KDB, GM set to sign initial funding deal for US carmaker's Korean unit this week

Published : Apr 24, 2018 - 13:33 Updated : Apr 24, 2018 - 14:33

General Motors Corp. and the state-run Korea Development Bank, the two biggest shareholders of GM Korea Co., are set to sign an initial funding agreement this week to help GM's Korean unit stay afloat, the two companies said Tuesday.

The KDB is expected to sign a preliminary agreement with GM by Friday to extend a fresh loan worth 500 billion won ($464 million) to GM Korea, a KDB official told Yonhap News Agency over the phone. GM is also expected to sign on to the funding deal with the KDB later this week.

The 500 billion won is equivalent to 17 percent of $2.8 billion worth of investment GM said it will provide its South Korean till 2027. The US carmaker said the investment is aimed at maintaining a combined annual output capacity of 500,000 vehicles from its three car assembly plants in Korea over the following 10 years.

GM Korea President and Chief Executive Kaher Kazem, GM Executive Vice President Barry Engle, ruling Democratic Party lawmaker Hong Young-pyo and Moon Seung, who represents GM Korea`s 140,000 subcontractors, hold hands after the company and its union reached a tentative restructuring agreement at the main Bupyeong plant, just west of Seoul on April 23. (Yonhap)

Last year, GM produced 520,000 vehicles from its four plants in Korea.

KDB Chairman Lee Dong-gull has said the new loan to GM Korea will be possible if the results of due diligence are satisfactory.

The interim review results will be available by late this week, the lender said.

In other commitments to its Korean unit, GM proposed converting $2.7 billion in debt owed to it by GM Korea into equity. But this proposal was balked at by the KDB, the second-biggest shareholder.

The bank holds a 17 percent stake in GM Korea with GM controlling a 77 percent stake.

If GM carries out the debt-to-equity conversion, the KDB's share will dwindle to less than one percent and it's safe to say the bank will have no influence, or say, in GM Korea's major decision making process, the KDB official said.

Thus, the KDB wants the so-called graded capital reduction in which GM decreases its shareholder equity through share cancellations and share repurchases, he said.

But the two sides may have to find an alternative to the graded capital reduction as GM has balked at the idea, according to GM and the KDB.

The KDB reportedly demanded GM allow the bank to exercise veto power over GM's key management decision toward GM Korea despite its sharply reduced stake in the Korean unit after the conversion.

Moreover, the policy lender said they can give financial support to GM Korea if GM vows to keep its operations in Korea for more than 10 years, according to local media outlets. The lender didn't confirm the reports.

In February, GM unveiled its restructuring plan for GM Korea.

The Detroit carmaker said it will shut one of its four Korean plants by May, while asking GM Korea workers to make some wage concessions and the Korean government to provide financial support to put its loss-making Korean unit back on track.

In the past 2 1/2 months, the union strongly protested against the self-rescue measures that drove 2,600 employees out of the company in voluntary retirement programs. The company currently has 13,000 employees.

On Monday, however, the company and the union tentatively agreed on restructuring measures to avoid being placed under a court-led bankruptcy protection.

Under the self-help plan, GM said it will allocate two new models -- a compact SUV and a crossover utility vehicle -- to its three remaining plants in Bupyeong, just west of Seoul, and Changwon, 400 km south of Seoul, by 2022. The KDB said it will make further investments in GM Korea upon the completion of due diligence on the carmaker.

All the agreements have yet to be approved in a union's vote from Wednesday to Thursday.(Yonhap)