September 4, 2017 / 1:27 AM / 3 months ago

Hyundai Motor JV turns to China bonds amid political tensions

* Debut issue comes as diplomatic spat has crippled sales

By Ina Zhou

HONG KONG, Sept 4 (IFR) - Hyundai Motor’s China joint venture plans to issue its first bonds at a time when high diplomatic tension between China and South Korea has left it short of cash.

Beijing Hyundai Motor, a 50:50 JV set up in 2002 with China’s BAIC Motor, last week sought authorisation from regulators to sell 5 billion yuan ($759 million) of 270-day notes in China’s interbank bond market.

In a preliminary filing to the National Association of Financial Market Institutional Investors, Beijing Hyundai said that it intended to use the proceeds to purchase components for its vehicles.

It said that the rising costs of bank loans, its main source of financing in China, in response to policies designed to curtail leverage throughout the economy, was the reason it was turning to the bond market for funding.

As at the end of March, the JV’s outstanding loans totalled 6.55 billion yuan with tenors of one and two years. Interest rates on the loans ranged from 3.83 percent to 4.79 percent, according to the filing.

The JV’s problems, however, go deeper.

Last Tuesday, Hyundai Motor said Beijing Hyundai suspended production a week earlier at its four mainland factories after a supplier of fuel-tank components refused to provide parts due to non-payment, according to Reuters.

Although production resumed last Wednesday, South Korean media reported that the $17 million outstanding payment was still under negotiation. Hyundai Motor did not respond to a request for comment.

The incident has raised alarm over the financial woes at the JV. It sold 105,000 vehicles in the April-June quarter, down 64 percent year on year. Hyundai Motor blamed anti-South Korea sentiment in China for the slump.

Diplomatic relations between South Korea and China deteriorated when Seoul agreed last July to deploy a US missile defence system - the Terminal High Altitude Area Defence (THAAD) system - to counter threats from North Korea.

China objected that the system’s radar would be capable of penetrating its territory, turning popular sentiment against Korean goods and services. MORE VICTIMS The rising tensions between the two countries have rippled through the capital markets. Many potential Korean issuers, including Export-Import Bank of Korea, were heard to have given up on plans to sell Panda bonds after obtaining ratings and legal opinions.

In May 2016, IFR reported that state-run Kexim had appointed Bank of China, HSBC, Export-Import Bank of China and Standard Chartered as joint bookrunners for a proposed offering of Panda bonds. However, the plan was dropped as the diplomatic dispute escalated, according to people familiar with the matter.

Market participants said Beijing Hyundai should be able to get regulatory approval for its financing, thanks to the reputation of its heavyweight Chinese partner, BAIC, but warned that selling the notes would be very challenging.

Chinese investors have every reason to be cautious towards Beijing Hyundai, reading into the geopolitical tension and negative headlines on the company.

“We will not buy the bonds as there are political risks (to the deal),” said a Shanghai-based investor with a medium-sized Chinese bank.

Another Beijing-based underwriter said Beijing Hyundai would need to pay hefty premiums if the deal came out this year.

The production disruption has also raised concerns about consumer finance affiliate Beijing Hyundai Auto Finance, in which Hyundai Motor holds a 60 percent stake. Beijing Hyundai Auto Finance has raised funds via auto loan-backed securities and financial bonds. Those securities are not widely traded and prices have not moved, but poor sales figures could make it harder for the company to raise funding in the future.

“We’ll need to see whether the sales will pick up later this year for Beijing Hyundai,” said an investor, who bought into Beijing Hyundai Auto Finance’s previous ABS deals.

He noted that Japanese car sales collapsed in China in 2012 during a dispute over the Diaoyu islands (Senkaku in Japanese), but rebounded sharply the following year once anti-Japan sentiment abated.

“What we learned from 2012 is that Chinese consumer demand (for Japanese cars) was affected, but it quickly came back. So, this time, South Korean car makers could follow the same pattern on sales,” he said.

Tensions in the Korean peninsula, however, show no sign of easing. North Korea’s firing of a ballistic missile over Japan last week has kept the international community firmly focused on the area, and on the controversial THAAD system, in particular. (Reporting by Ina Zhou; Editing by Steve Garton and Daniel Stanton)

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