Interested Party's Pain-Sharing
The South Korean government has decided to apply ‘Interest Party’s pain-sharing’ rule to insolvent companies that have suffered from corporate restructuring for the past few years such as Sungdong Shipbuilding & Marine Engineering Co., STX Offshore & Shipbuilding Co. and Kumho Tire Co., according to experts.
However, GM Korea is still having difficulties in restructuring due to conflict between labor and management. The company’s management and labor had the seventh round of negotiations over the reduction of welfare payments on March 30 but the negotiation ended without results in just two hours.
The investment banking industry believes that the government will also apply the stakeholders’ pain-sharing rule to GM Korea as well. A few hours before completing the negotiations between Kumho Tire’s management and labor over its self-rescue plan on March 30, the Cheong Wa Dae (presidential Office) said, “The government will never settle this problem through political logic. This is the will of the president.”
The government’s decision on how to deal with Sungdong Shipbuilding & Marine Engineering, STX Offshore & Shipbuilding and Kumho Tire is expected to be a huge burden on GM Korea. This is because GM Korea can go into bankruptcy when the labor union doesn’t make some concessions and the government sticks to the principle of “no money injection to insolvent companies without sharing pains with stakeholders” to GM Korea.
At the seventh round of negotiations, however, GM Korea’s labor union said, “We can negotiate only when the company withdraws its decision to shut down the plant in Gunsan. GM Korea’s management said to the labor union that reducing fixed costs, including welfare payments, is the only way to receive new car assignments and capital from GM. But, the two remained apart on the issue.
During the closed meeting on March 27, Barry Engle, president of GM International, said, “The costs for voluntary retirement compensations reach US$600 million (637.8 billion won). If the management and labor fails to reach an agreement, we will not inject US$600 million (637.8 billion won) into GM Korea.”
In addition, the government said there is no way to change the decision on GM. The Korea Development Bank, which currently conduct a due diligence on GM Korea, has decided not to provide 500 billion to 700 billion won (US$470.37 million to 658.51 million) of money requested by GM until it sees the results of due diligence. When GM Korea’s labor union oppose to the reduction of fixed costs to the end, GM Korea can go out of business.
An official from the government said, “Unlike Kumho Tire or Sungdong Shipbuilding & Marine Engineering, GM Korea has little debt on domestic banks. So, there is no possibility for banks or the government to intervene in the dispute. The clash is expected between GM Korea’s labor and management because they must solve the problem by themselves.”