Samsung Electronics intends to secure working capital through this loan.
In a regulatory filing issued on Tuesday, South Korean semiconductor giant, Samsung Electronics, said that it plans to borrow $15.78 billion (20 trillion won) from its Samsung Display unit to use as operational funds.
The company said that it would borrow the funds at an interest rate of 4.6% until August 2025. It said that the purpose of the loan was to secure working capital, according to the filing. Samsung Electronics owns 85% of Samsung Display.
Borrowing from the baby
Loans given by a subsidiary company to a holding company may offer tax advantages, such as the deductibility of interest payments or the ability to shift profits to a lower-tax subsidiary, depending on the specific tax laws in the relevant jurisdictions. The holding company may also be able to simplify its financial management and reporting requirements, by consolidating borrowing activities within the larger corporate structure.
With a loan from a subsidiary, the holding company may have more financial flexibility to pursue strategic initiatives, such as mergers and acquisitions, without needing to rely on outside financing or diluting existing shareholder equity. In case the subsidiary has a better credit rating or access to lower-cost funding sources, it could offer the holding company better loan terms.
Last month, the company reported a 69% drop in its fourth-quarter profit as high inflation and a weakening global economy hit the cost of memory chips and wore down demand for electronic devices. This is the lowest quarterly profit reported by the company in eight years.
Its mobile business’ profit declined in the fourth quarter as smartphone sales and revenue decreased due to weak demand resulting from prolonged macroeconomic issues.
Despite the dismal results, Samsung indicated that it had no plans to cut investment in chips this year. The company said that it intends to keep its capital expenditure this year in line with 2022 when it spent $39 billion on its chipmaking efforts.
This is in contrast to its peers such as SK Hynix and Micron Technology who said that they would cut back on capital expenditure in 2023-24. Samsung’s top executives believe that the weak consumer sentiment presented an opportunity to make early investments in future technology and production capacity.
Samsung Electronics is Asia’s fourth-biggest listed company by market value and is one of the world’s largest memory chip, smartphone and TV makers. All three of Samsung’s core business units rely heavily on the buoyant smartphone and server markets.