Seoul Bankruptcy Court Decides to Keep SsangYong Motors Alive, Approves Turnaround Plan

At a meeting with the Seoul (South Korea) bankruptcy court and SsangYong's creditors' association, the automaker has finally obtained approval of the restructuring programme it resubmitted during early November. This approval came despite the opposition of a minority group of bondholders who called for more concessions from the automaker. The court stated that the parties decided to keep the automaker alive, keeping in mind its contribution to the South Korean automotive industry and the economy as a whole.

Several other factors also influenced the court's decision. Hundreds of South Korean politicians filed a petition with the bankruptcy court yesterday calling for approval of the plan. They said in a joint statement that, "Ssangyong has enough capacity to move forward through this turnaround plan…If Ssangyong Motor goes bankrupt, it is expected to deal a serious blow not only to creditors, shareholders, employees and affiliated companies but also to local economy and nation's auto industry. It should revive by all means." The government has also pledged to provide support measures for the automaker, without providing further details.

A Glance at SsangYong's New Restructuring Programme

SsangYong submitted its turnaround plan to the bankruptcy court during mid-September, calling for a capital reduction and a debt-for-equity swap by creditors (see China - South Korea: 15 September 2009: SsangYong Motors Submits Turnaround Plan to Court; SAIC May Lose Majority Stake). However, the automaker's foreign investors twice rejected its plans. The revival plan approved today includes the following:

• A reduction in the shareholding of its Chinese parent company, Shanghai Automotive Industry Corporation (SAIC), from 51.33% to around 11.2%.
• Of the total debt of 1.78 trillion won (US$1.51 million), the automaker intends to repay secured debt worth 260.5 billion won over the next five years at an interest rate of 3.84% per annum. With regards to its outstanding liabilities with local financial institutions, the automaker is aiming to convert 43% of the debts into new equity shares, while 47% of the debts will be paid back over a period of five years at an interest rate of 3% per annum. Debts incurred in commercial dealings, which stand below 10 billion won, will be made as cash payments after exempting the remaining 5%. In a similar move, around 40% of total liabilities, which come to more than 10 billion won in value, will be converted into new shares, while 55% of the debt will be paid in cash over a five-year period after writing off 5% as bad debts.

After the completion of these measures, SAIC will hold an 11.2% stake in the automaker, while ordinary shareholders and creditors will own 17.7% and 71.1% shares, respectively.

Outlook and Implications

Commenting on the court's decision, Lee Yoo-il, one of the court-appointed managers of SsangYong, stated, "We, employees at Ssangyong Motor, will make utmost efforts to put the company back on track [within the next three years]." Despite the court's approval of the restructuring plan, there remain major question-marks over the long-term survival of the automaker. The main challenges include:

• Finding a Potential Investor: The first step for SsangYong will be to find a potential buyer for its business operations. Several media reports have been speculating that the sale price of the automaker would be between 300 billion won and 400 billion won. SsangYong is likely to face an uphill struggle to find investors, given its outdated facilities, lacklustre brand name that lacks an international presence, and an ageing product mix. Nevertheless, Lee remains positive about the prospective sale of the automaker, stating, "We are in contact with several overseas companies for the stake sale...We plan to set a guideline to select a stake-sale lead manager as soon as possible and our target is to complete a deal by the end of 2010."
• Complete Revamp of Product Line-Up: Another important step that would contribute towards the survival of the automaker would be a product-led resurgence. SsangYong needs to do a lot of work with regards to revamping its product line-up, which largely comprises "gas-guzzling" sport utility vehicles (SUVs), and introducing fuel-efficient and compact vehicles. The automaker is already struggling to launch its new C200 crossover utility vehicle (CUV) onto the local market, due to lack of funds. Although this model was scheduled for launch at the end of this year, the automaker is now unlikely to bring it to market until June 2010. SsangYong needs to launch at least three new models every year in order to survive in the ultra-competitive market environment.
• Financial Aid for Operating Activities: As already noted, any stake sale is likely to take at least one year to complete; thus the company will need emergency financial assistance to run its day-to-day operations. The state-run Korea Development Bank (KDB) and the South Korean government have already made it clear that any assistance for the automaker will depend on its ability to find a potential buyer.