Payback

GM Korea will start paying back 400 billion won (US$348.43 million) of debts this year.
GM Korea will start paying back 400 billion won (US$348.43 million) of debts this year.

 

GM Korea will start paying back 400 billion won (US$348.43 million) of debts this year. It is a partial amount of over 2 trillion won (US$1.74 billion) the company raised from the GM’s headquarters and its affiliates for years instead of banking businesses. It plans to gradually pay off all debts by 2020, beginning from this year.

According to industry sources and audit reports on Apr. 25, GM Korea borrowed 2.42 trillion won (US$2.11 billion) in total by the end of last year in order to raise funds needed to invest in facilities and research and development.

The figure has quintupled in just four years, compared to 507.3 billion won (US$441.9 million) in 2011. Since GM Korea hasn’t banked with local banks and financial firms, U.S.-based GM’s headquarters and affiliates lent money. 

GM Korea’s debts significantly increased in two years from 2012 and 2013 as the company tried to purchase redeemable preference shares issued to creditors early.

When GM bought Daewoo Motor in 2002, the company issued long-term dividend-based repayment preference shares rather than paying off debts to financial institutions. Its total amount was 2 trillion won (US$1.74 billion) and the dividend rate reached 8 percent. GM Korea purchased redeemable preferred stocks three times in 2012 and 2013 because it believed that it would be more effective to reduce interest costs by buying redeemable preferred stocks early, instead of paying high dividends. The company has advanced the initial plan to buy them by 2017, along with the provision of dividends, by four years. Accordingly, GM Korea has been able to save 200 billion won (US$174.22 million) of dividends which should be paid to financial institutions.

However, the company got financed 2 trillion won (US$1.74 billion), which was injected to buy redeemable preferred stocks, from GM’s head office and subsidiaries at that time and borrowed more money for operation costs. As a result, its debts mounted up to over 2.4 trillion won (US$2.09 billion). With an annual 5 percent interest rate, including London Interbank Offered Rate (LIBOR) interest rates and additional interest rates, GM Korea’s annual interest costs alone amount to 120 billion won (US$104.53 million). Although the company has lowered its financial expenses from 7 percent to 5 percent, it still needs to pay more than 100 billion won (US$87.11 million). It is a huge burden on GM Korea which posted 986.8 billion won (US$859.58 million) in losses last year.

In a bid to lower the interest burden and secure the financial soundness, the company plans to pay back 414.2 billion won (US$360.8 million) this year, 841.4 billion won (US$732.93 million) in 2017, 988 billion won (US$860.63 million) in 2018 and 177.4 billion won (US$154.53 million) in 2020. GM Korea wanted to carry forward this payment-push plan last year, but it postponed it for a year due to large losses.

However, some insiders, including the labor union, say that the company should lower its interest rate first. They think that about 3 percent of additional interest rates are relatively high in the era of zero interest rates.

In this regard, an official from GM Korea said, “Considering the credit rating and financial conditions, it is the level which meets global standards. If the company sets at lower rates than market interest rates because it is a related company, it is against the ignore market logic.”

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