Market turmoil helps rich Korean families cement their succession plans

SEOUL (BLOOMBERG) – Plunging markets have resulted in big losses for the world’s wealthiest, but rich families in South Korea have found a silver lining.

In a country where succession planning can be costly because of high inheritance tax rates, members of some family-run conglomerates are taking advantage of lower stock prices to snap up shares and increase their ownership stakes.

“The current situation can be a good opportunity for them,” said Park Ju-gun, president of corporate governance research firm CEOScore in Seoul. “They can spend less for greater control.”

Euisun Chung, the son and heir-apparent of Hyundai Motor Group Chairman Chung Mong-koo, paid 41.1 billion won (S$48.4 million) this week for a 0.32 per cent stake in holding company Hyundai Mobis Co, according to filings. He previously didn’t own shares in the company, whose stock has dropped 34 per cent this year.

He also acquired a 0.3 per cent stake in the group’s flagship unit, Hyundai Motor Co, for 40.6 billion won, filings show. The purchase increased Chung’s stake to 2.6 per cent and came just days after he was named chairman of the automaker’s board. Hyundai Motor’s shares have declined 28 per cent this year.

The move “could potentially help him in terms of the group’s ongoing ownership restructuring,” Kim Joon-sung, an analyst at Seoul-based Meritz Securities, said in March 24 report. “The acquisition of shares in Hyundai Mobis, considered as a key element in securing control over Hyundai Motor, could benefit Chung no matter when and how the reorganization proceeds.”

The stock purchases demonstrated Chung’s “responsibility as a CEO amid growing uncertainty in global stocks and financial markets,” a Hyundai spokesperson said in an email, adding that other company executives have also bought shares.

South Korea isn’t the only place where the coronavirus pandemic may make it easier for very wealthy families to pass fortunes to the next generation. Low interest rates and falling stock prices are helping rich Americans avoid US estate and gift taxes by lending assets to their children and setting them up to benefit from any recovery.

Family members of other Korean conglomerates also have been buying shares in their companies. Chung Yoo-kyung, whose mother is chairman of retail giant Shinsegae Group, added 50,000 shares in department store operator Shinsegae Inc for 13.7 billion won, raising her stake to 10.3 per cent, according to company filings. The firm’s stock is down 22 per cent this year.

At Hyundai Motor, the country’s second-largest chaebol after Samsung, it’s critical for Chung, 49, to secure control over his father’s shares. The elder Chung owns stakes in Hyundai Motor and Hyundai Mobis of 5.3 per cent and 7.1 per cent, respectively, allowing him to control the conglomerate through a web of cross shareholdings. His holdings in the group’s listed units, worth $2.2 billion, are subject to inheritance tax of as much as 60 per cent.

Tightening the family’s grip is more important than ever after Hyundai canceled its US$8.8 billion overhaul plan – aimed at paving the way for the father-son succession – in response to pressure from billionaire Paul Singer’s Elliott Management Corp.

While market fluctuations usually boost demand for safer assets such as cash, it’s a different case for rich families, said Park Sangin, a professor at Seoul National University’s Graduate School of Public Administration.

“It’s not just about making profits as ordinary investors would want,” Park said. “They are buying the shares because it helps them with more control and smooth succession.”

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Factbox: What's in the $2.2 trillion U.S. coronavirus rescue package

WASHINGTON (Reuters) – The U.S. House of Representatives on Friday approved an unprecedented $2.2 trillion stimulus package to alleviate the economic devastation of the coronavirus pandemic and sent it to President Donald Trump to sign into law.

Here are major elements of the plan. Cost estimates are provided by the Committee for a Responsible Federal Budget.

DIRECT PAYMENTS TO AMERICANS

Direct payments of up to $1,200 each to millions of Americans, with additional payments of $500 per child. Payments would be phased out for those earning more than $75,000 a year. Those earning more than $99,000 would not be eligible.

Estimated cost: $290 billion

ENHANCED UNEMPLOYMENT AID

Payments for jobless workers would increase by $600 per week. Laid-off workers would get those payments for up to four months. Regular benefits, which typically run out after six months in most states, would be extended for an additional 13 weeks.

Self-employed workers, independent contractors and those who typically don’t qualify for unemployment benefits would be eligible. The government would also partially make up wages for workers whose hours are scaled back, in an effort to encourage employers to avoid layoffs.

Estimated cost: $260 billion

SMALL BUSINESS LOANS AND GRANTS

Loans for businesses that have fewer than 500 employees could be partially forgiven if they are used for employee salaries, rent, mortgage interest and utility costs. The bill also includes emergency grants for small business.

Estimated cost: $377 billion.

AID TO AIRLINES, LARGE BUSINESSES

The bill sets up a fund to support a new Federal Reserve program that offers up to $4.5 trillion in loans to businesses, states and cities that can’t get financing through other means.

Companies tapping the fund would not be able to engage in stock buybacks and would have to retain at least 90% of their employees through the end of September. They would not be able to boost executive pay by more than $425,000 annually, and those earning more than $3 million a year could see their salaries reduced.

The fund would be overseen by an inspector general and a congressional oversight board. The Treasury secretary would have to disclose transactions.

Businesses owned by President Donald Trump, other administration officials or Congress members, or their family members, would not be eligible for assistance.

Loans are set aside for airlines, air cargo carriers, airline contractors and “businesses important to maintaining national security,” widely understood to be Boeing Co (BA.N).

Total cost: $504 billion

GRANTS FOR AIRLINES

Airlines, air cargo carries and airline contractors also could get grants to cover payroll costs. They would have to maintain service and staffing levels, and would not be able to buy back stock or pay dividends. The U.S. government could get stock or other equity in return. Executive pay above $425,000 a year would be frozen for two years, and those who earn more than $3 million annually would see their salaries reduced.

Total cost: $32 billion

MONEY FOR STATES, HOSPITALS, EDUCATION

– $150 billion for state, local and Native American tribal governments

– $100 billion for hospitals and other elements of the healthcare system

– $16 billion for ventilators, masks and other medical supplies

– $11 billion for vaccines and other medical preparedness

– $4.3 billion for the U.S. Centers for Disease Control and Prevention

– $45 billion in disaster relief

– $30 billion for education

– $25 billion for mass-transit systems

– $10 billion in borrowing authority for the U.S. Postal Service

– $1 billion for the Amtrak passenger rail service and $10 billion for airports, which are experiencing a drop in passengers

TAX CUTS

– A refundable 50 percent payroll tax credit for businesses affected by the coronavirus, to encourage employee retention. Employers would also be able to defer payment of those taxes if necessary. Cost: $67 billion

– Loosened tax deductions for interest and operating losses. Cost: $210 billion

– Suspension of penalties for people who tap their retirement funds early. Cost: $5 billion

– Tax write-offs to encourage charitable deductions and encourage employers to help pay off student loans. Cost: $3 billion

– Waiving of federal tax on distilled spirits used to make hand sanitizer

INCREASED SAFETY NET SPENDING

– $42 billion in additional spending for food stamps and child nutrition

– $12 billion for housing programs

– $45 billion for child and family services

OTHER ELEMENTS

– A ban on foreclosing on federally backed mortgages through mid-May, and a four-month ban on evictions by landlords who rely on federal housing programs.

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Senate bill set to give aviation sector up to $33 billion bailout: sources

WASHINGTON/CHICAGO (Reuters) – A compromise $2 trillion economic rescue package that will be voted on by the U.S. Senate on Wednesday is set to give passenger airlines about $25 billion in grants, and up to another $8 billion for cargo carriers and airport contractors like caterers, three people briefed on the negotiations said.

Reuters reported Chao worked the phones late into the night talking to air carriers about what they needed to ensure they could maintain payrolls, a person briefed on call on Tuesday that lawmakers were nearing agreement on a deal for cash grants for payroll and other airline employee costs, after airlines made a last-minute effort to convince lawmakers they needed the cash to prevent the layoff of tens of thousands of workers.

The aid package is expected to include a further $29 billion in loans for airlines, and the government could receive equity, warrants or other compensation as part of the rescue package. U.S. airports are set to receive $10 billion in grants under the agreement.

The final text is still being drafted but will include restrictions on stock buybacks, dividends and executive compensation.

Senate Republicans on Sunday rejected any grants for airlines and instead proposed $58 billion in loans for airlines. Major airlines sounded the alarm and emphasized in recent days that without grants, they had short-term plans to quickly furlough tens of thousands of workers as travel demand collapses amid the coronavirus pandemic.

On Sunday, the carriers promised not to lay off workers through Aug. 31 if they won grants.

Sara Nelson, president of the Association of Flight Attendants said on Twitter it was a “HUGE fight but we WON on this – We got the deal structured around maintaining payroll, no (involuntary) furloughs.”

Airlines and airline unions won crucial support from U.S. Transportation Secretary Elaine Chao, who spoke to lawmakers and others in the administration about the crisis.

In a memo Chao had drafted that was seen by Reuters, she noted that airlines employ 750,000 U.S. workers. She was worried about a dramatic decline in the U.S. aviation sector that could reduce competition, and the potential loss of hundreds of thousands of jobs, people briefed on the matter said.

“Without grant assistance, U.S. airlines have warned that they may be forced to furlough employees or declare bankruptcy,” Chao’s memo warned. “Without grants, airlines may be forced to choose bankruptcy over federal loans, if loan conditions are too inflexible.”

Chao worked the phones late into the night talking to air carriers about what they needed to ensure they could maintain payrolls, said a person briefed on call.

The government will also provide significant funding to Amtrak and U.S. transit systems that have both seen ridership fall dramatically as states order tens of millions of Americans to stay home and avoid non-essential travel.

Boeing Co (BA.N) could also receive government loans or loan guarantees under the bill, but it was not clear if they would tap $17 billion in loan funding set aside for national security-related loans that were part of the Republican bill released on Sunday. Boeing had sought at least $60 billion in government loan guarantees for itself and the entire aerospace manufacturing sector.

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