MUMBAI: Mahindra & Mahindra, Indian parent of South Korean SUV maker SsangYong Motor Co (SYMC), issued corporate guarantees earlier this year to some of its global creditors, such as Bank of America, JPMorgan Chase and BNP Paribas, to safeguard their exposure once SYMC was on the brink of bankruptcy, said people aware of the matter.For others like Citibank, the Indian conglomerate’s corporate guarantee was not enough. So, M&M had to issue an indemnity letter in favour of the US bank’s Indian arm. Based on that, Citi India wrote a standby letter of credit on behalf of Citi, South Korea. Citi, said sources in the know, has been paid out. Total contingent liabilities for Mahindra, including the guarantees, stand at Rs 680 crore, putting the onus on the Indian parent to clear all dues.These agreements came to light after SsangYong filed an application on December 21 for commencement of rehabilitation procedures with the Seoul Bankruptcy Court, under the Debtor Rehabilitation and Bankruptcy Act of South Korea. It had failed to repay loans of about 60 billion won (Rs 408 crore) due on December 14 to lenders including JPMorgan Chase, Bank of America and BNP Paribas.These guarantees can be invoked within a year of the company being admitted to bankruptcy, said the people cited above. For some creditors, the timeline is as short as a few weeks, one of them said. This runs counter to the view that the latest development is unlikely to have any impact on Mahindra’s financials. It had already taken an impairment hit in the March quarter, owing to which it reported a Rs 530-crore loss, the steepest in 19 years. Moreover, it has ceased fresh investments in its South Korean operations since the beginning of the current financial year, plagued by mounting losses.Mahindra acquired the company a decade ago, from court receivership. The loans were given by global banks three to four years ago and didn’t originally carry such guarantees. However, as the financial health of SsangYong deteriorated, lenders threatened to stop credit lines unless they obtained additional security. That came in the form of firm guarantees.“If, under the bankruptcy programme, SsangYong is sold at 40 cents to a dollar, then all creditors will get paid out accordingly,” said a creditor. “But for the remaining 60 cents, guarantees can potentially be invoked and M&M will have to make good the rest. M&M has a large relationship with banks, so even if there is a one-year deadline, they can request creditors and get some extra time if the whole process is left incomplete by the stipulated timeline. Banks will not lose a single penny.”BNP Paribas, Mahindra, JPMorgan, Citi and Bank of America declined to comment.A Mahindra spokesperson did not respond to specific questions. The company’s official release said, “Whilst the company has made a commitment to cover the above-mentioned loans given by banks, its final liability will be limited to the extent not recovered from SYMC.”80002021Korean govt bailout unlikelySYMC has been Mahindra’s biggest pain point and the latest filing is its last option to see if it can be sold, said analysts at Motilal Oswal. Mahindra’s total investment in SYMC was Rs 245 crore as of March 2020. It owns 74.65% of the company. Under court receivership, SsangYong will have three months to strike an agreement with a potential buyer or negotiate a restructuring plan with creditors.For the last six months, Mahindra has been trying to find a suitor. Talks with US distributor HAAH Automotive for a stake sale didn’t fructify. Analysts aren’t too confident about the prospects of a deal anytime soon — the company has recorded operating losses for 15 consecutive quarters and seen sales declining due to lack of new models since 2015.There had been indications that Korean Development Bank (KDB), which questioned the company’s ability to continue as a going concern, would consider extending the maturity of its loans if SsangYong cleared its debt to the foreign banks. But it appears that KDB found SsangYong ineligible for support from the Basic Industry Stability Fund operated to support companies undergoing financial difficulties. As KDB didn’t extend the maturity of its loans, SsangYong was forced into insolvency proceedings. Officials are worried that rescuing SsangYong to save local jobs might send the wrong signal to other foreign-backed auto majors, even as Seoul rolled out fiscal stimulus measures to soften the blow of Covid-19, including direct support to struggling industrial groups.Incidentally, GM Korea received a bailout in 2018, getting a $750-million lifeline from KDB.SsangYong was able to reduce its operating losses in the third quarter, with sales of 25,350 vehicles. The company has been struggling with deteriorating earnings since 2017.
from Economic Times https://ift.tt/2WTXYWe
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