General Motors (GM) and the Korean government have virtually finalized the methods to inject US$4.35 billion in fresh funds into GM Korea. The funds are part of the US$7.05 billion that the two sides will provide to revitalize the ailing auto company.
According to GM Korea and the Korea Development Bank (KDB), GM will provide US$3.6 billion in loans to its Korean subsidiary, including US$2.7 billion in fresh loans, US$800 million in conditional loans and US$100 million in revolving loans.
The remaining US$750 million will come from the KDB. The state-run bank issued a non-binding letter of commitment (LOC) to that effect to GM on April 27.
According to the LOC, GM and the KDB will provide a total of US$7.05 billion to GM Korea. Of the total, US$2.7 billion is “old money,” that is, GM’s existing loans to GM Korea that would be converted into equity.
GM will convert its loans to GM into preferred stocks that do not have voting rights to ensure that the current shareholding ratio between GM and the KDB (GM: 83%, KDB: 17%) is maintained.
Of the US$4.35 billion worth of “new money,” GM will fork over US$3.6 billion, with the remaining US$750 million coming from the KDB. The two sides use different methods in providing their financial support to GM Korea.
First, GM will inject US$2.7 billion in normal loans, US$800 million in conditional loans and US$100 million in revolving loans.
GM's conditional loan of US$800 million will change into investments over a period of time. The extension of the revolving loan’s maturity will be decided every year. The fund is highly likely to be recovered soon.
Excluding the US$800 million conditional loans intended for a debt-for-equity swap, US$2.8 billion will remain. This fund has an interest rate of 4% to 5% per annum.
The KDB plans to issue a legally binding LOC to GM and sign a contract with it if the final result of the due diligence inspection of GM Korea, which is due early next month, is the same as the interim report. When the contract is concluded, the GM Korea crosos will come to an end.
The due diligence inspection has found that the interest rates on GM’s loans to its Korean affiliate have not been excessive. It has also found that the transfer prices of finished cars and parts between GM and GM Korea did not exceed a reasonable level.
Some Korean politicians and labor unionists asserted that GM’s greed was one of the factors that caused the GM Korea crisis. They claimed that GM collected excessive interest rates from GM Korea and set preposterous transfer prices on finished cars and parts.
But the due diligence inspection, which has been conducted for nearly two months, found that the GM Korea debacle was more attributable to GM’s ill-advised management policies and the high-cost and low-efficiency structure of GM Korea rather than the "exploitation structure" that GM imposed on its Korean subsidiary.
"We did not find any particular problems in the due diligence inspection," a KDB official said with respect to the transfer prices between GM and GM Korea.
The inspection also concluded that GM lent funds to GM Korea due to the latter’s financial trouble and that the interest rate on those funds could not be considered excessively high. The borrowing rates of 4% to 5% per annum are similar to the rates that GM would have to pay when it raises funds in the United States with its own credit rating.
"We will complete the due diligence inspection as soon as possible and finalize a normalization plan for the management of GM in Korea," a KDB official said.
Controversy over KDB’s Investment Agreement with GM
Controversy is expected to arise as the KDB has reached an accord with GM on providing financial support to GM Korea.
Earlier, Lee Dong-geol, chairman of the KDB, stressed that the most important thing was the issue of transfer prices and pointed out that he would thoroughly look into this matter during the due diligence process.
However, GM explained that the company set the prices of finished cars and parts in trade between GM and overseas GM corporations in compliance with the rules set by the Organization for Economic Cooperation and Development (OECD). The due diligence inspection did not find any evidence showing problems with the transfer prices.
The results of the interim report did not prove the allegations initially made, but showed that the GM side did not have any problems. Accordingly, investment negotiations between GM and the KDB proceeded in favor of GM.
According to a provisional deal struck between GM and the KDB on April 26, GM decided to convert the US$2.7 billion existing loans to GM Korea into equity as promised, but did not accept capital reduction demanded by the Korean government. Instead, in order to maintain the KDB’s existing stake of 17.02% in GM Korea, GM decided to convert the loans into preferred stocks that carry no voting rights.
GM gave a veto right to the KDB, implying that it would not withdraw from Korea for at least 10 years.
GM increased the amount of “new money” it will provide to GM Korea from the initially proposed US$2.3 billion to US$3.6 billion. It also decided to provide the entire sum in loans rather than in equity. GM Korea should pay interest of about 4% to 5% per annum on the loan.
On the other hand, the KDB decided to provide the entire amount of US$750 million in the form of capital. As GM increased its investment, the KDB also ramped up its investment by 300 billion won (US$240 million).
The KDB earlier said it would provide loans to GM Korea if GM gives fresh loans to GM Koreas and provide capital to GM Korea if GM makes fresh investments in GM Korea.
The KDB says it will not disclose the content of its negotiations until they come to an end. But when conditions for the final contract with GM are found to be unfair and unequal, controversy is inevitable over the injection of taxpayer money.