Council Regulation (EC) No 584/2006 of 10 April 2006 amending Regulation (EC) No 1480/2003 imposing a definitive countervailing duty and collecting definitely the provisional duty imposed on imports of certain electronic microcircuits known as DRAMs (dynamic random access memories) originating in the Republic of Korea

COUNCIL REGULATION (EC) No 584/2006

of 10 April 2006

amending Regulation (EC) No 1480/2003 imposing a definitive countervailing duty and collecting definitely the provisional duty imposed on imports of certain electronic microcircuits known as DRAMs (dynamic random access memories) originating in the Republic of Korea

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1515/2001 of 23 July 2001 on the measures that may be taken by the Community following a report adopted by the WTO Dispute Settlement Body concerning anti-dumping and anti-subsidy matters ([^E0001]),

Having regard to Council Regulation (EC) No 2026/97 of 6 October 1997 on protection against subsidised imports from countries not members of the European Community ([^E0002]) (the basic Regulation),

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

Whereas:PROCEDUREExisting measures

• (1) By Regulation (EC) No 1480/2003 ([^E0003]) (the definitive Regulation), the Council imposed a definitive countervailing duty of 34,8 % on imports of certain electronic microcircuits known as dynamic random access memories (DRAMs) originating in the Republic of Korea and manufactured by all companies other than Samsung Electronics Co., Ltd (Samsung), for which a 0 % duty rate was established. The definitive Regulation was preceded by Commission Regulation (EC) No 708/2003 of 23 April 2003 imposing a provisional countervailing duty on imports of certain electronic microcircuits known as DRAMs (dynamic random access memories) originating in the Republic of Korea ([^E0004]) (provisional Regulation).

• (2) Two exporting producers located in the Republic of Korea cooperated in the investigation which led to the imposition of the existing measures (the original investigation): Samsung, which was not found receiving subsidies, and Hynix Semiconductor Inc. (Hynix). The European Community (EC) industry in the original investigation consisted of two producers which accounted for the major proportion of the total Community production of DRAMs, Infineon Technologies AG, Munich, Germany (Infineon) and Micron Europe Ltd, Crowthorne, United Kingdom (Micron).

• (3) The investigation of subsidisation and injury covered the period from 1 January 2001 to 31 December 2001 (IP). The examination of trends relevant for the assessment of injury covered the period from 1 January 1998 to the end of the IP (the period under consideration).

Report adopted by the Dispute Settlement Body of the WTO

• (4) On 3 August 2005, the Dispute Settlement Body (DSB) of the World Trade Organisation (WTOmm) adopted a Panel report in ‘European Communities — Countervailing measures on dynamic random access memory chips from Korea’ ([^E0005]).

• (5) According to the Panel report, the EC acted in a manner inconsistent with its WTO obligations under:

• (a)Article 1.1(a) of the Agreement on Subsidies and Countervailing Measures ([^E0006]) (the SCM Agreement) in determining that the May 2001 restructuring programme constituted a financial contribution by the government;

• (b)Article 1.1(b) of the SCM Agreement in its determination of the existence of a benefit in the case of the syndicated loan;

• (c)Articles 1.1(b) and 14 of the SCM Agreement in directly applying, for the purposes of the calculation of the amount of benefit, its grant methodology to all programmes found to constitute a subsidy;

• (d)Article 15.4 of the SCM Agreement by not evaluating the factor ‘wages’ as a relevant factor affecting the state of the domestic industry; and

• (e)Article 15.5 of the SCM Agreement by failing to make sure that the injury caused by certain other factors (in particular, decline in demand, overcapacity, and other (non-subsidised) imports) was not attributed to the subsidised imports.

• (6) On the other hand, the EC was found to have acted consistently with its WTO obligations under:

• (a)Article 1.1(a) of the SCM Agreement in determining that the syndicated loan, the KEIC guarantee, the KDB debenture programme and the October 2001 restructuring programme constituted a financial contribution by the Government of Korea (GOK);

• (b)Article 1.1(b) of the SCM Agreement in determining that a benefit was conferred on Hynix by the KEIC guarantee, the KDB debenture programme, the May 2001 restructuring programme and the October 2001 restructuring programme;

• (c)Articles 1.2 and 2 of the SCM Agreement in finding de facto specificity (two Korean claims);

• (d)Article 15.2 of the SCM Agreement in assessing the significance of the volume and price effects of the subsidised imports (2 Korean claims);

• (e)Article 15.4 of the SCM Agreement in considering all factors relevant to the overall condition of the domestic industry, except for the factor ‘wages’;

• (f)Article 15.5 of the SCM Agreement in demonstrating the requisite causal link between the subsidised imports and injury; and

• (g)Article 12.7 of the SCM Agreement in applying ‘facts available’ with respect to the subsidy investigation.

Reassessment to implement the DSB's recommendations

• (7) In the light of the recommendations set out in the Panel report, the Commission conducted a thorough and objective reassessment of the relevant findings in the definitive Regulation on the basis of information on the record. The scope of the reassessment is appropriately limited to an examination of the five specific aspects of the existing measure, as described above, that were found to be inconsistent with the SCM Agreement. This examination is based on the re-evaluation of the existing evidence on the record of the original investigation in light of the relevant findings in the Panel report.

• (8) The reassessment set out below shows that injurious subsidisation still exists, although at a slightly lower level.

PRODUCT UNDER CONSIDERATION AND LIKE PRODUCT

• (9) The product under consideration and the like product are the same as that covered by the original investigation, i.e. certain electronic microcircuits known as dynamic random access memories (DRAMs), of all types, densities and variations, whether assembled, in processed wafer or chips (dies), manufactured using variations of metal oxide-semiconductors (MOS) process technology, including complementary MOS types (CMOS), of all densities (including future densities), irrespective of access speed, configuration, package or frame etc., originating in the Republic of Korea. The product concerned also includes DRAMs presented in (non-customised) memory modules or (non-customised) memory boards, or in some other kind of aggregate form, provided the main purpose of which is to provide memory ([^E0007]).

• (10) The product concerned is currently classifiable within CN codes 8542 21 11, 8542 21 13, 8542 21 15, 8542 21 17, ex854221 01, ex854221 05, ex854890 10, ex847330 10 and ex847350 10.

• (11) The Panel report did not cover any claims affecting the findings set out in the definitive Regulation concerning the product under consideration and the like product.

REVISED FINDINGS BASED ON THE PANEL REPORTSubsidiesIntroduction

• (12) This part sets out the reassessed findings based on the conclusions and recommendations of the Panel report concerning:

• (a)whether the May 2001 restructuring programme constituted a financial contribution by the GOK within the meaning of Article 2(1) of the basic Regulation;

• (b)whether there was a benefit in the case of the syndicated loan within the meaning of Article 2(2) of the basic Regulation;

• (c)the calculation of the amount of the benefit with regard to all subsidy programmes within the meaning of Articles 2(2) and 6 of the basic Regulation.

• (13) All other findings concerning subsidies remain as established in the original investigation and set out in the provisional Regulation and the definitive Regulation.

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

• (14) The Panel found that the determination that the creditor banks were directed to participate in the May 2001 restructuring programme and that their purchase of KRW 1 trillion of convertible bonds (CBs) as part of the programme therefore constituted a financial contribution by the GOK was not consistent with Article 1.1(a) of the SCM Agreement ([^E0008]). More specifically, the Panel found that ‘while the May 2001 restructuring programme is a close case, we consider that the evidence before the investigating authority was insufficient to reasonably conclude that the government entrusted or directed the private banks to purchase the Hynix CBs.’ ([^E0009]).

• (15) In accordance with the Panel's assessment, the funds provided to Hynix in the context of the May 2001 restructuring programme shall not be countervailed ([^E0010]).

Syndicated loan of KRW 800 billion

• (16) With respect to the syndicated loan of KRW 800 billion, the Panel found that the EC had properly established that the GOK directed the Korea Exchange Bank (KEB) to participate in the loan and that this constituted a financial contribution via entrustment or direction of KEB in accordance with Article 1.1(a) of the SCM Agreement. The Panel also found that the Korea Development Bank (KDB) provided a direct financial contribution through its participation in the syndicated loan, and, because the KDB was a public body, the EC was not required to make a finding of entrustment or direction ([^E0011]). However, the Panel found that the EC failed to establish the existence of a benefit from the financial contribution provided by the KDB and the KEB within the meaning of Article 1(b) of the SCM Agreement ([^E0012]). Specifically, the Panel stated that the EC had not examined whether there were comparable commercial loans that could actually have been obtained by Hynix on the market and stated that the EC had ignored the other participants in the syndicated loans as possible benchmarks ([^E0013]).

• (17) In the view of the Commission, the participation by the other banks in the syndicated loan cannot serve as a proper benchmark for determining the existence of a benefit. As the Panel itself noted, in determining the existence of a commercial benchmark, authorities must examine whether such loans were so influenced by the alleged government intervention that they do not represent loans that could actually be obtained on the market ([^E0014]). The Commission has conducted a thorough re-examination of the extensive record in this case and has employed the type of analysis discussed by the Panel. On this basis, the Commission has determined that the loans from the other banks participating in the syndicated loan could not serve as a proper benchmark.

• (18) First, bearing in mind the financial condition of Hynix at the time that the syndicated loan was arranged, as noted in recital 19 of the definitive Regulation, at the time the loan was agreed to, at the end of 2000, Hynix was in severe financial distress. It had over USD 9,46 billion in liabilities at the end of 2000, which was over twice its net worth and over four times the market capitalisation of the company. It suffered a loss in 2000, a year in which other large DRAM producers registered profits and which was generally considered to have been a very good year in the DRAM industry. The majority of Hynix liabilities were coming due in 2001 and the company was facing intense liquidity problems. Many independent analysts and brokerage houses were saying at that time that the company would not be able to generate sufficient cash flow or asset disposals to pay off its maturing liabilities. Under such circumstances, profit maximising banks operating under normal commercial conditions would not voluntarily participate in loans with such enormous risk of default ([^E0015]).

• (19) Second, there is ample evidence on the record that other participants in the syndicated loan were pressured to participate in the overall restructuring of Hynix's debt. For example, the record contains evidence that one of the participants, Kookmin Bank, was required to lend directly to ‘troubled corporate borrowers’. Specifically, in a statement to the Securities and Exchange Commission of the United States, Kookmin stated:

‘The Korean government has promoted, and, as a matter of policy, may continue to promote lending to certain types of borrowers. It generally has done this by requesting banks to participate in remedial programs for troubled borrowers (such as Hynix) and by identifying sectors of the economy it wishes to promote and making low interest loans available to banks and financial institutions who lend to borrowers in these sectors. The government has in this manner promoted low-income mortgage lending and lending to technology companies. We expect that all loans made pursuant to government policies will be reviewed in accordance with our credit review policies. However, government policies may influence us to lend to certain sectors or in a manner in which we otherwise would not in the absence of government policy.’ ([^E0016]).

It is clear that Kookmin refers to Hynix in mentioning ‘troubled borrowers’, because the bank's 2001 annual report lists Hynix as the single largest financially troubled borrower ([^E0017]). Further, Kookmin, as a GOK-invested enterprise, was subject to audit and inspection by the GOK Board of Audit and Inspection and as such was under pressure to comply with GOK policy.

• (20) Other participants in the syndicated loan were also under pressure from the GOK to assist Hynix. In this respect, recital 55 of the definitive Regulation provides extensive information regarding the extent to which the GOK put pressure on Korea First Bank (KFB) to provide ongoing financing to Hynix. In a high-level economic ministerial meeting in November 2000 the GOK took steps to ‘alleviate Hynix's cash crunch’ and waived statutory credit limits for KFB, KEB and KDB. The Panel did not examine the evidence in relation to KFB, because the Commission concluded its involvement to be negligible. However, given that the Panel found that the same GOK tactics employed in relation to KEB amounted to direction and that the GOK owns 49 % of KFB, it is reasonable to conclude that the GOK was in a position to and did exert influence over KFB in relation to its decision to participate in the syndicated loan. KDB is a public body and KEB was found by the Panel to have been directed by the GOK. The participation of these banks in the syndicated loan is thus not a reliable commercial benchmark. Other banks that were part of the syndicated loan were also subject to similar pressure from the GOK. The GOK put very direct pressure on both Shinhan and KorAm banks regarding the extension of the export credit arrangements, which was made at the same time as the syndicated loan. These banks had concluded that they were already over-exposed to Hynix and reversed their earlier decision to increase the export credit ceiling available to Hynix. In response, an FSS official criticised their move as ‘unthinkable’ ([^E0018]). The GOK held 18,3 % of Shinhan and was its largest shareholder, thus able to exert considerable influence over the bank. It is clear that Shinhan was not acting commercially given that it increased its loan loss reserves for Hynix even as it continued to assist the company and that it offered no legitimate credit risk analysis for assisting it. KorAM Bank again faced GOK threats when the bank refused to purchase Hynix CBs, because it decided that doing so was not financially sound. In response to the bank's decision not to purchase the bonds, an FSS official rebuked KorAm, using language uncharacteristic of a government apparently uninvolved in credit decisions. The official stated: ‘If KorAm does not honour the agreement, we will not forgive the bank’ ([^E0019]). He further stated that the FSS would take stern measures against the bank, such as disapproving new financial instruments and subjecting the bank to a tighter audit ([^E0020]). As a result of these threats, KorAm Bank capitulated and reversed its decision ([^E0021]), while at the same time increasing its loan loss reserves for Hynix and offering no legitimate credit analysis for providing such financial assistance. Of the remaining banks which participated in the syndicated loan, Chohung Bank, Woori Bank, the NACF, Seoul Bank, Kwangju Bank, Peace Bank, Kyongnam Bank and the Industrial Bank of Korea are all GOK-owned and thus their credit decisions are tainted by GOK policy. The Housing and Commercial Bank, of which the GOK has a 20 % share, admitted government direction in its credit decisions in a sworn statement to the US SEC ([^E0022]). Finally, although Pusan Bank had no GOK ownership, it was nevertheless ordered by the FSS in 1999 to fire or replace its executives and to increase its paid-in capital by USD 86,2 million before the end of March 2000 ([^E0023]), to ‘slash their manpower, the number of branches and organisations, while disposing of ailing subsidiaries’ ([^E0024]) and, in 2000, the FSS sanctioned its former and current officials for mismanagement ([^E0025]). Given this degree of GOK control over Pusan Bank, the bank's decision to participate in the syndicated loan cannot be considered to be a safe commercial benchmark.

• (21) Third, it would clearly not be appropriate to use Citibank Seoul as a benchmark to determine the commercial reasonableness of participating in the syndicated loan, for the reasons set forth in recitals 130 to 133 of the definitive Regulation. First, Citibank Seoul failed to cooperate in this investigation, thus forcing the Commission to rely on facts available regarding the participation of Citibank Seoul. Second, the evidence on the record discussed in recital 133 of the definitive Regulation reflects an unusually close relationship between the GOK and Citibank that calls into question the impartiality of Citibank in lending to Hynix. Third, Citibank itself was a financial advisor to Hynix regarding its restructuring and thus had an inherent conflict with respect to participation in new lending to Hynix ([^E0026]). It had not given financing to Hynix prior to becoming Hynix's financial advisor. Fourth, the Panel itself recognised that Citibank cannot serve as a basis for determining whether any of the loans to Hynix were made on the basis of commercial considerations ([^E0027]).

• (22) Finally, it is important to note that Hynix defaulted on its interest payments on the syndicated loan almost as soon as the loan was given. As noted in recital 87 of the definitive Regulation, Hynix had not been servicing the syndicated loan that it received in January 2001.

• (23) Based on the foregoing, it may be concluded that none of the other seven participants in the syndicated loan can serve as an appropriate benchmark for measuring the commercial reasonableness or the amount of benefit to Hynix from the portions of the loan provided by KEB and KDB.

• (24) On this basis, the participation of KEB and KDB in the syndicated loan may still be considered to be a countervailable subsidy that provides a benefit to Hynix. However, as set out in recital 37 of the definitive Regulation, no subsidy amount has been countervailed under the syndicated loan in order to avoid double-counting, as the syndicated loan amount was subsequently rolled-over into the October 2001 measures. Thus, no amendment of the findings is necessary with regard to this measure.

Calculation of the amount of benefit

• (25) The Panel found, at para. 7.215 of its report, that the calculation of the amount of the benefit conferred by each of the financial contributions was inconsistent with Articles 1.1(b) and 14 of the SCM Agreement. The GOK did not raise any claims challenging ‘as such’ provisions of the basic Regulation or the Guidelines ([^E0028]) relating to the calculation of the amount of the benefit. Thus, the Panel report only addressed how the EC applied these provisions and calculated the amount of the benefit with respect to the measures at issue in this proceeding (the definitive Regulation).

• (26) In particular, the Panel considered that the EC acted inconsistently with Article 1.1(b) and 14 of the SCM Agreement by taking as a starting point that the amount of the benefit conferred by each of the financial contributions, which were generally in the form of loans, guarantees or equity, was to be calculated as if those financial contributions had been grants, irrespective of their terms and conditions. The Panel reasoned that the calculation of the amount of the benefit should be based on the benefit to the recipient, not the cost to the provider. It further reasoned that the provision in this case of funds to Hynix in the form of loans, guarantees and equity may have been of less benefit to Hynix than if the funds had been provided in the form of grants. In particular, the Panel reasoned that the funds would appear as debt in Hynix's balance sheet or would have given rise to the dilution of the ownership claims of existing shareholders in Hynix ([^E0029]).

• (27) The Panel considered that, as a matter of WTO law, the correct starting point for the EC in this case must be the search for an alternative benchmark as a base for the calculation of the amount of benefit. The Panel particularly referred, at para. 7.213 of its report, to ‘a comparable commercial loan which the firm could actually obtain on the market’ (Article 14(b) SCM Agreement) and ‘a comparable commercial loan absent the government guarantee’ (Article 14(a) SCM Agreement). The Panel also referred, by way of example, to so-called ‘junk bonds’ or ‘vulture funds’ ([^E0030]).

• (28) The Panel observed that there may be circumstances in which there is an absence of any comparable benchmark, and that the investigating authority was and is entitled to considerable leeway in adopting a reasonable approach to calculating the amount of the benefit to Hynix ([^E0031]).

• (29) In the light of the Panel's findings, for each of the relevant financial contributions in the measure at issue, the Commission has re-examined all of the relevant facts and evidence on the record, taking into account all of the submissions of interested parties, specifically with respect to possible alternative benchmarks, including ‘junk bonds’ and ‘vulture funds’, and, for each relevant financial contribution, redetermined the amount of the benefit to Hynix.

• (30) The Commission has not re-examined or made any redeterminations with respect to any substantive or procedural matters confirmed by the Panel report or not found by the Panel to be inconsistent with the SCM Agreement, including, but not limited to: Hynix's financial situation or worth, conditions in the DRAM market, conditions in the financial markets and the use of facts available. The Commission has limited itself to the specific issue that is the subject of the Panel's findings: the availability of alternative benchmarks.

• (31) In making this redetermination, the Commission has based its calculation of subsidy on a ‘benefit to the recipient’ and not on a ‘cost to the government’ standard, as is required by Article 6 of the basic Regulation, consistent with the Panel's reasoning, with the determinations in the definitive Regulation and with the Commission's established practice ([^E0032]). In this regard, the Commission notes that one of the key features of the SCM Agreement (Article 14) following the Uruguay Round was the confirmation that the ‘benefit to the recipient’ standard would normally prevail over the ‘cost to the government’ standard. The Commission further notes that the former will generally lead to a higher amount of subsidy than the latter, because it requires a comparison with commercial, rather than governmental, funding. Consequently, the Commission notes that the ‘cost to the government’ approach would not generally be expected to lead to a higher amount of subsidy than the ‘benefit to the recipient’ approach.

• (32) Thus, consistent with the Panel's reasoning, the Commission has examined the financial contributions ‘from the perspective of the recipient’. The Commission has done this by means of an objective examination of the information on the record of the case. The Commission has not enquired into what might have been the subjective state of mind of one or more Hynix executives at the time. Rather, it has enquired into what, objectively, the amount of the benefit would have been for a company in exactly Hynix's situation at the time. Calculating the amount of the benefit from the perspective of the recipient does not entail switching from an objective to a subjective basis of enquiry.

KEIC guarantee for export credits (D/A extension) in the amount of USD 600 million

• (33) The Panel summarised the facts concerning the KEIC guarantee in the following terms:

‘7.85The second action which was found to be a subsidy was the extension of a guarantee by the Korea Export Insurance Corporation (KEIC) which is the official export credit agency of Korea. The KEIC provides export insurance and guarantees to manage the risk associated with overseas transactions. In January 2001, 14 Hynix creditor banks increased the ceiling of the export credit facility for D/A's (documents against acceptance) provided to Hynix from USD 800 million to USD 1,4 billion, an increase of USD 600 million, The KEIC granted the short-term export credit insurance for the extended D/A limit as regards the transaction between Hynix and its overseas subsidiaries. In other words, Hynix collects the foreseen payment for the export transaction from the banks concerned, which hold the D/A documents. The affiliated importer in the country of destination then makes the payments for the goods concerned directly to the banks against the D/A. Hynix pays KEIC a premium for the guarantee and pays interest to the banks concerned for the D/A amounts withdrawn until the importer makes the final payment. The KEIC insurance covers the amounts due to the banks which cannot be collected due to the bankruptcy of either the exporter or the importer.’.

([^E0033])

• (34) The Panel found that the EC reached a reasonable and reasoned conclusion on the basis of the record before it that the KEIC Guarantee conferred a benefit to Hynix ([^E0034]). In doing so, it recalled that the KEIC itself was hesitant to provide the guarantee on Hynix's debt and needed its own guarantee from the GOK ([^E0035]). However, as regards the amount of the benefit, the Panel report indicates that the EC should, as a matter of WTO law, re-examine the question of the availability of alternative benchmarks for calculating the benefit to Hynix ([^E0036]).

• (35) As the Panel observed, the question of benefit in the case of a government guarantee can be examined from more than one angle ([^E0037]).

• (36) One reasonable method of enquiring into the amount of benefit from such a measure might be to compare the guarantee provided by the government with a comparable guarantee provided by the market ([^E0038]).

• (37) A second reasonable method is indicated by Article 6(b) of the basic Regulation (which generally corresponds to Article 14(b) of the SCM Agreement), which refers to government loans; and Article 6(c) of the basic Regulation (which generally corresponds to Article 14(c) of the SCM Agreement), which refers to a loan guarantee by a government ([^E0039]). In this case, the ‘loan guaranteed by the government’ is the revolving amount of debt outstanding at any time owed by the Hynix group, via its affiliated importers in various countries of export, to the banks, in respect of export transactions where payment has yet to be made, but funds have already been advanced by the banks to Hynix. The financial contribution under consideration related to the extension of the facility by USD 600 million. However, the facility itself had an overall ceiling of USD 1,4 billion.

• (38) The Commission has re-examined the extensive record in this case and considered whether there is any relevant benchmark against which the amount of the benefit could be calculated. First, the Commission considered whether Hynix had received new loans at the time that the USD 600 million increase had been granted. The record demonstrates, however, that no new commercially comparable lending had been provided. Second, the Commission looked for verified evidence regarding the cost and terms of a comparable commercial guarantee or a ‘comparable commercial loan absent the government guarantee’ that Hynix or another firm in a situation comparable to Hynix concluded at the relevant time. A comparable commercial loan would ideally be one of approximately the same size, would related to the same or a similar sector of economic activity, would involve a comparable type of activity, such as export credit insurance, and would have been concluded at approximately the same time. It could not involve any government guarantee, express or implied, and would need to involve a firm in a comparable financial situation to that of Hynix.

• (39) Having conducted this re-examination, the Commission has determined that there is no reliable information on the record regarding these matters. The Commission has not found any such benchmark as regards Hynix itself. The loans provided to Hynix were generally either provided by the GOK or by banks that were entrusted and directed by the GOK, and the rate on the syndicated loan would also be an inappropriate benchmark for the reasons stated in recitals 17 to 20 above. Lending from Citibank Seoul is also not an appropriate benchmark for the reasons stated in recital 21 above. Citibank's participation was insufficiently significant, was influenced by the participation of other lenders and the GOK and was distorted by both its interest, together with SSB, as Hynix's financial advisor and its long-term relationship with the GOK. In any event, Citibank did not cooperate in the investigation.

• (40) Given Hynix's financial condition, there are no Hynix-specific benchmarks that can be used and there is no data on the record regarding loans to companies in a similar financial condition to Hynix. Moreover, the available information indicates that Hynix did not obtain, and would not have been able to obtain, the relevant funds in the market ([^E0040]). The KEIC export credit guarantee programme and the KDB debenture programme were in effect throughout 2001. During this period, Hynix was, by all measures, uncreditworthy. Hynix's already dismal financial condition worsened markedly in 2000, when the company suffered a net loss of over KRW 2 trillion. At year-end 2000, Hynix's total indebtedness was KRW 8 trillion, and Hynix's current ratio, which measures the degree to which a firm's current assets cover current liabilities, was 0,33 ([^E0041]). Hynix's net profit margin fell from 2,08 % in 1999 to minus 24,03 % in 2000 (when the DRAM industry as a whole performed well) and minus 93,83 % in 2001 ([^E0042]). Clearly, during 2000 and 2001, Hynix was unable to generate adequate cash flow to cover its existing debt, much less new debt.

• (41) Market analysts agreed that Hynix was not creditworthy during this period. Hynix's Standard & Poor's rating was B- in March 2001, CCC+ in August 2001 and ‘selective default’ in October 2001. In January 2001, UBS Warburg explained that Hynix's ‘debt refinancing agreement with KDB … merely puts off the evil day but does not solve (Hynix's) core problem, that it is not profitable and is not paying off debt at a sufficiently fast rate from internal cash flow or asset disposals’ ([^E0043]). UBS Warburg subsequently stated that Hynix's lack of product diversity was a concern and that Hynix's excessive focus on commodity DRAMs would contribute to its ‘deteriorating fundamentals’ throughout the first half of 2001 ([^E0044]). Similarly, in February 2001, Deutsche Bank posited the cash flow problem bluntly: ‘We believe the most critical concern for (Hynix) is its ongoing cash flow concerns. In our view, it is unlikely that the Korean Government would be willing to give up on the company yet ….We believe (Hynix's) financial crisis will continue to carry a heavy burden on its ability to recover, as the DRAM sector is perhaps the most capital-intensive sector within semiconductors, with a constant requirement to upgrade technology processes’ ([^E0045]).

• (42) In February 2001, in an article in the Korea Herald ([^E0046]), another market expert stated that: ‘Given the fact that credit risk is still pronounced and haunting investors, I don't think fluent capital will flow into corporate bonds rated below BBB+’. This coincides with the early period of the KEIC Guarantee and KDB Debenture Programme. The article goes on to point out the yield difference between investment grade bonds and junk bonds, concluding that ‘this indicates that investors continue to shun low-grade corporate bonds, expanding the spread between high-credited bonds and the so-called junk bonds to their widest margin’. A press report in June 2001 stated that ‘Investors have started gazing down the Asian credit curve, but they still lack the nerve to eye corporates with ratings below the bottom rung of investment grade at BBB-minus. Only companies with strong cash flows, ability to service debt and growth prospects are likely to make them look.’ ([^E0047]). Another report stated that ‘Especially in the latter half of last year, it was nearly impossible for a company to issue junk bonds based on its own credit and the junk bonds market existed through primary collateralised bond obligations, collateral loan obligations and a government-initiated bond-refinancing plan.’ ([^E0048]).

• (43) Thus, the Commission confirms its original finding that Hynix fell short of the investment grade required by investors for the junk bond market; and that, during the IP, the type of capital markets referred to by the Panel were inaccessible to companies with prospects as weak as those of Hynix. Accordingly, such information as is on the record does not permit the establishment of a reliable benchmark with respect to such markets.

• (44) The Commission would therefore be in a position to reasonably and objectively conclude that no alternative commercial benchmark would actually be available in this case. Accordingly, in these circumstances, the Commission finds that the amount of the benefit to Hynix could not exceed the full amount of the loan, plus compound interest and the costs of recovery or attempted recovery in the event of default. Because there is also no reliable information on the record regarding these latter additional costs, the Commission has confined itself to the full amount of the loan. The Commission believes that this conclusion is fully supported by its (unchanged) determinations regarding the financial situation and worth of Hynix, and the situation in the DRAMs market and the financial markets, and that it is consistent with the basic Regulation and the Guidelines.

• (45) However, mindful of the WTO Panel’s reasoning, the Commission has, exceptionally and for this reason only, also considered whether or not, even absent any relevant benchmarks, there is anything that might serve as the basis for a proxy benchmark, adjusted where necessary to take account of the particular circumstances of this case. Such a proxy could, for example, be based on a commercial interest rate, with the addition of a risk premium, reflecting the default rates of companies exhibiting comparable risk. Such a calculation would take into account the term of the loan, a benchmark interest rate that would be paid by a creditworthy company, the probability of default by an uncreditwothy company within a specified period of time and the probability of default by a creditworthy company within the same specified period of time. This approach is premised on the commonly understood notion that when a lender makes a loan to a company that is considered to be uncreditworthy, the lender faces higher probability that the borrower will default on repayment of the loan. As a consequence of this higher default probability, the lender will charge a higher rate of interest, and one that is in proportion to the increased probability of default. Essentially, this would entail taking an interest rate available in the market to creditworthy borrowers and adding a ‘risk premium’ to it in order to account for the increased risk associated with lending to a company that is not creditworthy.

• (46) For purposes of implementing the Panel's report in this case, the Commission has used the following formula to calculate an appropriate uncreditworthy benchmark interest rate:

• ib= [(1-qn)(1+if)n/(1-pn)]1/n -1

• Where:

• (47) For the purposes of this implementation, the Commission has used as the creditworthy (or commercial) rate for USD loans the average USD lending interest rate for 2001, which, according to the IMF International Financial Statistics Service, was 6,922 %. Although the credit received by Hynix by virtue of the guarantee was short term, the measure under consideration, i.e., the guarantee itself, was in fact a form of rolling credit. The Commission used data from Moody's Investor Service to obtain default rates for creditworthy and uncreditworthy companies. For the uncreditworthy rate, the Commission used the likelihood of default for companies with a credit rating of Caa to C during the term of the relevant measure (i.e., one year for the KEIC guarantee). Similarly, the Commission used the default rate for a creditworthy company during the term of the measure in question, calculated based on a cumulation of data for investment grade companies. The rate of default of an uncreditworthy company in 2001 within one year was, according to Moody's, 34,34 %. The rate of default of a creditworthy company in 2001 within one year was 0,13 %. This led to total interest rate of 62,70 %. In contrast, the interest rate payable by Hynix on the USD loans in question was 8,33 %, i.e., a total interest differential of 54,37 %.

• (48) The Commission recalls that, normally, having determined that the benefit is equivalent to the full amount of the financial contribution (in this case, a loan or loan guarantee), the Commission treats it as a ‘non-recurring’ subsidy and allocates it over a period of time corresponding to the normal depreciation of fixed assets in the industry concerned. The Commission uses a straight-line allocation and does not increase the total amount of benefit by using the ‘time value of money’ method; it merely adds interest to each annual allocated portion. In this case, the allocation period was five years and no additional costs were added to the full amount of the loan as explained in recital 44 above, which means that 20 % of the financial contribution was allocated to each year.

• (49) Had the Commission used an interest rate comparison as described in recitals 45 to 47 above, the benefit (i.e., the difference between the benchmark and the actual interest rate) would have been considered as a recurring subsidy. The amount of subsidy allocated to each year would have been the interest rate differential multiplied by the fact amount of the loan. Therefore, depending on the size of the interest rate differential, the terms and conditions of the loan, and the length of the depreciation period, the annual benefit obtained by making an interest rate comparison may be bigger or smaller than that which results from the application of the Commission’s original approach.

• (50) In this case, the Commission's original approach would result in an allocated annual benefit of 20 % of the financial contribution. Depending on the exact terms of the loan, i.e., whether the beneficiary repays interest and capital or interest only each year, this amount would be reached with an interest rate differential of no less than 20 % and no more than about 35 % per year. The actual interest differential in this case is 54,37 %. This means that a strict application of this method would result in a much higher rate of countervailable subsidy allocated on turnover, in fact 12,8 % instead of the 5,1 % originally calculated by the Commission.

• (51) Consequently, the Commission considers that its original approach was and is reasonable in this case. Indeed, it is only in extreme cases that the Commission will determine the amount of the benefit to be equivalent to the full amount of a loan (i.e., when there is no realistic possibility of repayment) and in such circumstances it is usual that the benchmark interest rate will be extremely high. Therefore, the interest rate differential will often give a higher amount of benefit than a simple allocation of the face amount of the loan over time. In these circumstances, the Commission has used the more conservative of the two options in order to be sure that it has not exaggerated the amount of the subsidy, and will treat the face amount of the loan as the basis for a cap on the maximum amount of the benefit.

• (52) On the above basis, the amount of benefit conferred by the KEIC guarantee ad valorem of export turnover was 5,1 %.

KDB debenture programme

• (53) The Panel summarised the facts concerning the KDB debenture programme in the following terms:

‘7.88A third programme found to constitute a subsidy by Korea was the KDB debenture programme to which Hynix was admitted on 4 January 2001. This was a programme which essentially lasted for one year (2001) and was set up by the government in response to financial instability in Korea caused by the fact that a large amount of bonds issued by a few companies (including Hynix) were due to mature simultaneously. Under this programme, maturing debt was rolled-over and re-packaged for investors. A participating company repaid on its own 20 % of its corporate bonds falling due and the KDB assumed the remaining 80 %. This constituted the first phase of the programme. Of the 80 % originally assumed by the KDB, 20 % of the bonds was then sold to the company's creditor banks in proportion to their debt exposure to the company; 70 % was re-packaged for sale to investors as collateralised bond obligations (CBOs) and/or collateralised loan obligations (CLOs), guaranteed by the Korea Credit Guarantee Fund (KCGF) ([^E0049]); and the KDB retained the remaining 10 %. The participating company had to repurchase at least 3 % of any CBOs and 5 % of any CLOs ([^E0050]).

• 7.89We note that companies were placed in the programme upon nomination by the main creditor bank, and needed the approval by the Creditors Financial Institutions Council (CFIC), based on an assessment of the company’s financial future. The CFIC consisted of representatives of the KCGF, the KDB and 17 other creditor banks ([^E0051]). The CFIC ultimately decided on participation in the programme. If banks holding 75 % of the loans of the company agreed to the participation of the company in the programme, the CFIC considered the decision unanimous. To be placed in the programme, companies had to be able to repay 20 % of their maturing bonds; normalise business operations through a rescue plan; have credit ratings below A but higher than BB; and agree to any change in majority shareholdings requested by their creditor banks, or to the replacement of management in case of insolvency. Hynix was admitted to the programme on 4 January 2001 with a credit rating of BBB-. In total six companies were admitted, four of which, including Hynix, belonged to the Hyundai group ([^E0052]). The EC found that the bond purchase by the KDB as part of this programme constituted a financial contribution by the government which conferred a benefit on Hynix.

• (54) The Panel found that the EC reached a reasonable and reasoned conclusion on the basis of the record before it that the KDB debenture programme conferred a benefit on Hynix. In doing so, it recalled that the KDB debenture programme was itself set up and effectively guaranteed by the GOK ([^E0054]). However, as regards the amount of the benefit, the Panel report indicates that the Commission should, as a matter of WTO law, re-examine the question of the availability of alternative benchmarks.

• (55) As the Panel observed, the question of benefit, at least in the case of a government guarantee, can be examined from more than one angle ([^E0055]), and in applying the guidelines contained in Article 14 of the SCM Agreement, an investigating authority is entitled to considerable leeway ([^E0056]). The KDB debenture programme, for example, exhibits some of the characteristics of a guarantee, insofar as the entire measure was set up, sponsored and effectively guaranteed by the GOK or a GOK public body. Thus, one reasonable method of enquiring into the amount of benefit of such a measure might be to compare the guarantee provided by the government with a comparable guarantee provided by the market. The KDB debenture programme might also be considered in the light of Article 6(b) of the basic Regulation (which generally corresponds to Article 14(b) of the SCM Agreement), which refers to government loans, and Article 6(c) of the basic Regulation (which generally corresponds to Article 14(c) of the SCM Agreement), which refers to a loan guarantee by a government.

• (56) The Commission has re-examined the record to consider whether there is any relevant benchmark against which the amount of the benefit could be calculated. It has looked for verified evidence about a comparable government guarantee or ‘a comparable commercial loan’ or ‘a comparable commercial loan absent the government guarantee’ that Hynix or another firm in a situation comparable to Hynix concluded at the relevant time. A comparable commercial loan would ideally be one of approximately the same size, would relate to the same or a similar sector of economic activity, would involve a comparable type of activity, and would have been concluded at approximately the same time. It could not involve any government guarantee, express or implied, and would need to involve a firm in a comparable financial situation to that of Hynix.

• (57) Having conducted this re-examination, the Commission has determined that a commercial benchmark meeting these criteria was not available in this case. Hynix itself did not sell any corporate bonds into the commercial market at the time it participated in the KDB debenture programme. In fact, one of the threshold criteria for participation in the KDB debenture programme was that the company in question could not obtain loans or sell bonds on the normal commercial market. Moreover, as noted in recital 53 of the definitive Regulation, Hynix provided no evidence on the record that it tried to access foreign debt markets during this period. In addition, the fact that the international ratings agency Standard and Poor's downgraded Hynix's debt to a speculative rating of ‘B-’ makes it unlikely that Hynix would have been able to access foreign bond or loan markets, even if it had tried to do so. Even the Korean government itself noted in January 2001 that Hynix was ‘in a state of technical insolvency.’ ([^E0057]).

• (58) Moreover, other lending to Hynix during the period that the KDB rolled over Hynix’s maturing bonds cannot serve as a basis for measuring whether a benefit to Hynix exists. For the reasons noted in recitals 17 to 22 above, the loans provided as part of the syndicated loan cannot serve as an appropriate basis of comparison. The lending made pursuant to the syndicated loan was so distorted by the government’s intervention in that loan that it cannot serve as a reasonable commercial benchmark by which to measure whether a benefit has occurred or the amount of that benefit. In this regard, the Commission recalls that the syndicated loan itself was made possible by the GOK waiving the lending limits for three key participants in that loan. Without the participation of these three banks in the syndicate, it is unclear whether the loan would have been able to go forward at all, given that it would have been significantly undersubscribed ([^E0058]).

• (59) Further, the convertible bonds purchased by private bodies as part of the May 2001 restructuring programme cannot serve as a benchmark because, although the evidence on record did not rise to the level sufficient for a finding of entrustment or direction, it indicates a level of government involvement that makes the participation by private creditors an inappropriate measure of the commercial reasonableness of the CB purchases: the creditor banks themselves acknowledged in the 7 May 2001 creditor financial institution resolution that Hynix was unable to service its debts in May 2001 ([^E0059]) and the GOK was clearly heavily involved in overseeing the completion of the May 2001 CB offering, going as far as having a high level FSS official attend the March 2001 meeting of the creditor council ([^E0060]). Further, a comparable commercial loan which could serve as a benchmark is one which is concluded at approximately the same period of time; the CB offering took place five months after the KDB debenture programme, when both Hynix's financial situation and the state of the DRAMs market were markedly different.

• (60) As already indicated above ([^E0061]), no other comparable commercial benchmark was actually available in the market. On the contrary, the available information indicates Hynix would not have obtained the relevant funds in the market.

• (61) The Commission would therefore be in a position to reasonably and objectively conclude that no alternative commercial benchmark would actually be available in this case. Accordingly, under these circumstances, the Commission finds that the amount of the benefit to Hynix could not exceed the full amount of the funds obtained by Hynix as a result of the operation of the KDB debenture programme, plus compound interest and the costs of recovery or attempted recovery in the event of default. Because there is also no reliable information on the record regarding these latter additional costs, the Commission has confined itself to the full amount of the funds. The Commission believes that this conclusion is fully supported by its (unchanged) determinations regarding the financial situation and worth of Hynix, and the situation in the DRAMs market and the financial markets, and that it is consistent with the basic Regulation and the Guidelines.

• (62) However, mindful of the WTO Panel's reasoning, the Commission has also considered whether or not, even without the availability of any appropriate commercial benchmarks, there is anything that might serve as the basis for a proxy benchmark, adjusted where necessary to take account of the particular circumstances of this case. Such a proxy could, for example, be calculated along the lines already indicated above in recitals 45 and 46 with respect to the KEIC Guarantee.

• (63) For the purposes of this calculation, and as suggested by GOK, the Commission has used as the creditworthy rate for KRW loans the IMF International Financial Statistics rate on short-term KRW denominated-lending, which was 7,7 %. The default rates for both creditworthy and uncreditworthy companies for the term of the measure in question were taken from Moody's Investor Services (0,13 % and 34,37 % respectively). This led to a total interest rate of 63,89 %. In contrast, the average interest rate payable by Hynix on the KDB debentures in question was 12,7 %, i.e., a total interest rate differential of 51,19 %.

• (64) Viewing the financial contribution as a recurring subsidy, rather than as a non-recurring subsidy to be allocated over time, and applying this model to the calculation of the amount of the benefit in the financial contribution under consideration, would lead to an amount of benefit of KRW 626,9 billion, resulting in a countervailable subsidy allocated on turnover of 11,8 %, instead of the 4,9 % originally calculated by the Commission. Consequently, the Commission considers that its original approach was and is reasonable in this case, as the interest rate differential would give a much higher amount of benefit than a simple allocation of the face amount of the loan over time. In these circumstances, the Commission has used the more conservative of the two options in order to be sure that it has not exaggerated the amount of the subsidy and will treat the face amount of the loan as the basis for a cap on the maximum amount of the benefit.

• (65) Taking the amount of the funds obtained by Hynix as a result of the operation of the KDB debenture programme as a cap on the maximum amount of the benefit, the Commission finds that the amount of benefit to Hynix in the financial contribution at issue ad valorem of turnover was 4,9 %.

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

• (66) The Panel summarised the facts concerning the October 2001 restructuring programme in the following terms:

‘7.111The fifth and final programme considered to constitute a subsidy was the October 2001 restructuring programme. On 4 October 2001, a second Hynix CFIC was set up in accordance with the provisions of the Corporate Restructuring Promotion Act (CRPA). The CRPA was enacted in August 2001 and its purpose was to facilitate corporate restructuring, which before was based on agreements between creditor banks and the companies concerned. The CFIC consisted of 110 financial institutions including 17 banks and 15 investment trust companies. The decisions of the CFIC were taken by a 75 % majority. The votes were allocated in proportion of each institution’s exposure to the total loans to Hynix. Any financial institution exercising its dissenter’s rights by disagreeing with a CFIC resolution would be excluded from the CFIC permanently. In its second meeting held on 31 October 2001, the CFIC decided on a ‘second restructuring package’ for Hynix. The following measures were proposed: (a)provision of a new loan of KRW 1 trillion to Hynix with an interest rate of 7 %; (b)debt-to-equity swap by provision of bonds convertible into shares; (c)extending the maturities of existing loans until 31 December 2004, converting the maturing corporate bonds into corporate bonds with a three-year maturity and an interest rate of 6,5 % and adjusting the interest rate of the remaining loans in Korean currency to 6 %.

• 7.112The financial institutions were given three options by the CFIC in the 31 October meeting. The first option was to agree with the proposals by extending new credit and participating in a debt-to-equity swap (Option 1). Secondly, the banks which did not want to participate in the new loan were obliged to swap 28,5 % of their loans into equity and waive the rest of the Hynix debt (Option 2). Thirdly, the CFIC also decided that those banks which objected to the measures and used their dissenter’s rights would have their loans purchased back at the liquidation value as established by Arthur Andersen, the firm that was commissioned to conduct a study on the financial situation of Hynix at the time (Option 3).

• 7.113Nevertheless, only six banks agreed to extend new credit, which amounted to KRW 658 billion instead of the planned KRW 1 trillion. These banks swapped a considerable amount of their loans into equity. These so-called Option 1 banks were the KEB, Woori Bank, Chohung Bank, KDB, NACF and Citibank ([^E0062]). Eight banks refused to extend new loans, so they swapped approximately one-third of their loans into equity and wrote-off the rest as a loss. The remaining banks objected to the restructuring and elected to receive the liquidation value of their loans, and had to write the remaining debt off as a loss. The loans remaining with the banks of the first category were subject to maturity extensions and interest rate cuts as explained above ([^E0063]). The EC considered that the participation by the six Option 1 banks in the October 2001 restructuring programme constituted a financial contribution by the government which conferred a benefit on Hynix. The rate of subsidisation for this October 2001 restructuring programme was calculated to be 19,4 %.

• (67) The Panel found that the EC reached a reasonable and reasoned conclusion on the basis of the record before it that the October 2001 restructuring programme conferred a benefit on Hynix ([^E0064]). However, as regards the amount of the benefit, the Panel report indicates that the EC should, as a matter of WTO law, re-examine the question of the availability of alternative benchmarks.

Debt-to-equity swap

• (68) As the Panel indicated, in approaching the question of benefit in the case of the government provision of equity capital and in applying the guidelines contained in Article 14 of the SCM Agreement, an investigating authority is entitled to considerable leeway ([^E0065]). The Commission considers that the debt-to-equity swap in the October 2001 restructuring programme may be considered in the light of Article 6(1) of the basic Regulation (which generally corresponds to Article 14(a) of the SCM Agreement), which refers to government provision of equity capital inconsistent with the usual investment practice, including for the provision of risk capital, or private investors in the territory of the relevant Member. The Commission notes that, unlike subparagraphs (b) and (c), subparagraph (a) contains no final sentence providing further guidance on how the amount of the benefit is to be calculated.

• (69) The Commission has re-examined the record to consider whether there is any relevant benchmark against which the amount of the benefit could be calculated. It has looked for verified evidence about a comparable private provision of equity capital that Hynix or another firm in a situation comparable to Hynix concluded at the relevant time. A comparable provision of equity ideally would be one of approximately the same size, would relate to the same or a similar sector of economic activity, would involve a comparable type of activity and would have been concluded at approximately the same time. It could not involve any government guarantee, express or implied, and would need to involve a firm in a comparable financial situation to that of Hynix.

• (70) Having conducted this re-examination, the Commission has determined that there is no verified information on the record regarding these matters. The Commission has not found any such benchmark as regards Hynix itself. The equity provided to Hynix was generally either provided by the GOK or by banks that were entrusted or directed by the GOK.

• (71) Moreover, no other comparable commercial benchmark was actually available in the market. On the contrary, the available information indicated Hynix would not have obtained the relevant funds in the market. As noted in recital 103 of the definitive Regulation, in October 2001 Hynix's credit rating from Standard & Poor’s was ‘SD’ (selective default). Hynix went into default of interest payments on the syndicated loan in May 2001 and several creditor banks raised their loan-loss provisions as regards Hynix already in May 2001 and again in October 2001, before the measures under consideration were put in place. The six banks concerned by the October 2001 measures rated Hynix internally from ‘precautionary’ to ‘doubtful’ and the Option 2 banks involved in the debt-to-equity swap were given very little choice: they either took the shares or they effectively wrote off Hynix’s debts completely. The GOK suggestion that the difference between the swap price paid and the market price should serve as the amount of benefit ignores the realities of Hynix’s abysmal financial situation; no-one would invest in a company with an SD rating. The conclusions set out in recitals 101 to 112 of the definitive Regulation supporting the finding that no comparable equity financing that might serve as a benchmark was available to Hynix on the commercial market are hereby confirmed.

• (72) The Commission would therefore be in a position to reasonably and objectively conclude that no alternative commercial benchmark would actually be available in this case. Accordingly, under these circumstances, the Commission finds that the amount of the benefit to Hynix could not exceed the full amount of the funds obtained by Hynix as a result of the operation of the debt to equity swap in the October 2001 restructuring programme. The Commission believes that this conclusion is fully supported by its (unchanged) determinations regarding the financial situation and worth of Hynix, and the situation in the DRAMs market and the financial markets, and that it is consistent with the basic Regulation and the Guidelines.

• (73) However, mindful of the WTO Panel's reasoning, the Commission has also considered whether or not, even without any relevant benchmarks, there is any other method by which the amount of the benefit might be adjusted to take into account the particular circumstances of this case. The Commission considers that the uncreditworthy analysis conducted with respect to debt cannot provide an appropriate basis for comparison, precisely because this particular financial contribution is concerned with equity, which is a fundamentally different type of measure from debt.

• (74) The Commission has taken into consideration the possibility that, in the particular circumstances of the present reassessment, the cost to the recipient of receiving the financial contribution should be taken into account. The Commission notes that, in order to examine the cost, if any, of the swap from the point of view of the recipient, the obligations imposed on a company when issuing new equity would have to be considered. The Commission notes in this respect that injections of ordinary share capital do not generally impose particular obligations on a company, as there is neither a fixed rate of return which the company must achieve nor, in fact, do any payments need to be made. However, the company has at least a theoretical obligation to distribute its profits or part thereof to its shareholders; the return on equity ratio (ROE) could provide some indication of the level of return the company is expected to provide to its shareholders and could be used in the calculation of the amount of the benefit to Hynix. However, the ROE of Hynix for 2001 was minus 96,75 %, as calculated by reference to its financial statements for the year. Therefore, on the basis of an objective evaluation of Hynix's financial standing at the time of the debt-to-equity swap, it is unreasonable to expect that Hynix would be in a position to distribute any sort of return to its shareholders for the relevant year. Hence, using the ROE as a benchmark, it would still be concluded that the entire amount of the debt-to-equity swap is a countervailable subsidy.

• (75) The Commission has also examined whether there are costs to Hynix associated with having to surrender ownership shares as a result of the swap or the cost to Hynix from potential dilution of the share price resulting from the issuance of new shares ([^E0066]). Based on its review of the record evidence, the Commission does not believe that the net benefit to Hynix of the full debt-to-equity swap is diminished as a result of the issuance of new shares. In this regard, the Commission believes it is essential to recognise the impact that the debt-to-equity swap had on Hynix’s financial situation.

• (76) As a threshold matter, it is key to recognise that this was not a straight equity infusion. The fundamental benefit to Hynix resulted from the massive amount of debt that was extinguished as a result of the swap, namely KRW 2,483 billion. This effectively absolved Hynix from having to repay any of this principal amount and from having to pay interest. Instead, this massive amount of debt was replaced with equity shares issued to the Option 1 creditor banks. However, there was no real quantifiable cost to Hynix of issuing the new shares. While the existing share values were diluted as a result of the issuance, this had absolutely no balance sheet impact on Hynix. It did not result in any cash outlays (apart from the expense associated with the issuance of the new shares) and did not obligate Hynix to any sort of cash payments in the future, as would have been the case with debt instruments.

• (77) Consequently, in light of all these considerations and since Hynix did not report any costs associated with the issuance of equity, the appropriate approach to measuring the benefit from the debt-to-equity swap is to take the full amount of the swap. This results in an overall benefit to Hynix of KRW 358,2 billion and a countervailable subsidy allocated on turnover of 9,6 %.

Debt roll-over and new loan

• (78) The Commission considers that the debt roll-over and new loan in the October 2001 restructuring programme may be considered in the light of Article 6(b) of the basic Regulation (which generally corresponds to Article 14(b) of the SCM Agreement), which refers to the amount which the firm would pay on a comparable commercial loan that the firm could actually obtain on the market.

• (79) The Commission has re-examined the record to consider whether there is any relevant benchmark against which the amount of the benefit could be calculated. It has looked for verified evidence about a comparable commercial loan that Hynix or another firm in a situation comparable to Hynix concluded at the relevant time. A comparable commercial loan ideally would be one of approximately the same size, would relate to the same or a similar sector of economic activity, would involve a comparable type of activity, and would have been concluded at approximately the same time. It could not involve any government guarantee, express or implied, and would need to involve a firm in a comparable financial situation to that of Hynix.

• (80) The bonds purchased as part of the May 2001 restructuring programme cannot serve as a basis for determining the commercial reasonableness of the new loan and the debt roll-over, as Hynix's financial situation deteriorated substantially between May and October 2001. Therefore, the two situations cannot be considered to be comparable.

• (81) Having conducted this re-examination, the Commission has determined that there is no verified information on the record regarding these matters. The Commission has not found any such benchmark as regards Hynix itself. The loans provided to Hynix were generally either provided by the GOK or by banks that were entrusted or directed by the GOK.

• (82) As already indicated above ([^E0067]), no other comparable commercial benchmark was actually available in the market. On the contrary, the available information indicates Hynix could not have obtained the relevant funds in the market.

• (83) The Commission would therefore be in a position to reasonably and objectively conclude that no alternative commercial benchmark would actually be available in this case. Accordingly, under these circumstances, the Commission finds that the amount of the benefit to Hynix could not exceed the full amount of the funds obtained by Hynix as a result of the operation of the debt roll-over and new loan in the October 2001 restructuring programme. The Commission believes that this conclusion is fully supported by its (unchanged) determinations regarding the financial situation and worth of Hynix, and the situation in the DRAMs market and the financial markets, and that it is consistent with the basic Regulation and the Guidelines.

• (84) However, mindful of the WTO Panel's reasoning, the Commission has also considered whether or not, even in the absence of any relevant benchmarks, there is any other method by which the amount of the benefit might be adjusted to take into account the particular circumstances of this case. In this respect, the same methodology as the one outlined in recitals 45 and 46 was used to calculate the amount of the benefit received by Hynix from these two measures.

• (85) For the purposes of this calculation, the Commission has used as the creditworthy rate for KRW loans the average Bank of Korea interest rate on investment grade corporate bonds in 2001, which was 11,38 %. The default rates for both creditworthy and uncreditworthy companies for the term of the measures in question were taken from Moody's Investor Services. The rate of default of an uncreditworthy company in 2001 within three years (the term of the new loan and of the roll-over) was 57,97 %, whereas the rate of default of a creditworthy company within three years in 2001 was 0,94 %. This led to a total interest rate of 48,22 %. In contrast, the interest rate payable by Hynix on the new loan was 7 % and on the roll-over 6,5 %, i.e., an interest rate differential of 41,2 % and 41,7 % respectively.