SEOUL -- GM Korea survived a long, tense tightrope walk as U.S. parent General Motors and South Korea agreed Thursday to provide a combined $7.15 billion to the unit, avoiding a threatened bankruptcy protection filing.
The Ministry of Strategy and Finance confirmed the deal, which came after a long-sought acceptance by the labor union on GM Korea's cost-cutting plan.
The American automaker will convert its $2.8 billion in outstanding loans to GM Korea into preferred stock in a debt-equity swap by the end of 2018, and provide an additional $3.6 billion in new loans. The state-run Korea Development Bank, the second-largest shareholder, will buy $750 million in preferred stock this year. The government also might waive some of GM Korea's tax liabilities, which had been requested by General Motors.
Preferred stock carries no voting rights, so General Motors will continue to hold an 77% interest in GM Korea, the Korea Development Bank will hold 17% and Chinese automaker SAIC Motor holding the remaining 6%.
The $3.6 billion in new lending from the parent includes $2.8 billion pegged for capital investment and research and development over a decade. The remainder will be set aside for purposes such as compensating workers who take early retirement to support staff reductions.
General Motors regards South Korea as an export hub to supply European and emerging markets. GM Korea's factory utilization rates sank due in part to the parent's sale of Opel operations in Germany, and the Incheon-based unit sustained net losses topping 3 trillion won ($2.79 billion) over four years through 2017.
GM decided in February to close one of the three vehicle assembly plants in South Korea. Executive Vice President Barry Engle, who heads the U.S. automaker's international operations, asked the union to accept a wage freeze as well as a spending cut of 100 billion won on employee benefits, citing the possibility of a bankruptcy filing.
The union accepted the management proposal in late April, prompting the American automaker's willingness to fund the South Korean unit. To help lift utilization rates, the parent will allocate two highly competitive new models to GM Korea.
Analysts say GM's decision to keep the South Korean operations despite the ongoing group restructuring highlights the unit's vital role in developing strategic compacts.