The Seoul Economic Daily reported on March 7 that Korea Development Bank (KDB) and General Motors (GM) reached a secret agreement earlier so that the public funds invested in GM Korea can be recouped even if the company goes under. This means KDB and GM put recoupment of investment before the normalization of the ailing carmaker. If call option exercise, even a partial exercise, is included in the agreement as an option, GM can leave the South Korean market by spending just 560 billion won (US$494 million) on 3 percent preferred share purchase.
Back in May 2018, GM Korea’s only option for survival was GM’s US$2.8 billion debt cancellation and a US$750 million loan from KDB for investment in facilities. However, the latter opted for preferred shares instead of the loan because the public funds could not be recuped if they are provided in the form of a loan once GM Korea goes under. Likewise, GM decided to convert the US$2.8 billion debt into preferred shares without voting rights. In this manner, a fund of US$7.15 billion was prepared for business normalization, consisting of the US$2.8 billion portion from GM, the US$750 million portion from KDB, and US$3.6 billion GM promised to invest anew for 10 years down the road.
The agreement was reached on May 10, 2018. That day, the South Korean government announced a normalization plan to invest US$7.15 billion in GM Korea together with GM. “Equity sales between 2018 and 2022 have been prohibited in the interest of GM’s long-term management in South Korea and GM has to maintain its position as the largest shareholder, along with a shareholding of at least 35 percent, for the following five years,” the government explained at that time. In short, the government said GM would not leave the South Korean market until 2027.
What has been found out is that GM can withdraw its facilities in stages from 2024, unlike the announcement, based on a call option allowing GM to buy back KDB’s 800 billion won public fund investment at the cost price. Although the government did not explain in the announcement, GM’s 114.32 million preferred shares and KDB’s 23.81 million preferred shares in GM Korea can be converted into common stocks in seven years. GM recently specified in its business report that it has the call option regarding the preferred shares purchased by KDB and the call option becomes effective six years after the date of issue.
Things can be serious if this secret agreement is real. At present, GM and KDB own 83 percent and 17 percent of GM Korea with 344.77 million and 70.70 million shares, respectively. KDB’s veto rights against GM’s asset disposal are based on the former’s 17 percent stake in GM Korea. If GM Korea remains in the red until 2024, GM is likely to opt to leave South Korea. If GM exercises its call option at this time to buy back KDB’s 23.81 million preferred shares at the cost price, GM’s common stocks increase from 344.77 million shares to 482.91 million shares to cause an increase in shareholding from 83 percent to 87 percent. Then, KDB’s shareholding falls to 13 percent and its veto rights disappear although the bank can recoup the principal of its 2018 public fund spending.
In other words, in reaching the agreement last year, GM made preparations for withdrawal from South Korea and KDB made preparations for investment recoupment on the assumption that GM Korea would go under in five years and GM would not stay in South Korea for as long as 10 years. Experts are criticizing KDB, claiming that it provided no protection for the local automotive industry in order to recoup its spending.
Things after 2024 cannot be clearly known unless GM and KDB disclose specifics of their deals. The possibility cannot be ruled out that there are additional undisclosed and shocking deals between the two. As of 2017, the total value of GM Korea’s land assets alone amounted to 1,084 billion won, which means GM can leave South Korea in 2024 with most of its investment in the country intact.