TEXT-S&P rtgs on Hyundai, Kia unaffected by mileage error

Wed Nov 7, 2012 2:32am EST

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(The following statement was released by the rating agency)

Nov 07 - Standard & Poor's Ratings Services today said its long-term corporate credit and debt ratings on Korea-based automakers Hyundai Motor Co. (HMC; BBB+/Stable/--) and Kia Motors Corp. (Kia; BBB+/Stable/--) are unaffected by overstated fuel-economy labels on their vehicles in the U.S.

On Nov.2, 2012, HMC and Kia apologized for overstating fuel mileage labels on around 900,000 2011-13 model vehicles sold in the U.S. Most of the labels overstated mileage by 1-2 miles per gallon. The companies said they would correct the labels and compensate car owners for the undeclared fuel consumption.

In our view, the incident has little impact on our ratings on either company. We believe the admission is unlikely to have a significant immediate financial impact on the companies, because compensation is likely to shave at most less than 1% off annual EBITDA for either company over the next 5-7 years. Also, we believe the companies' financial profiles are solid enough to absorb potential additional compensation if further negative developments occur, such as a class action suit or similar mislabeling cases in other countries.

However, the admission could slow the rapid improvement of HMC and Kia's brands in recent years and, consequently, also their shares of the global auto market and their profitability. We think restoring a loss of credibility in the companies' claims of better fuel-economy than their competitors, which we consider a key driver of their improved business performance amid a climate of higher oil prices and a weak global economy, will take some time.

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