As the South Korean unit of U.S. automaker General Motors (GM) said it can cancel the plan to convert its debt into equity while making preparations to file for court receivership, it put more pressure on the South Korean government and the labor union of GM Korea. This seems like the strategy to get as much support as possible from the government and the Korea Development Bank (KDB).
According to the government and investment banking (IB) industry sources on April 15, GM International President Barry Engle, who is responsible for overseas operations, met officials from the KDB, the second-biggest shareholder, on the 13th, and suggested a plan for the U.S. headquarters to give loans to GM Korea, while the bank makes an investment. The suggestion runs counter to GM’s previous proposal. The company suggested a US$2.7 billion (3 trillion won) debt-for-equity swap and 200 billion won (US$197.09 million) of reduction in financial expenses in return for financial aid through the KDB. This is because the debt-for-equity swap is directly connected to differential capital reduction.
When GM converts 3 trillion won of debt into equity, the KDB’s stake in GM Korea goes down from 17 percent to 1 percent. This can be prevented by differential capital reduction. The KDB says it can support “new money” according to GM’s injection of new funds only when the force of “old money” is limited to under 85 percent with the differential capital reduction of in the proportion of at least 20 to 1 in return for GM’s debt-for-equity swap.
Engle refused KDB’s request for the differential capital reduction and said it can call off its debt-for-equity swap plan for GM Korea. The differential capital reduction is connected to the veto right that can tie up GM’s production facilities in South Korea. More than 15 percent stake of common stock can exercise the veto right for special resolutions at the shareholders’ general meetings. The KDB’s veto right for disposition of assets was expired in October last year. The KDB asked GM for differential capital reduction and revival of its veto right for disposition of assets. However, Engle also refused to revive the bank’s veto right for disposition of assets.
GM Korea is currently preparing for administrative work to file for court receivership through its financial, human resources and legal divisions. Previously, GM has started the internal procedure to file for court receivership right after 20th when its funds dry up as GM and GM Korea management stated several times. Engle’s move and schedule also show that GM’s final decision, including court receivership, is imminent. Engle visited South Korea on the 10th and will not leave the country until next week for now.
When GM Korea go under court receivership, it will suffer a huge loss from over 3 trillion won (US$2.8 billion) of bonds. So, some say it doesn’t make sense that GM Korea announced its plan to file for court receivership on the 20th and withdraw debt-for-equity swap plan at the same time. Engle made the remarks about GM Korea’s bankruptcy but asked the KDB for a letter of commitment for GM Korea by the 27th.
When GM Korea choose to file for court receivership, it is highly likely to carry out a large-scale workforce reduction, shut down its plants in Bupyeong and Changwon and leave South Korea except for research and development and sales division, according to sources inside GM Korea.