that it had not relied on the guarantee of Hanbo Steel when it issued its original rating because
Hanbo Steel itself was unrated.
In early May 1997 CE Casecnan terminated the EPC contract. It announced that the
Hanbo Group had defaulted on the EPC contract for several reasons, including the fact that it
had filed for court receivership protection in South Korea. CE Casecnan added that the bank-
ruptcy filing was related to Hanbo’s alleged participation in fraudulent kickback schemes
involving banking and government officials.
At the time the EPC contract was terminated about 600 metres of the tunnel had been
excavated and a tunnel-boring machine was in position, abandoned by the EPC contractor.
Most of the large-scale electromechanical components were in the bidding process or already
on order. To replace the contractor’s functions the company assembled a consortium of other
contractors and subcontractors that already had stakes in the project.
On 7 May 1997 CE Casecnan announced that it had signed a lump-sum, date-certain,
turnkey contract with a new limited-liability consortium as EPC contractor, organised under
Italian law, headed by Cooperative Muratori e Cementisti (CMC) di Ravenna and Impresa
Pizzarotti & C Spa. Other members of the new consortium included Siemens AG, Sulzer
Hydro Ltd, Black & Veatch, and Colenco Power Engineering Ltd. Standard & Poor’s con-
firmed that its ‘BB’ rating remained on CreditWatch with negative implications and would
remain on CreditWatch at least until CE Casecnan was able to draw under the Korea First
Bank letter of credit, the replacement contractor was completely mobilised, and the agency
had reviewed the new contracts and security arrangements.
Also on 7 May Casecnan tendered a certificate of drawing to Korea First Bank under the
standby letter of credit that it had issued as financial security for the obligations of the Hanbo
Group. The bank dishonoured the drawing, upon which CE Casecnan filed for action in the
New York State Court.
On 12 May Orlando Soriano, head of the NIA, cited complaints about unpaid wages from
some local contractors as evidence of Hanbo’s financial problems. He said that on a recent visit
to the project site he had found some of the contractor’s engineering and construction work to
be defective. Soriano also said that police and army battalions had been sent to the area to
secure valuable equipment and property that would be left behind by the departing Koreans.
At that time the New York State Court granted CE Casecnan’s request for an order
requiring Korea First Bank to deposit US$79,329,000 in an interest-bearing account with a
bank in the United States. Korea First Bank appealed against the ruling, but the appeal was
denied by the State Appellate Court. Korea First Bank made the bank deposit as ordered by
the court on 19 May.
The next day John G. Sylvia, Chief Financial Officer of CE Casecnan, said:
We are very surprised and disappointed that Korea First Bank, South Korea’s second
largest commercial bank, would let its troubled relationship with Hanbo interfere with its
independent obligations to CE Casecnan under its letter of credit. Korea First Bank’s failure
to honour its standby letter of credit is indefensible and will only result in increasing the
bank’s exposure to Hanbo-related problems. It appears that the criminal investigations in
South Korea which have been reported in the press, in connection with the alleged fraudulent
loans-for-kickbacks scheme implicating a number of top South Korean government, Korea
First Bank and Hanbo officials, has greater ramifications than previously reported [...] It is
essential that international lending institutions honour their obligations under standby letters
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