's regulations creates a rebuttable
presumption that the AUL will be taken from the U.S. Internal Revenue
Service's 1977 Class Life Asset Depreciation Range System (the ``IRS
Tables''). For DRAMS, the IRS Tables prescribe an AUL of five years.
During this review, none of the of the interested parties disputed this
allocation period. Therefore, we continue to allocate non-recurring
benefits over the five-year AUL.
Discount Rates and Benchmarks for Loans
Long-Term Rates
For loans that were found countervailable in the investigation and
which continued to be outstanding during the POR, we have used the same
benchmarks that we used in the investigation.
For outstanding long-term loans that originated after the period of
investigation, i.e., since June 30, 2002, we have used an
uncreditworthy benchmark calculated in accordance with 19 CFR
351.505(a)(3)(iii). See ``Creditworthiness'' infra. For the commercial
interest rate charged to creditworthy borrowers required for the
formula, we used the rate for AA-three-year won-denominated corporate
bonds as reported by the Bank of Korea (``BOK''). For Hynix's foreign
currency-dominated loans, we used lending rates as reported by the
International Monetary Fund's (``IMF'') International Financial
Statistics Yearbook. For the term of the debt, we used 5 years because
all of the non-recurring subsidies examined were allocated over a 5-
year period.
Short-Term Loans
For short-term loans, we utilized the money market rates reported
in the IMF's International Financial Statistics Yearbook. However, for
countries (or currencies) for which a money market rate was not
reported, we utilized the lending rate.
Equityworthiness
As discussed below, some of Hynix's debt was converted to equity as
part of the December 2002 restructuring. The petitioner alleged that
Hynix was unequityworthy at the time of these debt/equity conversions
and that the entire infusion should be treated as a countervailable
grant.
Section 771(5)(E)(I) of the Tariff Act of 1930, as amended,
effective January 1, 1995, by the Uruguay Round Agreements Act (``the
Act''), and 19 CFR 351.507 state that, in the case of a government-
provided equity infusion, a benefit is conferred if the investment
decision is inconsistent with the usual investment practice of private
investors. According to 19 CFR 351.507, the first step in determining
whether an equity investment decision is inconsistent with the usual
investment practice of private investors is examining whether, at the
time of the infusion, there was a market price for similar, newly-
issued equity. If so, the Department will consider an equity infusion
to be inconsistent with the usual investment practice of private
[[Page 54525]]
investors if the price paid by the government for newly-issued shares
is greater than the price paid by private investors for the same, or
similar, newly-issued shares.
Where actual private investor prices are not available, pursuant to
19 CFR 351.507(a)(3)(i), the Department will determine whether the firm
funded by the government-provided infusion was equityworthy or
unequityworthy at the time of the equity infusion.
In making the equityworthiness determination, pursuant to 19 CFR
351.507(a)(4), the Department will normally determine that a firm is
equityworthy if, from the perspective of a reasonable private investor
examining the firm at the time the government-provided equity infusion
was made, the firm showed an ability to generate a reasonable rate of
return within a reasonable time. To do so, the Department normally
examines the following factors:
(A) objective analyses of the future financial prospects of the
recipient firm, (B) current and past indicators of the firm's financial
health, (C) rates of return on equity in the three years prior to the
government equity infusion, and (D) equity investment in the firm by
private investors.
The Department's regulations further stipulate that the Department
will ``normally require from the respondents the information and
analysis completed prior to the infusion, upon which the government
based its decision to provide the equity infusion.'' 19 CFR
351.507(a)(4)(ii). Absent an analysis containing information typically
examined by potential private investors considering an equity
investment, the Department will normally determine that the equity
infusion provides a countervailable benefit. This is because, before
making a significant equity infusion, it is the usual investment
practice of private investors to evaluate the potential risk versus the
expected return using the most objective criteria and information
available.
The Department examined the circumstances leading up to Hynix's
December 2002 restructuring. This restructuring resulted in the
refinancing of some debt and the conversion of other debt to equity.
Shortly after Hynix's October 2001 restructuring package was
adopted, Hynix's Corporate Restructuring Promotion Act Creditors'
Council established a Special Committee for Corporate Restructuring
(``Restructuring Committee'') that would more closely monitor Hynix'
situation and fashion recommendations for enhancing the Council
members' recovery of their investment. The Restructuring Committee was
a sub-group of Hynix' principal creditors and outside consultants. The
Restructuring Committee had explored the possibility of either securing
a strategic alliance with other manufacturers in the DRAMS industry or
selling Hynix.
On December 3, 2001, the Restructuring Committee initiated
negotiations with Micron Technologies to sell Hynix's memory division
and a stake in Hynix's non-memory operations. Although the Creditors'
Council approved a Memorandum of Understanding (``MOU'') between the
two companies, Hynix's Board of Directors ultimately rejected the MOU,
largely due to concerns over the fate of Hynix's non-memory division.
See Hynix's December 17, 2004, Questionnaire Response at III-14-15.
Following this decision by Hynix's Board, the Restructuring
Committee continued its evaluation of Hynix's operations and the
measures necessary to preserve the creditors' existing investment in
the company and to position the company and/or its assets for future
sale. Id. at III-15. Pursuant to this endeavor, the Korea Exchange
Bank, Hynix's lead bank, retained Deutsche Bank (``DB'') and Morgan
Stanley Dean Witter (``MSDW'') in May 2002 on behalf of the Creditors'
Council.
Additionally, Arthur D. Little (``ADL'') was retained in May 2002
to assist DB in reviewing the outlook for the semiconductor market,
Hynix's business portfolio, technical and marketing competitiveness,
and Hynix's restructuring plan. Also, Deloitte and Touche (``DT'') was
brought in as an independent accountant to perform a new appraisal of
Hynix's liquidation value. In addition, De Dios & Associates provided
DB with semiconductor market and price projections, and benchmarking.
The final product of DB's analysis was the November 2002 report (``DB
Report '') and recommendations. Id. at III-15-16.
The DB Report outlined three basic courses of: (1) liquidation, (2)
sale of Hynix's memory operations, or (3) continued commitment to a
turnaround of the company. Regardless of the option chosen, DB
concluded that a financial restructuring in the immediate term was
necessary to allow time for the exploration and pursuit of these three
options because otherwise, Hynix would run out of cash in the first
quarter of 2003 given its balance sheet and operating plan at that
time. Ultimately, because of the uncertainty surrounding the timing and
duration of a liquidation process or a sale of memory assets, which
could affect actual recovery for the creditors, the DB Report
recommended sequential action, focusing first on a new financial
restructuring of the company, followed by parallel pursuits of a
turnaround of the company and a sale of its memory operations.
Liquidation was proposed only as a fall-back option. In addition to
this basic recommendation, the DB Report provided a more detailed
financial restructuring plan. Id. at III-16-17.
Based on the DB analysis and proposed restructuring plan, the
Restructuring Committee requested the approval of the full Creditors'
Council to move ahead with the DB Plan. Id. at III-17. According to
Hynix, the plan was adopted by the Creditors' Council on December 30,
2002, as the best means of maximizing loan recovery and increasing
shareholders' value. Under the terms of the restructuring, the
Restructuring Committee would continue to search for prospective buyers
of Hynix's noncompetitive and memory business units. Hynix would
continue a self-rescue plan as outlined by DB, with regular reports
provided to the creditors on the performance of that plan. Finally, the
creditors would engage in a new round of debt restructuring, focusing
on a new debt-to-equity conversion and the restructuring and
rescheduling of interest payments on remaining debt. Id.
The debt/equity swap was effected as part of a restructuring plan
by DB, and reflected in a November 2002 report by DB (``DB Report''),
prepared at the behest of KEB and pursuant to the Restructuring
Committee's goal of preserving existing investment in Hynix, and
repositioning the company for possible future sale. Under the terms of
the restructuring, half of the value of unsecured debt held by the
creditors was converted to equity or to bonds convertible to equity.
Specifically, 1,849,156 million won of the debt was converted to common
stock and 12,393 million won was converted to convertible bonds. One
creditor, C&H Capital, exercised its appraisal rights under the CRPA
rather than sign on to the new restructuring. Id. at III-17-18.
On April 15, 2003, Hynix issued 193,904,000 common shares to those
creditors who elected in the December 2002 restructuring to convert the
debt owed to equity.
On August 8, 2003, certain of the bonds received with the December
2002 restructuring were converted to equity. For the remaining
convertible bonds, the bondholders are required to exercise the
conversion rights between July 15, 2003 and December 24, 2006. Id. at
III-18.
[[Page 54526]]
The remaining debt was refinanced on December 30, 2002, extending
its maturity until December 31, 2006. In addition, some prospective
interest was scheduled to be converted into principal. Specifically, it
was determined that interest would be paid at a rate of 3.5 percent,
according to the existing (pre-restructuring) payment schedule of the
debt instrument in question. Any interest owed in excess of 3.5 percent
would convert into principal at the end of each semi-annual period. A
maturity date of December 31, 2006, was set for this interest to be
converted to principal, in line with the extended maturity on the
refinanced debt. Interest on this new principal was set at 6 percent
per annum, to be paid on a quarterly basis. Id.
The DB Report projected a favorable turnaround for Hynix following
the proposed restructuring. However, that turnaround was predicated on
optimistic assumptions about the market and the company, which were not
shared by other independent analyses in the record. In addition, prior
to and during the restructuring, independent analyses raised strong
concerns about Hynix's viability and future survival. While the DB
Report forecast Hynix to be nearly debt-free by 2006, it was predicated
upon certain predictions regarding DRAM prices and capital
expenditures, and it was not certain that these scenarios would come to
pass.
The Petitioner provided additional analyst reports to bolster its
claim that Hynix's stability and future were precarious.
``We do not foresee the company returning to profit within
our forecast period (to 2004). Also, large net losses should continue
to eat away at retained earnings, diminishing book value. Hynix is
technically bankrupt, kept alive only through debt restructuring
programs.'' Also, ``If Hynix obtains a significant bailout package and
increases production, we believe that the market is likely to be
oversupplied in 2003.'' Morgan Stanley Hynix Semiconductor Equity
Research (September 25, 2002), at Petitioner's September 27, 2004,
submission, at Exhibit 15.
``We are increasingly concerned about Hynix's dismal
earnings prospects. We are cutting 02-03 estimates into deficit
territory as cost improvements and supply growth is constrained by lack
of investment in the process technology upgrade. Moreover, the sharp
decline prices coupled with weakening demand for sync DRAM pose risk of
amounting losses. We reiterate our sell rating on the stock.'' Merrill
Lynch: Hynix Semiconductor, Inc: Comment (September 27, 2002), at
Petitioner's April 25, 2005, Factual Information Submission (``FIS''),
at Volume 44, Exhibit A-12.
``Unfortunately, the bad news is that the company is over a
generation behind in shrink technology compared to market leaders due
to lack of capex in the past two years'' and ``...the risks of dilution
from a debt-to-equity swap and write-down plans present a negative
investment case. We maintain our sell recommendation.'' Merrill Lynch:
Hynix Semiconductor, Inc: Comment (November 27, 2002), at Petitioner's
April 25, 2005, FIS, at Volume 44, Exhibit A-13.
``Creditors cannot afford to nurse the company back to
health. Hynix is technically bankrupt, kept alive only through debt
restructuring programs. Whatever the outcome, the message is clear to
investors: Hynix is not an investment grade company.'' Morgan Stanley
Hynix Semiconductor Equity Research (February 13, 2003), at
Petitioner's September 27, 2004, submission, at Exhibit 10.
As these statements indicate, the DB report ran counter to the
prevailing wisdom at the time of the debt to equity conversions, namely
that Hynix was not an investment grade company.
In addition, it is noteworthy that DB was retained by KEB, in its
capacity as Hynix's lead bank. The Department has previously found that
the KEB acted in accordance with the GOK's policy objectives and that
the GOK has significant influence over the bank's lending decisions.
See Investigation Decision Memorandum at 56. Our prior finding and the
GOK's continued high level of ownership in the KEB call into question
the independence of the bank from the GOK's policy regarding Hynix.
During the POR, the GOK remained the bank's single largest shareholder.
The Petitioner also claims that the GOK influenced the final
conclusions that were presented to the Creditor's Council. According to
Petitioner, ``the original restructuring plan endorsed by DB called for
dividing and selling the company. Apparently, however, that was not the
answer that the GOK was looking for...Another source reported that `the
government and the creditors group altered the original plan.' '' See
Petitioners's Pre-Preliminary Comments on the Hynix Bailout, July 21,
2004, at 41. For these reasons, we do not find that the conclusions of
the DB Report are completely independent, market-based assessments and,
at the very least, should be scrutinized given the lack of outside
investors or other corroborating projections from additional third-
party financial analyst reports.
The Department has preliminarily determined that all but one of the
creditors participating in the debt to equity conversions resulting
from the December 2002 restructuring package were either government
authorities or were entrusted or directed by the government to provide
financial contributions to Hynix.
For the one creditor that we have preliminarily found was not
directed by the GOK in connection with the Hynix restructuring during
the POR, we must consider whether the price paid by this creditor for
the equity constitutes a private investor price for the purposes of
assessing whether the other creditors' decision to swap their debt for
equity was consistent with the private investor standards in 19 CFR
351.507 and section 771(5)(E)(i) of the Act.
In the investigation, the Department looked at a similarly-situated
creditor, Citibank. We found that the value of the equity acquired by
Citibank in the October 2001 restructuring was insignificant within the
meaning of 19 CFR351.507(a)(2)(iii). See Investigation Decision
Memorandum at 90. See, also, Preamble at 65373 (citing to Small
Diameter Circular Seamless Carbon and Alloy Steel Standard, Line and
Pressure Pipe from Italy, 60 FR 31992, 31994 (June 19, 1995)).
Moreover, the Department also found that Citibank's participation was
small relative to the total value of debt converted to equity by GOK-
owned, controlled, or directed banks. See Investigative Decision
Memorandum at 90.
In this review, we find that the value of the equity acquired by
the creditor in question in connection with the December 2002
restructuring was similarly insignificant and small in comparison with
that of the GOK-owned, controlled or directed banks combined.
Consequently, the Department has preliminarily determined that the
price paid by this creditor cannot serve as a benchmark for the
purposes set forth under 19 CFR 351.507. Therefore, since there were no
other private investor prices relevant to the December 2002 debt-for-
equity swap, we next examined other indicators of Hynix's
equityworthiness, pursuant to 19 CFR 351.507(a)(4).
As articulated further in the creditworthiness section below,
current and past indicators showed the company to be in poor financial
health. Hynix's profitability, solvency, liquidity and repayment
capabilities were dire for the three years leading up to the December
2002 restructuring and continuing through the POR. Its net
[[Page 54527]]
profit margin, return on equity, and return on assets were all negative
during this period. The debt-to-equity, current and quick ratios all
demonstrate that Hynix was in danger of not being able to make all of
its payments. This situation necessitated multiple debt restructurings.
Given the overall economic situation of the firm and the DRAM industry,
Hynix was hard pressed to find independent private investors. Moreover,
the multiple debt restructurings resulted in Hynix being owned
primarily by its creditor banks.
Based upon these factors, we preliminarily find that Hynix was
unequityworthy at the time of the initiation and implementation of the
December 2002 restructuring process through 2003.
Creditworthiness
The examination of creditworthiness is an attempt to determine if
the company in question could obtain long-term financing from
conventional commercial sources. See 19 CFR 351.505(a)(4). According to
19 CFR 351.505(a)(4)(I), the Department will generally consider a firm
to be uncreditworthy if, based on information available at the time of
the government-provided loan, the firm could not have obtained long-
term loans from conventional commercial sources. In making this
determination, according to 19 CFR 351.505(a)(4)(i), the Department
normally examines the following four types of information: (1) the
receipt by the firm of comparable commercial long-term loans, (2)
present and past indicators of the firm's financial health, (3) present
and past indicators of the firm's ability to meet its costs and fixed
financial obligations with its cash flow, and (4) evidence of the
firm's future financial position.
In the case of firms not owned by the government, the receipt by
the firm of comparable long-term commercial loans, unaccompanied by a
government-provided guarantee (either explicit or implicit), will
normally constitute dispositive evidence that the firm is not
uncreditworthy. See 19 CFR 351.505(a)(4)(ii). However, according to the
Preamble to the Department's regulations, in situations where a company
has taken out a single commercial bank loan for a relatively small
amount, where a loan has unusual aspects, or where we consider a
commercial loan to be covered by an implicit government guarantee, we
may not view the commercial loan(s) in question to be dispositive of a
firm's creditworthiness. See Countervailing Duties: Final Rule, 63 FR
65348, 65367 (November 28, 1998) (``Preamble'').
The Department examined Hynix's performance from January 1, 2000,
to June 30, 2002, in the investigation and found the company to be
uncreditworthy. According to record evidence, Hynix did not obtain any
new medium-term or long-term credit during the period July 1, 2002,
through December 31, 2003. See Hynix's June 1, 2005, Supplemental
Questionnaire Response at 20, 51. The only ``fresh'' loans resulted
from the conversion of excess interest amounts, above 3.5 percent, from
prior loans. Thus, these loans would not be dispositive of Hynix's
creditworthiness. See Hynix's December 17, 2004, Questionnaire Response
at 18-20.
We note that a creditor found not to be entrusted or directed by
the GOK participated in the December 2002 debt restructuring. Our
preliminary finding that credit extended by this lender does not
constitute a comparable commercial long-term loan within the meaning of
19 CFR 351.505(a)(4)(i)(A) is addressed in a separate memorandum
because of the proprietary nature of the analysis.
Pursuant to 19 CFR 351.505(a)(4)(i), we next examined present and
past indicators of Hynix's financial health, its ability to meet its
costs and fixed financial obligations with its cash flow, and various
projections of Hynix's future financial position. In accordance with
the Department's usual practice, we conducted the examination on a
year-by-year basis, for the years 2002 and 2003. See Preamble, 63 FR at
65367; see also Calculation Memorandum. We also reviewed, from
information on the record, projections by market watchers of Hynix's
future performance, contemporaneous with the December 2002 debt
restructuring.
Hynix's financial record generally indicated poor financial
performance and inadequate current assets to cover the company's
current liabilities. Specifically, Hynix's current and quick ratios
were both below 1.0 for each year under consideration for the review,
indicating poor ability by the company to cover current liabilities
with current assets. Hynix's times-interest-earned ratios--which show
the extent to which pre-tax income covers interest expense, and which
creditors closely monitor to gauge exposure to the risk of default--
were negative in 2001, 2002 and 2003, due to pre-tax losses. Hynix's
net profit margins, as well as its return on assets and return on
equity ratios, showed progressive deterioration: barely positive in
1999 and turning negative from 2000 through 2003. Finally, Hynix's cash
flow to current debt and cash flow to total liabilities ratios, which
indicate a company's bankruptcy risk, were extremely weak during the
same period. These ratios were actually negative in 2001, in the single
digits in 2002, and only modestly improved in 2003. Hynix's prolonged
inability to generate sufficient cash flow was problematic and not
indicative of a creditworthy company. See Calculation Memorandum.
Next, we examined the record for independent expert analyses
regarding Hynix's future financial prospects. MSDW analyst reports in
2002 and 2003 expressed doubt as to Hynix's prospects for independent
survival without additional help from its creditors. In March 2002,
MSDW cautioned that the then current rebound in DRAMS prices was not
enough for Hynix to compete globally on a stand-alone basis without the
support of creditors. See Morgan Stanley Hynix Semiconductor Equity
Research (March 7, 2002), at Petitioner's April 25, 2005, FIS, at
Volume 46, Exhibit 274.
In September 2002, MSDW stated that, ``Hynix's chances of
independent survival appear limited without more help from creditors''
and ``whatever the outcome, the message is clear to investors: Hynix is
not an investment grade company.'' Morgan Stanley Hynix Semiconductor
Equity Research (September 25, 2002), at Petitioner's September 27,
2004, submission, at Exhibit 9. MSDW postulated three possible outcomes
for Hynix: (1) liquidation at a rock-bottom price, (2) continued
operation with a deterioration of Hynix's market position, and (3)
another bailout with partial debt forgiveness, debt restructuring, and
a debt-to-equity swap. Another concern was Hynix's lack of investment
in technology and other capital expenditures during the POR, which MSDW
projected could erode its future competitiveness. See Morgan Stanley
Hynix Semiconductor Equity Research (February 13, 2003), at
Petitioner's September 27, 2004, submission, at Exhibit 10.
We note that DB's November 2002 Report, as discussed more fully in
the equityworthiness section above, presented a more positive outlook
for Hynix's future financial performance. According to the DB Report,
Hynix would be debt-free by 2006, assuming that the company
successfully implemented its technology roadmap, capital expenditure
plan, and that DRAMS prices recovered by 2005/2006. See Hynix's July
11, 2005, Questionnaire Response, Exhibit 23; see also Hynix's December
17, 2004 Questionnaire Response, Exhibit 14, 18. However, as also noted
in the equityworthiness section above, these
[[Page 54528]]
assumptions were not shared by other independent analyses on the record
and not consistent with the indications from Hynix's past performance.
On the basis of these considerations, we preliminarily find that
Hynix was uncreditworthy in 2002 and 2003. Consequently, we have used
an uncreditworthy benchmark rate in calculating the benefit from loans
received during this time period, and we have used an uncreditworthy
discount rate in calculating any non-recurring benefits received by
Hynix that were allocable to the POR.
Analysis of Programs
I. Programs Preliminarily Determined to Confer Subsidies During the POR
Entrustment or Direction and Other Financial Assistance
In the investigation, the Department determined that Hynix received
financial contributions from Korean banks that had been entrusted or
directed by the GOK. We reached this determination on the basis of a
two-part test: First, we determined that the GOK had in place a
governmental policy to support Hynix's financial restructuring to
prevent to the company's failure. Second, we found that the GOK acted
upon that policy through a pattern of practices to entrust or direct
Hynix's creditors to provide financial contributions to Hynix. See
Investigation Decision Memorandum at 47-61. We also found that ``this
policy and pattern of practices continued throughout the entire
restructuring process through its logical conclusion.'' Id.
The petitioner has alleged that an additional financial
restructuring in December 2002 reflects a continuation of the
government's policy to prevent Hynix's failure and that the GOK again
entrusted or directed Hynix's creditors. For that restructuring,
Hynix's creditors converted 1,856,771 million won of outstanding debt
into equity, extended the maturities on 3,293.2 billion won of debt,
and converted interest due into new long-term loans. See ``Hynix
Semiconductors Inc.: Notes To Non-Consolidated Financial Statements,''
at numbered paragraph 14, available at Micron's ``Submission Of
Rebuttal Factual Information,'' June 20, 2005, Volume 1, Tab 13, at 39-
40.
As in the investigation, the question in this proceeding is whether
the GOK entrusted or directed Hynix's creditors to provide financial
contributions to Hynix, within the meaning of section 771(5)(B)(iii) of
the Act.\1\ Government entrustment or direction to provide a financial
contribution constitutes a subsidy when providing the contribution
would normally be vested in the government and the practice does not
differ in substance from practices normally followed by governments.
See section 771(5)(B)(iii) of the Act.
---------------------------------------------------------------------------
\1\ In evaluating the petitioner's allegation regarding the
December 2002 restructuring, we continued to distinguish between
those banks found to be ``government authorities'' within the
meaning of section 771(5)(B) the Act, and banks found to be
``entrusted or directed'' by the GOK, within the meaning of section
771(5)(B)(iii) of the Act. See Investigation Decision Memorandum at
13-17. No new evidence or changed circumstances exist that would
lead us to revisit our prior determination that the Korean
Development Bank (``KDB'') and other ``specialized'' banks are
government authorities and that the financial contributions made by
these entities fall within section 771(5)(B)(i) of the Act. For all
other financial institutions, we continued to evaluate whether the
financial contributions they made to Hynix as part of the December
2002 restructuring were entrusted or directed by the GOK in
accordance with section 771(5)(B)(iii) of the Act.
---------------------------------------------------------------------------
The contributions in this case are loans and equity infusions. The
provision of such contributions falls within section 771(5)(D) of the
Act and therefore would normally be vested in the government, and the
practice does not differ in substance from practices normally followed
by governments. Entrustment or direction occurs when a government gives
responsibility to, commits the execution of a task to, or exercises
authority over, a private entity. Government actions which entail
pressuring, exerting influence, guiding, ordering, regulating, or
delegating vis-a-vis a private entity are indicative of entrustment or
direction. Moreover, these actions need not be explicit. Rather, the
government entrustment or direction can also be implicit or informal.
Additionally, when a government executes its policy by operating
through a private entity, or when a government causes a private entity
to act consistently with that policy, there is entrustment or direction
by the government. Evidence of entrustment or direction need not be
explicit but, rather, entrustment or direction can be inferred from
circumstantial evidence.
In examining the evidence on the record, we are mindful that we
must evaluate carefully all possible explanations for the actions taken
by Hynix's creditors, and that our conclusions must be made on the
basis of the totality of the record facts. As we have noted, above, it
is appropriate in cases involving government entrustment or direction
to reach conclusions based on inferences from circumstantial evidence.
Indeed, as in the investigation, much of the information regarding the
GOK's involvement in the December 2002 Hynix restructuring is
circumstantial in nature. Moreover, the probative value of such
circumstantial evidence can be enhanced where the parties are found to
be secretive or evasive with respect to information that is relevant
and responsive to the investigating authority's analysis. This has been
the case in this administrative review. Specifically, record evidence
indicates that the GOK and Hynix's creditors were overly careful not to
discuss publically their communications regarding Hynix because they
feared potential trade remedy cases. Additionally, as discussed more
fully, below, we are troubled by numerous instances during the course
of this review, in which the GOK did not provide all of the information
requested by the Department , including information that was later
revealed in submissions by the petitioner. Such instances hinder our
ability to fairly conduct a complete and accurate analysis of all of
the evidence relevant for reaching a decision. Nonetheless, we
preliminarily find on the basis of substantial record evidence that the
GOK entrusted or directed Hynix's creditors to provide financial
contributions to Hynix. We also find that it is appropriate to treat
the circumstantial evidence in support of this conclusion as highly
probative in light of the GOK's inadequate responses and the
secretiveness under which the GOK and Hynix's creditors were operating
at the time of the restructuring.
Hynix and the GOK claim that Hynix's creditors acted independently
of the government and on a commercial basis when they provided new
financial contributions to Hynix in connection with the December 2002
restructuring. We disagree. As we explain in detail, below, record
evidence demonstrates that the GOK's policy to prevent Hynix's failure
continued after the period of investigation. Record evidence also shows
incontrovertibly that at the time of the December 2002 restructuring,
Hynix was once again in dire financial straits and that the company
desperately needed new financial assistance from its creditors in order
to survive as a viable entity. Direct and indirect record evidence
further demonstrates that the GOK entrusted or directed Hynix's
creditors to provide that assistance.\2\ At
[[Page 54529]]
the time of the December 2002 restructuring, GOK-owned or controlled
banks dominated the Creditor's Council, giving the GOK the means to
effectuate its policy toward Hynix and allowing it to set the terms of
the restructuring. Although Hynix and the GOK argue that the creditors
were merely acting upon the plan devised by its financial advisors,
record evidence shows that independent financial analysts not
associated with Hynix or its creditors reached very different
conclusions and issued consistent warnings about the company's
viability. This evidence demonstrates that Hynix's condition was so
dire that no commercially motivated actor would have invested in or
made loans to Hynix at the time of the December 2002 restructuring. The
absence of a compelling commercial rationale to provide more financial
assistance to Hynix provides further evidence that the role of the GOK
was critical in bringing about the December 2002 bailout.
---------------------------------------------------------------------------
\2\ This finding does not apply to Creditor X, a foreign-owned
creditor holding a small amount of Hynix's debt. For further
discussion on the role of this bank in the restructuring, see the
``Equityworthiness'' and ``Creditworthiness'' sections of this
notice.
---------------------------------------------------------------------------
The evidence on the record demonstrates that the GOK continued to
worry that Hynix's collapse could have a damaging effect on the Korean
economy, even after the last major bailout was completed in October
2001, and that the GOK was taking steps to deal with the company. In
early 2002, after the company's merger negotiations with Micron, the
U.S. DRAMS producer and petitioner in this case, ended in failure, the
government again expressed its concern about the fate of Hynix. For
example, after the merger talks with Micron ended, the Deputy Prime
Minister stated that the government would soon reveal its position on
how to handle Hynix. See ``Government Started to Establish a Counter
Plan for the Handling of Hynix,'' Maeil Business Newspaper (May 1,
2002) {English Translation{time} , Petitioner's April 25, 2005, FIS at
45-189. Shortly thereafter, the Deputy Prime Minister stated in a radio
program interview that ``the government is encouraging creditors group
to swiftly handle Hynix.'' ``Encouraging Swift Handling Of Hynix'
Deputy Prime Minister Yoonchol Chon,'' HANKOOK Economy (May 5, 2002)
{English Translation{time} , Petitioner's April 25, 2005, FIS at 45-
182. On the same day, the Deputy Prime Minister was quoted as saying
that ``{w{time} riting off Hynix's debt would also be considered as
fresh financial assistance'' and that Hynix's creditors and the FSC
should come up with a speedy resolution to the breakdown of the Hynix-
Micron deal to minimize any negative impact on the economy. See
``Creditors won't offer new loans to Hynix: Jeon,'' Korea Herald (May
5, 2002), Petitioner's April 25, 2005, FIS at 45-187. The article added
that the government was planning a ``Financial Policy Coordination
Meeting'' to discuss Hynix's fate, which would be attended by Finance
and Economy Vice Minister Yoon Jin-shik, FSC Vice-Chairman Yoo Ji chang
and Bank of Korea Deputy Governor Park chul. Id.
The government's ability to control the fate of Hynix became
apparent in additional press reports from that time which noted that
the head of the United Liberal Democratic Party, Kim Jong-pil, while
visiting a Hynix plant in Cheongju, told Hynix labor union leaders they
had ''. . .earned the promise from Vice Prime Minister and Minister of
Finance and Economy that the government will not sell Hynix within the
next six months.'' ``Hynix, cannot sell within the year after all,''
Financial News (June 12, 2002) {English Translation{time} ,
Petitioner's April 25, 2005, FIS at 45-163; see also ``Hynix Not To Be
Sold Within 6 Months,'' Maeil Business Newspaper (May 29, 2002)
{English Translation{time} , Petitioner's April 25, 2005, FIS at 45-172
(``. . . secured a promise that Hynix will not be sold in the next six
months.'').
In its July 25, 2002, report to the National Assembly, the Ministry
of Finance and Economy stated that it would prepare a structural
adjustment plan for Hynix around the end of July based on due diligence
underway at the time. See Report Materials for the Committee of Finance
and Economy: Current Economic Situations and Pending Issues, (July 25,
2002) {English Translation{time} , Petitioner's April 25, 2005, FIS at
44-B-9. In September 2002, Vice Finance Minister Yoon Jin-Shik ``called
on creditor banks of the cash-strapped Hynix Semiconductor to swiftly
decide on the fate of the world's third largest chipmaker.'' The Vice
Finance Minister was quoted as saying that ``{c{time} reditors will
have to find a solution to Hynix as soon as possible to minimize an
adverse impact (of the collapse of a proposed [sic] deal with Mircon
Technology) on the economy.'' ``Creditors Urged to Swiftly Decide on
Hynix's Future,'' Korea Times (September 19, 2002), Petitioner's April
25, 2005, FIS at 45-134.
In November 2002, on the eve of the presidential election and just
before the December 2002 restructuring, the GOK was severely criticized
by Korea's Grand National Party (``GNP'') which had completed a report
in the National Assembly regarding the GOK's mismanagement of public
funds in recent years. See Special Committee on Parliamentary
Inspection of Public Fund Administration: Public Fund Mismanagement
Investigation Report (November 2002) {English Translation{time} ,
Petitioner's April 25, 2005, FIS at 54-100. A section of this report,
entitled ``Why is the Dae-Jung Kim Administration so Preoccupied With
the Bailout of Hyundai?,'' addressed the restructuring of Hynix,
stating that the Dae-jung Kim Administration:
{F{time} orced financial institutions to extend 24.4 trillion
{won{time} in loans to the Hyundai Group, and mobilized government-
invested banks and other government-funded or invested institutions
which are run with taxpayers' money, to extend 11.5 trillion won to the
Hyundai Group. This resulted in the injection of the astronomical
amount of 33.6 trillion won in total thus far, since the Hyundai
Group's liquidity crisis in May 2000 (excluding the matching portion
from the Korea Development Bank).
Id. at 100. This report further notes that, by saving the failing
company, the GOK was ``injecting money into bottomless pits'' and
should account for the total amount of public funds being provided to
the Hyundai Group. Indeed, the GNP concluded that the government was
wasting astronomical sums of money on failed companies, including
Hynix, and that the Korean taxpayers had suffered the consequences. Id.
at 104.
Immediately following the GNP report, the Financial Times reported
in December 2002, that ``{w{time} ith 13,000 people directly employed
by Hynix and a further 600,000 suppliers and family members dependent
on the company, bankruptcy would have been politically damaging to the
government ahead of this month's presidential election.'' See
``Pressure builds on Seoul over Hynix: Creditors are contemplating a
third multi-billion dollar bail-out of the troubled chip maker amid
mounting protest, says Andrew Ward,'' Financial Times (December 9,
2002), Petitioner's April 25, 2005, FIS at 45-93. Only one week after
the December 2002 restructuring had been finalized, another report
noted that an economic ministers' meeting, attended by President Dae-
Jung Kim and Deputy Prime Minister Yoon Cheol Jeon, was held at the
Blue House to set out ``plans for the year 2003 economy.'' At this
meeting, GOK officials stated that they would ``try to conclude dealing
with insolvent companies including Hanbo Steel and Hynix Semiconductor
as soon as possible.'' ``2 or 3 New Urban Areas to be Developed in the
Capital City Area ... Potential Locations to be Selected in the 1st
Half of the Year,'' Donga Daily (January 9, 2003), available at
Micron's
[[Page 54530]]
``Submission of Rebuttal Factual Information, July 21, 2005, at Tab 31.
These reports evidence undiminished support by the GOK for Hynix,
motivated by its concern about the effect that the company's failure
would have on the Korean economy. These reports also attest to the
high-level involvement of GOK officials in the process leading up to
the December 2002 restructuring. We also note that there is no evidence
on the record that suggests the GOK's policies with respect to Hynix
came to an abrupt end after the October 2001 restructuring. Rather, as
we noted during the investigation, the government's goal was to ensure
Hynix's viability as an ongoing concern. The October 2001 restructuring
did not bring about this goal. Rather, as became apparent during 2002,
especially after the merger negotiations with Micron ended, Hynix again
found itself in dire need of additional financial assistance from its
creditors, without which the company would have failed.\3\
---------------------------------------------------------------------------
\3\ For further discussion of Hynix's financial condition during
the period leading up to the December 2002 restructuring, see the
``Equityworthiness'' and ``Creditworthiness'' sections of this
notice, above.
---------------------------------------------------------------------------
By December 2002, Hynix once again faced the prospect of financial
collapse. The GOK, however, had little difficulty effectuating its goal
of preventing the company's failure, in part because the GOK-owned or
controlled banks dominated the company's Creditors' Council. At the
time of the December 2002 restructuring, the creditors which were
either government entities or in which the GOK held the largest or a
majority share accounted for over 80 percent of the voting rights in
the Creditors' Council, measured by a banks' exposure to Hynix.
Although government ownership by itself is not sufficient to result in
a finding that a financial institution is a government entity, the high
level of ownership by the government in Hynix's creditors gave it the
ability to exercise substantial influence over the activities of these
entities, including their lending decisions with regard to Hynix.
The GOK claims in its questionnaire responses that it does not
intervene in the internal management and decision-making processes of
financial institutions. See GOK's June 1, 2005, Questionnaire Response
at 5. The GOK also reported, however, that, in ``important instances,''
it exercised its shareholder voting rights through its government
entity banks (e.g., KDIC). Id. at 31-33. Such ``important instances''
included, appointment and dismissal of directors or auditors,
alteration of the ceiling of directors' remuneration, appointment of
senior officers, exemption of directors' and auditors' indemnity
responsibility to the shareholders, disposal of all assets of the bank,
application for bankruptcy and liquidation by the bank, capital
reductions, issuance of new shares, and mergers with related companies.
See GOK's July 11, 2005, Questionnaire Response at 12-15. Given the
significance of these ``instances,'' the Department finds that the GOK
exercised substantial influence over those banks in which it retained
ownership during the POR.
Furthermore, the record evidence from secondary sources contradicts
the GOK's claim that it did not interfere in internal bank affairs. For
instance, one report noted that if ``some argue that there are
government-directed banking practice and parachute appointments, a
counter argument that {sic{time} `Why are you against the exercise of
stockholder's right?' is presented.'' However, the report continues,
the problem is that ``the government's exercise of shareholder's rights
is politically motivated rather than by business considerations.''
``{Government-Directed Banking Practices{time} Do Bank Officers
{Belong to{time} the Government?,'' Maeil Business Newspaper (May 21,
2002) {English Translation{time} , Petitioner's April 25, 2005, FIS at
45-175. The article also reports that ``7 out of 10 commercial banks
are essentially under government management'' and that it became
``reasonable for the government, as the majority shareholder, to sway
the appointment of the Chairman of the bank.'' Id. Further, the article
explained that ``strong influence of former officials appointed {as
bank officials{time} after serving in the Ministry of Finance and
Economy, and the Financial Supervisory Committee, {is{time} enabling
the connection for the government-directed banking practices. . . .''
Id.
Another report cited the observations of Lee Phil-sang, the Dean of
the Korea University's Business School, who noted that by ``. .
.injecting large sums of public funds, the government nationalized
banks and kept a firm grip on financial institutions via the Financial
Supervisor Commission,'' and that ``{o{time} ut of ten existing
commercial banks, the government is the major shareholder of seven
banks. . .'' ``Soundness of Financial Sector Still Remains Remote,''
The Korea Times (September 2, 2002), Petitioner's April 25, 2005, FIS
at 54-117. The article goes on to say that the ``government has
publicly declared it will not intervene in bank management, even when
it is the major shareholder, but whenever there is a major shakeup,
such as the election of a CEO, the government has been known to exert
pressure.'' Id. This observation is corroborated by reports from
various other sources that the EXIM Bank and the BOK, which are
shareholders in Korean Exchange Bank (``KEB''),\4\ influenced the
Presidential Candidate Recommendation Committee's recommendation of
Kang Won Lee as KEB president, that the FSC's decision to remove the
president of Kookmin was likely due to his opposition to Hynix's
restructurings, and that officials at the KEB and Chohung Bank
(``CHB'') resigned following a dispute with the GOK over the
appointment of bank officers.\5\
---------------------------------------------------------------------------
\4\ As discussed in more detail below, the KEB was the lead
creditor in the Hynix Creditors' Council.
\5\ See ``About the Case of Korea Exchange Bank,'' Money Today
(May 13, 2002) ``English Translation'', Petitioner's April 25, 2005,
FIS at 48-50; ``Revival of Government-Directed Banking'' Munwha Ilbo
(September 13, 2004) {English Translation{time} , Petitioner's April
25, 2005, FIS at 44-B-15; ``Analysis: S. Korea's battle with bank,''
United Press International (January 3, 2005), Petitioner's April 25,
2005, FIS at 54-111; ``{Government-Directed Banking Practices{time}
Do Bank Officers {Belong to{time} the Government?,'' Maeil Business
Newspaper (May 21, 2002) {English Translation{time} , Petitioner's
April 25, 2005, FIS at 45-175.
---------------------------------------------------------------------------
Further corroboration of similar significant interference by the
GOK is provided in another news article, which reported that any GOK
denials regarding its involvement in Hynix's restructurings ``is merely
a rhetorical remark for public consumption,'' and that whenever banks
``. . .shy away from providing support, the government has talked to
them, or even twisted their arms, to bring support for Hynix.''
``Hynix, will it really survive?,'' http://www.kyunghyang.com (February 18,
2003) {English Translation{time} , Petitioner's April 25, 2005, FIS at
21-B-51.
In a separate article, Maeil Business Newspaper quoted a current
officer of a city bank as saying that ``the government always made a
telephone call when the bank tried to process an insolvent corporation
through bankruptcy, asking {the{time} bank's cooperation in
consideration of employment issues and bankruptcy of subcontractors,''
and that ``the most typical of such a case would be the new financial
support extended to Hynix Semiconductors.'' ``Revival of the new
government-controlled finance? Giving oral instruction without written
document to dodge responsibilities,'' Maeil Business Newspaper (March
31, 2003) {English Translation{time} , Petitioner's April 25, 2005, FIS
at 47-B-23. The article further reported that, according to bank
officers, such telephone calls were not mere suggestions, explaining
that once ``they receive oral instructions
[[Page 54531]]
from the government agencies, banks have no choice but to comply.'' Id.
One bank officer reportedly stated that ``banks cannot decline the
government's instructions because not complying with the government's
orders can lead to many disadvantages under the situation.'' Id.
As may be expected, evidence of the government's influence in the
lending decisions of banks tends to come from indirect sources. This is
especially the case where, as here, the government is concerned about
potential trade actions taken against the subsidized company. However,
in this case, the record also contains direct evidence of government
involvement in the lending decisions of Hynix's creditors. For
instance, in order to gain listing in the U.S. stock market, Woori Bank
(``Woori''),\6\ a GOK-owned or controlled bank, filed a disclosure with
the U.S. Securities and Exchange Commission (``SEC'') that very frankly
describes the GOK's practices with respect to the banking sector. See
Form 20-F: Registration Statement: Woori Finance Holdings Co., Ltd.
(September 25, 2003), available at Micron's ``Submission of Rebuttal
Factual Information, July 21, 2005, at Tab 46 at 26-27. Such filings
are subject to stringent transparency rules designed to protect
investors, and the veracity of the accompanying statements entails
serious litigation and liability risk for the company. Therefore, we
consider these SEC filings to be highly probative evidence.
---------------------------------------------------------------------------
\6\ As of December 2002, Woori Bank was a wholly-owned
subsidiary of Woori Financial Group. See GOK's June 1, 2005
Supplemental Questionnaire Response at 29. Woori Financial Group is
registered with the U.S. SEC as ``Woori Finance Holdings Co., Ltd.''
Woori Bank's financial disclosures are consolidated within the
filing by Woori Finance Holdings Co., Ltd. Hereafter, the entities
may be referred to interchangeably as ``Woori.''
---------------------------------------------------------------------------
Woori's Form 20-F explains the risks related to GOK ownership and
control of the bank, particularly the risks involved in governmental
pressure to lend to certain industries. The filing states: Risks
relating to government control. The KDIC,\7\ which is our controlling
shareholder, is controlled by the Korean government and could cause us
to take actions or pursue policy objectives that may be against your
interests. The Korean government, through the KDIC, currently owns
86.8% of our outstanding common stock. So long as the Korean government
remains our controlling stockholder, it will have the ability to cause
us to take actions or pursue policy objectives that may conflict with
the interests of our other stockholders. For example, in order to
further its public policy goals, the Korean government could request
that we participate with respect to a takeover of a troubled financial
institution or encourage us to provide financial support to particular
entities or sectors. Such actions or others that are not consistent
with maximizing our profits or the value of our common stock may have
an adverse impact on our results of operations and financial condition
and may cause the price of our common stock and ADSs to decline. . . .
---------------------------------------------------------------------------
\7\ Korea Deposit Insurance Corporation.
---------------------------------------------------------------------------
Risks relating to government regulation. The Korean government
promotes lending and financial support by the Korean financial industry
to certain types of borrowers as a matter of policy, which financial
institutions, including us, may decide to follow. Through its policy
guidelines and recommendations, the Korean government has promoted and,
as a matter of policy, may continue to attempt to promote lending by
the Korean financial industry to particular types of borrowers. For
example, the Korean government has in the past announced policy
guidelines requesting financial institutions to participate in remedial
programs for troubled corporate borrowers, as well as policies
identifying sectors of the economy it wishes to promote and making low
interest funding available to financial institutions that lend to these
sectors. The government has in this manner encouraged low-income
mortgage lending and lending to small- and medium-sized enterprises and
technology companies. We expect that all loans or credits made pursuant
to these government policies will be reviewed in accordance with our
credit approval procedures. However, these or any future government
policies may influence us to lend to certain sectors or in a manner in
which we otherwise would not in the absence of that policy. Id.
Given the timing of these statements (shortly after the December
2002 restructuring and during its implementation), we find that the
references to ``troubled corporate borrowers'' and ``technology
companies'' strongly indicate that the risks discussed pertained at
least in large part to the December 2002 restructuring of Hynix. As of
December 31, 2002, Hynix represented Woori's largest exposure; the bulk
of this exposure was ``classified as substandard or below;'' and Hynix
was Woori's only substandard exposure that was also a technology
company. See id. at 26-27, 75, 85. The Department finds the nexus of
these facts to be highly probative. Thus, Woori's SEC disclosure
provides crucial direct evidence of GOK interference in the lending
decisions of GOK-owned or controlled banks with respect to Hynix.
The evidence on the record also demonstrates that Hynix's
Creditor's Council was dominated by GOK-owned or controlled banks,
which, as we already explained, were subject to significant government
influence. This dominant position allowed the GOK to maintain a veto-
proof margin in the Creditors' Council, which was governed by the
Corporate Restructuring Promotion Act (``CRPA''). Under the CRPA, the
decisions made by creditors holding 75 percent of a company's debt, and
a corresponding 75 percent of the voting rights, are binding upon all
the members. See Investigation Decision Memorandum at 54. In the
investigation, the GOK-owned or controlled banks held a ``blocking
majority'' in the Creditors' Council. At that time, the Department
found that these banks ``had significant control over the plans that
were approved by the councils, and could derail any plans with which
they did not approve'' and that ``these banks were thus in a position
to set the terms of the financial restructuring via their control of
votes in the Hynix Creditors' Council.'' Id. at 51, 53. By comparison,
at the time of the December 2002 restructuring, the GOK-owned or
controlled banks and GOK entities accounted for greater than 75 percent
voting rights in the Creditors' Council. See Hynix's June 1, 2005,
Questionnaire Response at Exhibit S-38. As we explained in the
investigation, the government's ability to dominate the Creditors'
Council allowed it to determine the outcome of the Council meetings and
entrust the continuation of its policy regarding Hynix to the Council.
See Investigation Decision Memorandum at 54. The evidence on the record
of this administrative review demonstrates that the government's
ability to effectuate its policies through the Council was
substantially enhanced by the dominant position held by GOK-owned or
controlled banks, as described above.
As in the investigation, KEB continued to be the lead creditor bank
in the Creditors' Council. In the investigation, the Department had
found that the ``record evidence illustrates that the KEB acted in
accordance with the GOK's policy objectives.'' See Investigation
Decision Memorandum at 18. Specifically, the Department found that the
KEB justified its participation in the various Hynix restructurings not
on the basis of commercial considerations but for reasons that were
aligned with
[[Page 54532]]
the government's social and economic concern regarding the impact of
Hynix's potential collapse. We find no evidence in this review that the
KEB's motivations have changed since the investigation, especially
given that the GOK remained the KEB's largest shareholder. As in the
investigation, the GOK-owned or controlled KEB was the lead creditor at
the time of the December 2002 restructuring and, thus, continued to
play a pivotal role.
The KDB also played a very prominent role in the December 2002
restructuring and further consolidated the GOK's control over the
Creditors' Council. As stated above, the Department considers the KDB
to be a government authority. The KDB held a significant share of the
voting rights on the Creditors' Council. See Hynix's June 1, 2005,
Questionnaire Response at Exhibit S-38. In the investigation, the
Department found that participation of the policy lending banks, such
as the KDB, sent a clear signal of GOK support for the restructurings.
See Investigation Decision Memorandum at 57-58. Based on the record in
this review, the Department finds no evidence that this legitimizing
role of the KDB did not continue with regard to the December 2002
restructuring. In this role, the record shows, the KDB pushed for
decisions that became elemental to the restructuring plan. For
instance, the Hankook Economy reported that the KDB discouraged the
notion of selling Hynix and, instead, recommended its further
restructuring. See `` `HYNIX's sale is impossible at this point'
Development Bank's Response to the National Assembly's Inspection,''
Hankook Economy (October 3, 2002) {English Translation{time} ,
Petitioner's April 25, 2005, FIS at 45-131. Further, another new
article stated that the KDB and Hynix requested that bond maturities be
extended on the grounds that Hynix was in financial distress and
``additional funding for facility investment is needed.'' `` `Matured
corporate bonds of 82.4 billion won must be redeemed' Korea Development
Bank's request To Hynix,'' http://www.hankyung.com, (June 20, 2002) {English
Translation{time} , Petitioner's April 25, 2005, FIS at 45-162. The KDB
agreed to extend the maturities of 56 billion won of bonds.
Hankooki.com quoted a source at the KDB as saying that ``{i{time} n
principle, the 56 billion won maturing on {July 27, 2002{time} should
be redeemed, but if that's difficult, we could first extend the
deadline and handle that portion by including it in the restructuring
plan slated to be established in the beginning of August.'' ``Korea
Development Bank extends maturity on Hynix corporate bonds of 56
billion won,'' Hankooki.com (July 25, 2002) {English
Translation{time} , Petitioner's April 25, 2005, FIS at 45-156. Hynix
immediately announced that the KDB decided to extend maturities of
Hynix's corporate bonds worth 56 billion won. Id. Thus, we find that
KDB played a prominent role in the December 2002 restructuring and
provided a clear signal to other creditors of GOK support for saving
Hynix.
In addition, the evidence on the record demonstrates that other
GOK-owned or controlled banks with substantial control over the
Creditors' Council were significantly influenced by the GOK. As
discussed above, Woori's SEC disclosure acknowledges government
influence over its activities. During the POR, Woori was a wholly-owned
subsidiary of Woori Financial Group, which in turn was 88.21 percent
owned by the KDIC (a government entity), and had a significant share of
voting rights on the Creditors' Council. See GOK's June 1, 2005,
Questionnaire Response at 29; see also Hynix's June 1, 2005,
Questionnaire Response at Exhibit S-38. Similarly, CHB was 80.05
percent directly owned by the KDIC, and also had a significant share of
voting rights on the Creditors' Council. Id. By June 2003, the KDIC had
injected 2.7 trillion won of public funds into CHB, a stake further
solidified with an MOU between the two entities. See Board of Audit and
Inspection: Current Government Funding & Management Conditions: Audit
Report: May 2004 {English Translation{time} , Petitioner's April 25,
2005, FIS at 47-A-1 at 93; see also Ministry of Finance and Economy:
Public Fund Oversight Commission: Public Fund Oversight White Paper:
August 2003 {English Translation{time} , Petitioner's April 25, 2005,
FIS at 47-A-2 at 293. Further, as indicated on CHB's website, CHB
disburses GOK policy fund loans under various GOK industrial
development programs. See ``Strategic Fund Loan: What is Strategic Fund
Loan?,'' Website of Chohung Bank (January 24, 2002) {English
Translation{time} , Petitioner's April 25, 2005, FIS at 48-C-7.
Additional record evidence demonstrates that the GOK exerted its
control over other Hynix creditors and that it was able to enlist the
cooperation of these commercial banks in pursuit of its policy to save
Hynix.
For instance, Kookmin Bank (``Kookmin'') is a commercial bank with
relatively small GOK ownership. In the investigation, the Department
found that Kookmin's September 2001 SEC disclosure ``is direct evidence
that such direction occurred and provides crucial evidence of the
government's role in directing lending decisions.'' Investigation
Decision Memorandum at 59. In June 2002, Kookmin filed another
disclosure with the SEC which contained language that is identical to
that found in its September 2001 filing. See Kookmin Bank Prospectus
(June 18, 2002) at 22, Petitioner's April 25, 2005, FIS at 33-11 (``The
Korean government promotes lending to certain types of borrowers as a
matter of policy, which we may feel compelled to follow.''). Even
though Kookmin itself was not a member of Hynix's Creditors' Council in
December 2002, it controlled several affiliates who were on the
Council. See e.g., Hynix's December 17, 2004, Questionnaire Response at
Exhibit 20. Because this new SEC disclosure occurred during the
planning stages of the December 2002 restructuring, our previous
findings concerning GOK interference in Kookim's lending practices with
respect to the October 2001 restructuring remain equally applicable to
the bank's practices and, by extension, to those of its affiliates on
the Creditors' Council, in the context of the December 2002
restructuring.
Moreover, both the Kookmin and Woori disclosures, as discussed
above, provide crucial direct evidence of GOK interference in the
lending decisions of Hynix's other creditors. The disclosures state
that the ``Korean government promotes lending and financial support by
the Korean financial industry to certain types of borrowers as a matter
of policy, which financial institutions, including us, may decide to
follow'' {emphasis added{time} . Additionally, these disclosures
contain a highly telling caveat, stating that, although ``. . .credits
made pursuant to these government policies will be reviewed in
accordance with our credit approval procedures,'' nevertheless, ``these
or any future government policies may influence us to lend to certain
sectors or in a manner in which we otherwise would not in the absence
of that policy'' {emphasis added{time} . See Form 20-F: Registration
Statement: Woori Finance Holdings Co., Ltd. (September 25, 2003),
available at Micron's ``Submission of Rebuttal Factual Information,
July 21, 2005, at Tab 46 at 26-27; Investigation Decision Memorandum at
59 (quoting the September 2001 Kookmin disclosure). Both Woori and
Kookmin had to disclose these potential risks because, in order to be
listed on a U.S. stock exchange, companies must comply with stringent
transparency rules. These rules are designed to protect investors, and
companies cannot afford to hide certain
[[Page 54533]]
risks from their investors. To do so would create a serious litigation
and liability risk for the company. See Investigation Decision
Memorandum at 55. In this instance, Woori and Kookmin were signaling to
investors that they must assume risks in making lending decisions not
based on commercial considerations but, rather, on direction by the GOK
and reflective of the GOK's economic and social policy objectives.
Given that Woori is a GOK-owned or controlled bank and Kookmin is
mostly a private bank, the Department finds these two disclosures
highly indicative of the general exposure by both GOK-owned or
controlled banks and private banks toGOK influence. Indeed, the Hynix
creditors that did not seek listing on a U.S. stock exchange were not
legally required to make similar disclosures as Woori and Kookimn.
Nevertheless, both disclosures state that the government promotes
lending to certain types of borrowers which ``financial institutions''
may follow. Id. Thus, these statements strongly suggest that other
financial institutions were subject to similar governmental pressures
as Woori and Kookmin.
As discussed above, the GOK wielded substantial influence over
Korean banks and had the means to pressure those financial institutions
through its veto-proof control of the Creditors' Council. The GOK
reported that, under the CRPA, a Mediation Committee may be formed to
resolve disputes among the various creditors. See GOK's June 1, 2005,
Questionnaire Response at 84. Hynix filed comments before the
Department in which it claimed that new factual information regarding
the Mediation Committee casts doubt on a previously considered
financial contribution (i.e., October 2001 restructuring). Hynix argues
that the record evidence demonstrates that those institutions that
opted for mediation received a better outcome than they did under the
options provided by the Council. Hence, Hynix argues that these lenders
could not possibly have been entrusted or directed. We are not
persuaded.\8\ The presence of the mediation committee does not negate
the fact that the GOK controlled a large majority of the voting rights
on the Creditor's Council, as discussed earlier. Additionally, the
record shows that only one Hynix creditor, CNH Capital, requested
mediation in connection with the December 2002 restructuring. See GOK's
July 11, 2005, Questionnaire Response at 50. CNH Capital, however, held
only a negligible percentage of Hynix's debt throughout the entire
restructuring program, including the December 2002 restructuring. See
Hynix's June 1, 2005, Questionnaire Response at Exhibit S-4. In our
view, this one instance where a relatively insignificant member opted
for mediation is insufficient to support Hynix's contention. Thus,
although mediation may have been officially provided for under the
CRPA, we do not believe it was a realistic option for the overwhelming
majority of creditors. As explained above, ``not complying with the
government's orders can lead to many disadvantages under the
situation.'' ``Revival of the new government-controlled finance? Giving
oral instruction without written document to dodge responsibilities,''
Maeil Business Newspaper (March 31, 2003) {English Translation{time} ,
Petitioner's April 25, 2005, FIS at 47-B-23. Consequently, we find that
the option of mediation under the CRPA does not contradict our finding
that the GOK exercised its influence and control over the Creditors'
Council in pursuit of its goal to save Hynix.
---------------------------------------------------------------------------
\8\ The Department has addressed Hynix's claim with regard to
the October 2001 restructuring below.
---------------------------------------------------------------------------
Our finding that Hynix's creditors were entrusted or directed by
the GOK to provide financial contributions to Hynix is further
supported by record evidence demonstrating that at the time of the
December 2002 restructuring, no commercially motivated lender would
have invested in or provided loans to Hynix.
As discussed in greater detail under the ``Equityworthiness'' and
``Creditworthiness'' sections of this notice, we find that Hynix was
both unequityworthy and uncreditworthy during the POR and preceding
three years. By all indications, both the financial condition of the
company and its future prospects were extremely poor and getting worse
throughout that period, and would clearly have dissuaded commercial
lenders from lending to, or otherwise investing in, the company. For
instance, in September 2002, Morgan Stanley Dean Witter reported that
``Hynix is technically bankrupt'' and concluded that ``{w{time} hatever
the outcome {of the potential restructuring{time} the message is clear
to investors: Hynix is not an investment grade company'' {emphasis in
original{time} . Morgan Stanley Hynix Semiconductor Equity Research:
The Gridlock (September 25, 2002), Petitioner's April 25, 2005, FIS at
44-A-15. In November 2002, Merrill Lynch echoed these assessments,
explaining that ``the risks of dilution from a debt-to-equity swap and
equity write-down plans present a negative investment case'', and
concluding that ``{w{time} e maintain our sell recommendation.''
Merrill Lynch: Hynix Semiconductor, Inc: Comment: Round 3 of
Refinancing (November 27, 2002, at Petitioner's April 25, 2005, FIS at
44-A-13. In February 2003, Morgan Stanley Dean Witter issued another
analyst report, saying, ``we see no real chance of independent survival
without generous levels of debt forgiveness and large injections of
capital.'' See Morgan Stanley Hynix Semiconductor Equity Research
(February 13, 2003), at Petitioner's September 27, 2004, submission, at
Exhibit 10. Morgan Stanley also noted at the time that the DB proposal
to restructure the company would ``be seen as another Korean government
bailout given that most of the creditor banks are still government
controlled.'' Morgan Stanley Hynix Semiconductor Equity Research
(September 25, 2002), at Petitioner's September 27, 2004, submission,
at Exhibit 15. Hence, it is our view that any lender who did provide
credit or equity capital to Hynix during that time could not have been
acting in accordance with normal commercial considerations.
Consequently, such a lender, in the context of the totality of the
record evidence, was instead entrusted or directed by the government in
pursuit of its policy to save Hynix.
The Department finds this evidence persuasive, considering that
these analyst reports are independent projections of the future
prospects of Hynix. The objective assessments on the record are clear:
No commercially motivated investor would invest in this company; no
commercially motivated lender would provide credit to this company.
Thus, as noted above, the Department finds that this evidence further
supports the conclusion stated above that the GOK pressured Hynix
creditors to lend to the failing company because the creditors would
not have engaged in the December 2002 restructuring had they not been
pressured to do so by the GOK.
Given the totality of the evidence discussed above, the Department
finds that the GOK entrusted or directed ROK lenders to provide a
financial contribution to Hynix. The record shows that many leading GOK
officials made statements which reveal the GOK's policy goals. These
statements were reported at length by independent media reports, as
discussed above.
As we noted above, it is also important to note that Hynix's
creditors adopted a policy of secretiveness regarding Hynix and the GOK
has been less than completely forthcoming with
[[Page 54534]]
regard to our requests for information and documentation related to
Hynix.
On June 5, 2002, Infineon filed a countervailing duty petition
against DRAMS from Korea with the European Communities. See Commission
Regulation (EC) No 708/2003, Official Journal of the European Union,
April 23, 2003, Petitioner's April 25, 2005, FIS at 50-16. A petition
was filed in the United States on November 1, 2002. In addition,
throughout many of the articles on the record, including those cited
above, these impending trade disputes were mentioned, and it was
becoming clear that the Hynix restructurings would be subject to trade
remedy actions. As such, it is not surprising that reports at the time
indicated that the creditors and the government would not discuss the
issue publically, but would only do so informally. Therefore, as would
be expected, a ``silence'' policy was adopted. For instance, according
to the Maeil Business Newspaper, KEB Chairman Kangwon Lee stated that
``{f{time} rom now on, regarding items related to the process of
Hynix's normalization, all will keep silence consistently . . . When
having discussions with the government in the future, it will be
conducted orally, instead of in writing, whenever possible. See
``Kangwon Lee Bank CEO `{I{time} Will Not Tell,' '' Maeil Business
Newspaper (August 23, 2002) {English Translation{time} , Petitioner's
April 25, 2005, FIS at 45-148. In another Maeil Business Newspaper
article, a bank official is quoted as saying that ``the government
tends to make all communications via telephone when it needs something
done in order to avoid leaving any evidence.'' ``Revival of the new
government-controlled finance? Giving oral instruction without written
document to dodge responsibilities,'' Maeil Business Newspaper (March
31, 2003) {English Translation{time} , Petitioner's April 25, 2005, FIS
at 47-B-23.
The Department finds that the GOK's reluctance to reveal
information is also reflected in the GOK's questionnaire responses. For
example, the Department asked the GOK to identify each meeting held
during the period January 1, 2000, through the end of the POR by any
GOK agency or official, at which the subject of Hynix's financial
restructuring or financial condition was discussed. See e.g., GOK's
June, 22, 2005, Questionnaire Response at 8. The GOK responded that
``{g{time} iven the lack of official records detailing `all' kinds of
meetings taking place inside the GOK apparatus and the `broad and
general' nature of the question, it is impossible to provide a
meaningful response to this question.'' See GOK's July 11, 2005,
Questionnaire Response at 41. The GOK promised to collect relevant
information only if the Department provided ``the specific title of the
meeting and hosting agency, preferably with the exact date of such
alleged meetings.'' Id. We note that prior to a preliminary finding in
these proceedings, the Department's primary role is that of fact-
finder. To this end, the Department often asks numerous and detailed
questions in order to reach informed decisions based on the facts of a
case. However, the parties involved in these proceedings control the
facts. Hence, the Department could not possibly know ``the specific
title of the meeting and hosting agency'' or the ``exact date'' of such
meetings unless the GOK first provided a sufficient survey of those
meetings.\9\ Id. The GOK states that ``it is impossible to provide a
meaningful response to this question.'' Id. If a request from the
Department is unclear, needs to be clarified, or the respondent would
like to consult with the Department about, for instance, limiting its
response to information reasonablely available, it is incumbent upon
the party, not the Department, to assist the administrative process and
clarify the precise information sought. See Carpenter Technology Corp.
v. United States, Consol. Court No. 00-09-00447, Slip Op. 02-77 (CIT
July 30, 2002) at 10, citing Atlantic Sugar, Ltd. v. United States, 744
F.2d 1556, 1560; Persico Pizzamiglio, S.A. v. United States, 18 CIT
299, 304 (1994).\10\ The GOK requested no consultation with the
Department to clarify any questionnaire it may have found unclear.
---------------------------------------------------------------------------
\9\ Indeed, the GOK did not offer to continue to make every
effort to uncover the information requested by the Department.
Rather, the GOK qualified its response by placing the burden on the
Department to point to the ``hosting agency,'' ``specific title,''
and the ``exact date'' of the meeting before it would provide an
answer to the question.
\10\ The Department acknowledges that these cases specifically
dealt with antidumping duty proceedings. However, the Department
believes that this does not vitiate the essential administrative
principle at issue.
---------------------------------------------------------------------------
Another example relates to the Creditors' Council meetings. In the
investigation, Hynix and the GOK stated that ``summaries'' are the only
documentation of the Creditors' Council meetings, which the Department
verified. See e.g., GOK Investigation Verification Report at 15,
Petitioner's April 25, 2005, FIS at 41-59 (``We asked KDB officials to
provide meeting transcripts instead of just summaries'', but that ``KDB
officials indicated that no such minutes were kept. . .''). However, in
its first supplemental questionnaire response in this administrative
review, Hynix reported that there were full Korean texts of documents
relating to the meetings of the Hynix CRA and CRPA Creditors' Councils,
stating, that ``. . . consistent with practice in the original
investigation, we provide only these summaries, though we are informed
that the full Korean texts to which these summaries relate will be
available for review during verification'' {emphasis added{time} .''
See Hynix's June 1, 2005, Questionnaire Response at 34.
Further, Hynix stated that the KEB would only allow ``on site
disclosure'' of the creditor meeting documents at verification, because
KEB considered these documents highly sensitive. See Hynix's July 11,
2005, Questionnaire Response at 1-2. However, a review of the
information at verification, as the respondents have offered, is both
insufficient and inappropriate. The Department collects relevant
information in making its findings. Hence, verification is designed to
confirm the accuracy of the factual information already submitted on
the record. It is not an opportunity for parties to submit new
information, especially information the parties knowingly possess and
which would otherwise be responsive to the Department's questionnaire.
Otherwise, the Department and other interested parties to not have
adequate opportunity to review the factual information, and, if
necessary, ask additional questions. Thus, by continuing to withhold
information, the respondents have impeded the administrative process of
this administrative review. Moreover, given that the KEB is the GOK-
designated lead bank in the Hynix restructurings, with considerable
ownership equity in Hynix and that the GOK is KEB's largest
shareholder, the Department is highly doubtful of the claim that the
KEB could not be persuaded to provide the information. Id. (``KEB will
simply not release control of these documents'').
In indirect subsidy cases, the most direct evidence of entrustment
or direction usually will be held by governments and foreign interested
parties, who may wish to conceal their actions. Such evidence therefore
is often very difficult for outside parties to obtain. A ``silence''
policy, such as the one adopted by the GOK, enhances the difficulty of
obtaining direct evidence. Accordingly, a finding of entrustment or
direction must be based in large part on circumstantial evidence. When
the respondent government strives to keep its actions off the written
record, and when the respondents evade their responsibility to provide
all requested information, the inferential value of the circumstantial
and other evidence on the record increases. Therefore, the
[[Page 54535]]
GOK's secretive practices and evasive questionnaire responses, when
coupled with the substantial evidence on the record, are further
indicia of entrustment or direction in this case.
In summary, given all the totality of the evidence discussed above,
the Department finds that the GOK provided a financial contribution to
Hynix through banks found to be ``government authorities'' within the
meaning of section 771(5)(B)(i) the Act and through its entrustment or
direction of Hynix's creditors, within the meaning of section
771(5)(B)(iii) of the Act, with respect to the December 2002
restructuring.
Specificity
In the investigation, the Department determined that the GOK
entrusted or directed credit to the semiconductor industry through
1998. See Investigation Decision Memorandum at 12-21. For the period
1999 through June 30, 2002, the Department determined that the GOK
directed or provided loans and other benefits specifically to the
Hyundai Group within the meaning of section 771(5A)(D)(iii)(I) of the
Act. Id.
In this review, we have found no information which would indicate
that the GOK abandoned its commitment to preventing the collapse of the
Hyundai Group, and Hynix in particular. Indeed, as evidenced by many of
the articles placed on the record of this segment of the proceeding,
the vast majority of statements relating to governmental pressure on
banks specifically identify the Hyundai Group or Hynix.
In considering whether the December 2002 phase of restructuring was
de facto specific, there are additional indicators of GOK activity
specifically focused on aiding Hynix and the Hyundai Group. During the
investigation, we considered information regarding the magnitude of
monies involved with corporate debt restructurings under ROK corporate
laws, and examined CRPA restructuring data through the end of March
2003. Specifically, our analysis of ROK companies undergoing debt
restructurings under the CRPA indicated that the Hyundai Group
accounted for a disproportionately large share of the debt
restructured. See Investigation BPI Memo. Because the December 2002
phase of the Hynix restructuring occurred within this time frame, the
data provide meaningful evidence of de facto specificity for this
review.
On this basis, we preliminarily determine that the Hynix
restructuring continued to be specific to Hynix through the POR.
Contributions Made Pursuant to the GOK's Direction of Credit
In the investigation, the Department determined that the GOK
entrusted or directed creditor banks to participate in financial
restructuring programs, and to provide credit and other funds to Hynix,
in order to assist it through its financial difficulties. The financial
assistance provided to Hynix by its creditors took various forms,
including: loans, convertible bonds, extensions of maturities (which we
treated as new loans), Documents Against Acceptance Line of Credit
(``D/A'') financing, usance financing, overdraft lines, debt
forgiveness, and debt-for-equity swaps. The Department determined that
these were financial contributions which conferred a countervailable
subsidy during the POI.
In an administrative review, we do not revisit the validity of past
findings unless new factual information or evidence of changed
circumstances has been placed on the record of the proceeding that
would case us to deviate from past practice. See e.g., Certain Pasta
from Italy: Preliminary Results and Partial Rescission of Seventh
Countervailing Duty Administrative Review, 69 FR 45676 (July 30, 2004),
affirmed in Certain Pasta From Italy: Final Results of Seventh
Countervailing Duty Administrative Review, 68 FR 70657 (December 7,
2004). In comments filed before the Department, Hynix makes several
claims regarding the Department's investigation findings with respect
to the October 2001 restructuring.
Hynix has set forth new methodological arguments concerning the
October 2001 restructuring. For instance, Hynix argues that ``the
Department never established that GOK-owned or allegedly controlled
creditors held 75 percent of Hynix's debt as of the October 2001
restructuring plan sufficient to sustain a resolution of Hynix's CRPA
Creditors' Council'' {emphasis in original{time} . See Hynix's August
2, 2005, Pre-Preliminary Comments at 21. However, the Department based
its finding in the investigation on the fact that these creditors held
a ``blocking majority'' in the Creditors' Council not that they held
more than 75 percent of Hynix's debt. See Investigation Decision
Memorandum at 51.
Hynix also claims that ``new information'' on the record concerning
the October 2001 debt-to-equity swaps calls into question the
Department's investigation equity analysis. However, Hynix points to
its 2001 audited financial statements and makes a methodological
argument. See Hynix's August 2, 2005, pre-preliminary comments at 23.
Hynix's arguments regarding the determination made in the investigation
were based on its 2001 audited statements, which were on the record in
the investigation. Thus, the Department preliminarily finds that
Hynix's arguments with regard to the October 2001 restructuring are
beyond the scope of this administrative review as they are not based on
new factual information.
Hynix also argues that new information is on the record regarding
the Mediation Committee that was formed under the CRPA. See GOK's June
1, 2005, Supplemental Response at 84. Hynix contends that new
information on the record demonstrates that creditors who chose
appraisal rights but refused the terms settled on by the Creditors'
Council secured better terms through mediation and could have disputed
those terms even further within the Korean courts. See Hynix's July 11,
2005, Supplemental Response at Exhibit 3S-13. However, based on the
information on the record, only a few creditors actually went through
the mediation process. See GOK's July 11, 2005, Supplemental Response
at 50. Further, the percentage of Hynix's debt held by these creditors
was negligible. See Hynix's June 1, 2005, Supplemental Response at
Exhibit S-4. Although mediation was a ``legal'' option under the CRPA,
it was not a practical choice for the overwhelming majority of
creditors, which, as the Department found in the investigation, were
under continual pressure by the GOK to lend to Hynix. Therefore, the
Department preliminarily finds that this new information is not
persuasive enough to warrant a re-examination of its findings in the
investigation with respect to the October 2001 restructuring.
Therefore, we are including in our benefit calculation the
financial contributions countervailed in the investigation: bonds,
debt-to-equity swaps, debt forgiveness, interest-free debentures,
overdraft financing, usance financing, and D/A financing. In
calculating the benefit, we have followed the same methodology used in
the investigation. For the short-term debt instruments, we have used
the benchmarks described above in the ``Subsides Valuation
Information'' section.
In addition, as discussed above, the December 2002 restructuring
involved a restructuring of Hynix's debt and a conversion of debt to
equity. We preliminarily determine that these debt-equity swaps and
loans confer a benefit
[[Page 54536]]
to within the meaning of section 771(5)(E)(i) and (ii) of the Act,
respectively. Because we have preliminarily found Hynix to be
unequityworthy at the time of the investment, we have treated the full
amount swapped as a grant and allocated the benefit over the five-year
AUL. See 19 CFR 351.507(a)(6) and (c). We have used a discount rate
that reflects our preliminary finding that Hynix was uncreditworthy at
the time of the debt-to-equity conversions. For the loans, we have
followed the methodology described at 19 CFR 351.505(c) using the
benchmarks described in the ``Subsidies Valuation Information'' section
of this notice.
We have divided benefits from the various financial contributions
by CY2003 or POR sales, as appropriate, to calculate a countervailable
subsidy rate of 60.61 percent ad valorem for the POR.
II. Programs Previously Found to Confer Subsidies
We examined the following programs determined to confer subsidies
in the investigation and preliminarily find that Hynix continued to
receive benefits under these programs during the POR.
A. Operation G-7/HAN Program-2
Implemented under the Framework on Science and Technology Act, the
Operation G-7/HAN program (``G-7/HAN program'') began in 1992 and ended
in 2001. See ``Issues and Decision Memorandum for the Final
Determination in the Countervailing Duty Investigation of Dynamic
Random Access Memory Semiconductors from the Republic of Korea,'' dated
June 16, 2003, at 25 (``Final Decision Memorandum''), GOK's
Verification Report at 29; Hynix's Verification Report at 35; see also
the GOK's December 17, 2004, Questionnaire Response at 9. The purpose
of this program was to raise the GOK's technology standards to the
level of the G-7 countries. There were 18 different project areas,
including semiconductors, environment, and energy. Eight ministries
participated in various projects, with the Ministry of Science and
Technology (``MOST'') acting as the funding authority.
For the project area entitled ``Next Generation Semiconductors''
(``NGS''), MOST assigned the administrative function to the Korean
Semiconductor Research Association, an industry research and
development (``R&D'') association. This association was renamed in 1998
as the Consortium of Semiconductor Advanced Research (``COSAR''), and
it acted as the intermediary between the MOST and participating
companies. Applications were submitted to COSAR, which passed them on
to a committee at MOST for evaluation. Under the NGS project, the GOK,
through MOST, made interest-free loans to participating companies.
These loans were provided as matching funds; in general, participating
companies contributed at least 50 percent of the total R&D funding,
while the government contribution was capped at 50 percent.
Hynix notes that, although the G7/HAN program ended in 2001, the
company had outstanding loans under this program during the POR. See
Hynix' December 17, 2004, Questionnaire Response at 24, Exhibit 12.2;
see also, Hynix's June 1, 2005, Supplemental Response at Exhibit 33.2.
The Operation G-7/Han Program was found to provide countervailable
subsidies in the investigation. No new evidence has been provided that
would lead us to reconsider our earlier finding.
To calculate the benefit of these loans during the POR, we compared
the interest actually paid on the loans during the POR to what Hynix
would have paid under the benchmark described in the ``Subsidy
Valuation Information'' section of this notice. We then divided the
total benefit by Hynix's total sales in the POR to calculate the
countervailable subsidy. On this basis, we preliminarily determine that
countervailable benefits of 0.18 percent ad valorem existed for Hynix.
The petitioner alleged that there is a link between the G-7/HAN
program and the System IC 2010 Project (``System IC project''). In
response to our questions, the GOK and Hynix responded that there is no
connection between the two programs. The System IC Project is discussed
below.
B. 21st Century Frontier R&D Program
The 21st Century Frontier R&D program (``21st Century program'')
was established in 1999 with a structure and governing regulatory
framework similar to those of the G-7/HAN program, and for a similar
purpose, i.e., to promote greater competitiveness in science and
technology. See Investigation Decision Memorandum at 26; GOK's
Verification Report at 30. Altogether, the program is composed of 19
project areas, each typically having a 10-year time horizon. The 21st
Century program provides long-term interest-free loans in the form of
matching funds. Repayment of program funds is made in the form of
``technology usance fees'' upon completion of the project, pursuant to
a schedule established under a technology execution, or implementation
contract.
Hynix stated that it had loans outstanding under this program
during the POR. See Hynix' December 17, 2004, Questionnaire Response at
III-24.
In the investigation, we determined that this program conferred a
countervailable benefit on Hynix. No new evidence has been provided
that would lead us to reconsider our earlier finding.
To calculate the benefit of these loans during the POR, we compared
the interest actually paid on the loans during the POR to what Hynix
would have paid under the benchmark described in the ``Subsidy
Valuation Information'' section of this notice. We then divided the
total benefit by Hynix's total sales in the POR to calculate the
countervailable subsidy. On this basis, we preliminarily determine that
POR countervailable benefits of 0.00 percent ad valorem exist for
Hynix.
III. Programs Previously Found Not to Have Been Used or Provided
Benefits
We preliminarily determine that the following programs continue to
not be used during the POR: See Hynix's December 17, 2004,
Questionnaire Response at III-25; GOK's December 17, 2004,
Questionnaire Response at 11; Hynix's June 1, 2005, Supplemental
Response at 56.
A. Tax Programs Under the TERCL and/or the RSTAP-2>1. Reserve for
Overseas Market Development (formerly, Article 17 of TERCL)-2>2.
Reserve for Export Loss (formerly, Article 16 of TERCL)-2>3. Tax
Exemption for Foreign Technicians (Article 18 of RSTA)-2>4. Reduction
of Tax Regarding the Movement of a Factory That Has Been Operated for
More Than Five Years (Article 71 of RSTA)-2>B. Tax Reductions or
Exemption on Foreign Investments under Article 9 of the Foreign
Investment Promotion Act (``FIPA'')/ FIPA (Formerly Foreign Capital
Inducement Law)-2>C. Duty Drawback on Non-Physically Incorporated Items
and Excessive Loss Rates-2>D. Export Insurance-2>E. Electricity
Discounts Under the RLA Program-2>
IV. Program Preliminarily Found to Not Confer Countervailable Subsidies
Based on the information provided in the responses, we
preliminarily determine that the following program did not confer
countervailable subsidies during the POR:
System IC 2010 Project-2>
The System IC 2010 Project was established by the Government of
Korea's MOST and the Ministry of Industry and Resources in 1998 as a
joint research and development project.
[[Page 54537]]
The goal of this project is to make Korea the 3rd largest producer of
semiconductors by 2012. The project is structured in three stages to be
implemented over the period 1998-2011. Phase One of the project targets
development of core technology research. Phase Two concentrates on
intellectual property integration, high speed performance, and leading
chipsets. Phase Three will develop new core technology.
The System IC project is applicable only to semiconductor
development. Participants must contribute 50 percent of the total
budget, and matching funds are provided through COSAR. The amount
contributed by COSAR is repaid by the applicant once the research is
successfully completed. See GOK's June 8, 2005, Supplemental Response
at 4-6, 8; see also Hynix's June 1, 2005 Supplemental Response at
Exhibit 50.
Hynix submitted a research plan to COSAR in September 2003
regarding ferroelectric random access memory semiconductors
(``FeRAMs''). This project is set to end in August 2007. Hynix has
received funds under the System IC Project to support its research.
These funds have not been repaid because Hynix's project is still
ongoing. See Hynix's June 1, 2005, Supplemental Response at Exhibit 50
Hynix states that FeRAM are non-subject merchandise. Hynix
explains, moreover, that FeRAMs are produced in its ``System IC''
segment, whereas DRAMS are produced in the company's ``memory''
segment. The former segment produces applied products that are
unrelated to memory semiconductors such as DRAMS and SRAMS. According
to the response, the production processes for the memory products and
the applied (non-memory) products are completely different. Hynix
further argues that the nature and goals of the project, as evidenced
by Hynix's research/business plan submitted to COSAR, are solely for
the development of FeRAMs, i.e., non-subject merchandise. See Hynix's
July 12, 2005, Supplemental Response at Exhibit 16.1. In addition, the
contract between Hynix and COSAR clearly limits governmental support to
development of FeRAMs.
Based on the information provided, we preliminarily determine that
any benefits provided to Hynix under the System IC 2010 Project are
tied to non-subject merchandise in accordance with 19 CFR
351.525(b)(5). Therefore, we preliminarily determine that Hynix did not
receive any countervailing benefits under this program during the POR.
Preliminary Results of Review
In accordance with 19 CFR 351.221(b)(4)(i), we calculated an
individual subsidy rate for Hynix Semiconductor, Inc., the producer/
exporter covered by this administrative review. We preliminarily
determine that the total estimated net countervailable subsidy rate for
Hynix Semiconductors for calendar year 2003 is 60.74 percent ad
valorem.
If the final results of this review remain the same as these
preliminary results, the Department intends to instruct CBP, within 15
days of publication of the final results of this review, to liquidate
shipments of DRAMS by Hynix entered or withdrawn from warehouse, for
consumption from April 7, 2003, through December 31, 2003, at 60.74
percent ad valorem of the F.O.B. invoice price. We will instruct CPB to
take into account the ``provisional measures cap'' in accordance with
19 CFR 351.212(d). In addition, for April 7, 2003, through December 31,
2003, the assessment rates applicable to all non-reviewed companies
covered by this order are the cash deposit rates in effect at the time
of entry.
The Department also intends to instruct the CBP to collect cash
deposits of estimated countervailing duties at 60.74 percent ad valorem
of the F.O.B. invoice price on all shipments of the subject merchandise
from Hynix, entered, or withdrawn from warehouse, for consumption on or
after the date of publication of the final results of this
administrative review.
We will instruct CBP to continue to collect cash deposits for non-
reviewed companies covered by this order at the most recent company-
specific rate applicable to the company. Accordingly, the cash deposit
rate that will be applied to non-reviewed companies covered by this
order will be the rate for that company established in the
investigation. See Notice of Amended Final Affirmative Countervailing
Duty Determination: Dynamic Random Access Memory Semiconductors from
the Republic of Korea, 68 FR 44290 (July 28, 2003). The ``all others''
rate shall apply to all non-reviewed companies until a review of a
company assigned this rate is requested. The Department has previously
excluded Samsung Electronics Co., Ltd. from this order. Id.
Public Comment
Interested parties may submit written arguments in case briefs
within 30 days of the date of publication of this Notice. Rebuttal
briefs, limited to issues raised in case briefs, may be filed not later
than five days after the date of filing the case briefs. Parties who
submit briefs in this proceeding should provide a summary of the
arguments not to exceed five pages and a table of statutes,
regulations, and cases cited. Copies of case briefs and rebuttal briefs
must be served on interested parties in accordance with 19 CFR
351.303(f).
Interested parties may request a hearing within 30 days after the
date of publication of this notice. Unless otherwise specified, the
hearing, if requested, will be held two days after the scheduled date
for submission of rebuttal briefs.
The Department will publish a notice of the final results of this
administrative review within 120 days from the publication of these
preliminary results.
We are issuing and publishing these results in accordance with
sections 751(a)(1) and 777(i)(1) of the Act.
Dated: August 31, 2005.
Barbara E. Tillman,
Acting Assistant Secretary for Import Administration.
[FR Doc. E5-4891 Filed 9-14-05; 8:45 am]
BILLING CODE 3510-DS-S