GM Daewoo in urgent search for cash

GM Daewoo Auto & Technology, General Motors' Korean subsidiary, remains locked in negotiations with its minority shareholder, Korea Development Bank (KDB), about the provision of emergency financing.

In February, GM Daewoo asked KDB for new loans, reportedly worth W1 trillion ($791 million), after using up its existing credit facilities. GM Daewoo needs the cash because exports, which make up 90% of its revenues, have collapsed, and because the unit has incurred losses from long-US dollar currency hedges.

According to local sources, GM Daewoo needs to conclude the funding talks with KDB within 60 to 90 days. In April, the company's president and chief executive, Michael Grimaldi, warned that liquidity could be "critical" in the second quarter of the year without external aid.

One possibility is that GM Daewoo will have to offer up an equity stake as a guarantee or collateral for financial support from KDB. In May, the company indicated that it might be willing to do so. Yet, in a press briefing last week, Grimaldi insisted that GM is not planning to sell its South Korean unit.

"GM Daewoo and GM Korea will continue to operate in South Korea as they have been," he said. GM Daewoo will become part of "New GM" as the parent company proceeds with restructuring under Chapter 11 bankruptcy protection in the US.

GM filed for bankruptcy protection in New York on June 1, and the US government agreed to provide $30 billion in financing to GM in return for a 60% equity stake and $8.8 billion in debt and preferred stock in the new company.

Meanwhile, KDB is continuing to undertake due diligence. Kim Youngmo, head of corporate finance at KDB and in charge of the GM Daewoo talks, told FinanceAsia on Monday that the state-owned policy bank is "still investigating how much the company wants and whether it can guarantee repayment of any loan", after hearing that the GM parent company is in no position to provide any funding.

At this stage, Kim was unable to comment on whether or not KDB's stake in GM Daewoo might be sold. But then, of course, now is hardly the best time for a divestment.

KDB is GM Daewoo's second-largest shareholder with a 28% stake. The rest is owned by GM and affiliated companies.

A senior Seoul-based banker familiar with the process told FinanceAsia that GM Daewoo needs to meet two main conditions in order to get the funding: it has to maintain its research and development function; and make assurances that GM Daewoo doesn't turn into either a supplier of parts to GM or a distributor of completed products on behalf of GM. And this is a genuine concern. As part of its restructuring, GM intends to build small cars in the US from 2011 -- that is, the sort of cars that GM Daewoo currently manufactures.

Additionally, there is concern that the cash might end up with the parent company.

However, the banker believes that KDB will eventually have to come to the table. With no other lenders prepared to offer the financing, KDB simply has no choice.

Last year, GM Daewoo reported a net loss of W875.69 billion ($663 million) after three successive years of profitability. But the company employs about 17,000 workers and has several hundred vendors, so its demise would be both economically and politically damaging.