The Korea Development Bank (KDB) requested U.S.-based General Motors (GM) to come up with self-rescue plans for GM Korea which posted the biggest losses in history last year.
According to investment banking industry sources on May 15, the KDB recently asked the GM headquarters for financial and accounting statements in a bid to check the mismanagement of GM Korea which recorded nearly 1 trillion won (US$853.61 million) of net losses last year.
The bank also requested GM Korea’s self-rescue plans to break the current crisis as well as financial support to GM Korea. This is because the bank think that there is a limit to examine causes of the poor management and possible liquidity crisis in the future with “2015 audit report” released by GM Korea earlier last month alone. Since GM Korea is an unlisted company, its audit report, which is released once a year four months after the close, is the only data that allows the bank to objectively check the current financial conditions of the company.
The KDB asked the GM headquarters in the U.S. for the self-restructuring plan for GM Korea because it has a great risk to take from the continuous poor management. The bank has to sell its shares of GM Korea within three years under the financial authorities’ policy for the stake sale of non-financial subsidiaries. However, its worsening financial structure caused by cumulative deficits is highly likely to lead to the decrease in shares owned by the KDB and the stake sale at bargain prices in the end.
The KDB recently asked Ernst & Young to reevaluate its shares of GM Korea (17.02 percent). According to the reevaluation, the equity value, or recoverable amounts, plunged from 269 billion won (US$229.62 million) in 2014 to 68 billion won (US$58.05 million) at the end of last year. As the financial structure of GM Korea got worse due to losses recorded for two consecutive years, the shares of the KDB, the second largest shareholder of GM Korea, also decreased. In fact, GM Korea posted 148.5 billion won (US$126.76 million) in operating losses and 353.5 billion won (US$301.75 million) in net losses in 2014. Its losses got even greater in 2015 with 594.4 billion won (US$507.38 million) of operating losses and 986.8 billion won (US$842.34 million) of net losses. GM Korea was the only company which showed losses for two years in a row last year among domestic automakers.
Under the current condition, the KDB is under pressure as the GM headquarters in the U.S. will be able to sell its 76.9 percent stake in GM Korea owned by its subsidiaries, including GM Investment, from the second half of next year. When GM took over Daewoo Motor in 2002, the company agreed with creditors not to sell its shares to a third party for the next 15 years until October 2017. GM instead secured the tag-along right which allows the company to sell its shares and a 17.02 percent share of the KDB in one lot after the release of sales restrictions. From next October, GM will be in an advantageous position for the sales of GM Korea shares. If GM decides to accept damages from GM Korea, which is now unable to survive without support from the headquarters due to the mounting deficits, and seek an exit strategy, the KDB will be forced to sell its shares at a giveaway price.
Another reason for the KDB to take a strong stand against GM has something to do with the recent controversy over responsibility raised during the business restructuring. The KDB is criticized for failing in a preemptive restructuring, though it had spent trillions of won to restructure STX Group and Dongbu Group from 2013. In particular, the KDB failed to deal with it until Daewoo Shipbuilding & Marine Engineering, whose largest shareholder is the KDB, recorded an astronomical loss of 5.5 trillion won (US$4.69 billion) last year and raised doubts about an accounting fraud of trillions of won in the process.
The KDB plans to put strong pressure on GM in the future. In addition to an annual audit report, the bank will ask GM to provide other devices which can help assess the company’s business situations through interim result reports and investment relations. It is also considering the expansion of the lock up period for the stock sales, which is being lifted after October 2017, if needed.