GM has proposed to increase its investment in GM Korea by up to US$1.5 billion for 10 years to come as part of its effort to normalize its troubled Korean subsidiary.
When it comes to GM Korea’s US$2.7 billion debt from the GM headquarters, which was planned to be completely written off through a debt-equity swap, the size of the swap is likely to be reduced instead.
According to the Korea Development Bank (KDB), GM has notified the bank that it would increase its investment in its Korean affiliate by US$1 billion to US$1.5 billion in order to stabilize the operation of the plants.
The KDB is positive about the proposal. Early this year, GM said that it would invest US$5.5 billion in the plants, US$2.7 billion through a debt-equity swap and US$2.8 billion in new investment to be made for 10 years. In return, it requested financial support from the KDB.
More recently, however, GM reached a conclusion that an additional investment is necessary to pay retirement benefits and restore local sales network.
The KDB is required to increase its financial support when GM increases its investment. Previously, the KDB, which owns 17% of GM Korea, was supposed to provide approximately 500 billion won in accordance with its shareholding, with GM additionally investing US$2.8 billion. If GM increases its investment by US$1 billion, the KDB’s additional support should reach 180 billion won or so. The KDB is said to be willing to provide the money.
The size of the debt-equity swap is likely to be reduced. GM proposed to completely write off the debt, but the KDB is said to be feeling some pressure about the proposal because its shareholding in GM Korea falls below 1% in that case. If the size of the swap is reduced, however, the KDB’s shareholding falls less and the company’s financial soundness can be improved at the same time.
The method for the financial support from the KDB, which has been an issue of much interest, is likely to be capital plus loan. For example, on the assumption that the KDB additionally provides 680 billion won, some of the money can be lent and the rest can take the form of capital to the extent that its shareholding is maintained.
Then, the KDB can maintain its influence in GM Korea’s board meetings and shareholders meetings and hold GM Korea’s plant in Bupyeong or Changwon as security, and thus the bank can have some bargaining power if GM threatens to leave the South Korean market in 10 years. The KDB said that the method is yet to be determined.
GM’s Commitment and KDB’s Veto Right
It has been found that GM, which decided to stay in the South Korean market for at least 10 years, is positive about the Korea Development Bank’s veto that can be exercised during its decision-making processes within the period.
Earlier, the South Korean government and the bank told GM not to sell its shares in GM Korea for at least 10 years. “GM’s stay and the KDB’s veto in the processes are not objects of negotiation but prerequisites for the government’s financial support for GM Korea,” said an industry source, adding, “GM is willing to accept these points.”
Another source said that stabilization of GM Korea is about to begin. “A provisional contract is likely to be signed within this week, with the final contract concluded next month after the completion of due diligence,” he said.
GM already announced that its plants in South Korea would produce two of its new models. In addition, GM included its local business plan for 2018 to 2027 in its application for foreign investment zone designation. This means GM is likely to stay in South Korea for at least 10 years to come.
The South Korean government also demanded a veto concerning important decisions, such as disposal or transfer of assets exceeding 20% of GM Korea’s total assets, so that the KDB can exercise its veto regardless of its shareholding in the automaker. GM can dispose of its land and plants at will without this veto and the government’s stance is that it will provide no financial support without the veto being guaranteed. It is said that GM understood its stance.