Fitch Affirms Hyundai Capital at 'BBB+'; Hyundai Card at 'BBB'

Thu Apr 24, 2014 1:49am EDT

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(The following statement was released by the rating agency) SEOUL/SINGAPORE, April 24 (Fitch) Fitch Ratings has affirmed Hyundai Capital Services Inc.'s (HCS) Long-Term Issuer Default Rating (IDR) at 'BBB+', its Short-Term IDR at 'F2', and its senior unsecured debt rating at 'BBB+. At the same time, the agency has affirmed Hyundai Card Co., Ltd's (HCC) Long-Term IDR at 'BBB' and its Short-Term IDR at 'F3'. The Outlooks for HCS and HCC are Stable and reflect the Outlook on the rating on Hyundai Motor Company (HMC; BBB+/Stable), which is the majority owner in both companies. KEY RATING DRIVERS - HCS's IDRs and Senior Unsecured Debt HCS's ratings are equalised with those of HMC, given that HCS, as a captive auto financier of HMC and its affiliate Kia Motor Corporation (KMC; BBB+/Stable), is a core subsidiary of HMC. HCS has a strong franchise in the domestic market as HMC and KMC together dominate auto sales in Korea. Having said that, HCS's franchise faces growing challenges as the competition in auto finance has intensified and HMC-KMC's market share in new car sales is slowly declining due to the increasing sales of imported cars in Korea. Captive auto financing-related assets form about 65% of HCS's portfolio, with the rest of the portfolio made up of non-captive assets such as used car financing, personal loans, and mortgage. HCS's profitability is likely to weaken due to tighter regulation and rising pressure from the authorities and the public on consumer financing companies to lower interest rates and remove separate upfront fees that they charge customers. HCS's asset quality is not expected to materially improve based on the increase in Korean households' leverage, especially in the sub-prime sector. HCS's exposure to non-captive higher margin sub-prime personal loans and mortgages could be a source of high risk given its limited experience in this area. The capitalisation is adequate with a capital adequacy ratio of 15.3% at end-2013, which should cover potential credit costs in a cyclical downturn. HCS's liquidity remains adequate despite its reliance on wholesale funding and the reduction of General Electric Capital Corporation's (GECC) committed credit line to USD0.6bn from USD0.7bn in January 2014. HCS's funding /liquidity risk would not increase materially if the economy continued to deteriorate because HCS's funding needs and leverage would decline as auto related receivables fall while auto sales shrink during a downturn. KEY RATING DRIVERS - HCC's IDRs HCC's ratings reflect Fitch's view of HCC as a strategically important subsidiary of HMC. About 12% of HCC's total credit purchase transaction volume is derived from purchases of vehicles from HMC and KMC. Fitch believes that there is a high probability of support from HMC. HCC, HCS and HMC have operational and ownership linkages as they share the same brand name and premises/functions, and jointly execute some marketing strategies. HCC's ratings are one notch lower than HMC's because the credit card business is not a core operation of the auto manufacturer. HCC's profitability will continue to be quite low due to regulatory pressure, stagnant credit card usage and competition. To mitigate these, HCC continues to increase its high margin riskier assets (card loan and revolving receivables). Although this may help HCC to maintain its profitability in the short term, it may increase credit costs in the long term. Furthermore, its profitability would be squeezed due to the increased funding cost if interest rates rise. HCC's portfolio mix is increasingly weighted towards riskier assets and Korea's households, especially those categorised as sub-prime, which are more highly leveraged. HCC depends solely on wholesale funding, exposing it to capital market fluctuations. HCC currently maintains adequate funding and liquidity and maintains credit lines for contingency purposes amounting to KRW770bn at end 1Q14, mostly with several domestic banks. GECC stopped providing a credit line to HCC in January 2014 (USD100m at end-2013). HCC's upscale marketing strategy helped to increase its market share and build its brand recognition so far. However, the effectiveness of this strategy in increasing customer base remains to be seen, given that the credit card industry has matured and HCC is expanding the loan business. RATING SENSITIVITIES - HCS and HCC HCS's ratings will be affected by any change in HMC's ratings or in the relationship between HCS and HMC in terms of ownership and HCS's role in offering auto loans to HMC-KMC buyers. Changes in HCC's ratings will be triggered by any change in HMC's ratings or the linkage between HCC, HCS and HMC in ownership or operation. If the financial profiles of HCS and HCC deteriorate materially, which result in dragging down HMC's financial profile or rendering them as less important to the parent's business strategy, their ratings will be reviewed, although Fitch considers this to be a remote possibility. Any changes in GECC's ownership in HCS or HCC are not expected to affect their ratings, as they do not reflect extraordinary support from GECC. Fitch views its minority ownership as an opportunistic investment. HCS and HCC are joint ventures between HMC (with a majority stake) and GECC. GECC is involved with HCS's and HCC's risk management and compliance. The boards of directors of HCS and HCC are composed of HMC and GECC appointees, and GECC has veto rights. Contacts: Primary Analyst Mihwa Park Associate Director +65 6796 7238 Fitch Ratings Singapore Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Heakyu Chang Director +822 3278 8363 Committee Chairperson Tim Roche Senior Director +612 8256 0310 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014, "Rating FI Subsidiaries and Holding Companies", dated 10 August 2012, "Finance and Leasing Companies Criteria", dated 11 December 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Rating FI Subsidiaries and Holding Companies here Finance and Leasing Companies Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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