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Fitch Affirms Hyundai Capital Services at 'BBB+'; Hyundai Card at 'BBB'
March 8, 2017 / 2:03 AM / 7 months ago

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

(The following statement was released by the rating agency) SEOUL/TAIPEI/SINGAPORE, March 07 (Fitch) Fitch Ratings has today affirmed the Long-Term Issuer Default Rating (LT IDR) of Hyundai Capital Services Inc. (HCS) and Hyundai Card Co., Ltd. (HCC) at 'BBB+' and 'BBB', respectively. The Outlook on the Long-Term IDRs is Stable, reflecting the Outlook on Hyundai Motor Company (HMC; BBB+/Stable/F2), the major shareholder of both companies and the flagship company of Hyundai Motor Group. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS HCS'S IDRS AND SENIOR DEBT HCS's IDRs are equalised with those of HMC because Fitch views HCS as a core subsidiary of HMC. HCS is the domestic passenger car financier of HMC and Kia Motors Corporation (Kia; BBB+/Stable) - the two auto manufacturers of Hyundai Motor Group - and its management and operations are highly integrated with HMC. HMC and Kia collectively own 80% of HCS's shares. HCS's strong franchise in Korea's car-financing market is challenged by sluggish auto sales growth of HMC and Kia in the domestic auto market and intensified competition among auto financiers, resulting in a decline in its captive car-financing volume and revenue in 2016. Rapid expansion in its foreign joint-venture operations and selective high-margin non-captive assets may mitigate the negative earnings impact, but Fitch sees the credit risk of its portfolio as rising due to greater risk associated with the new growth areas. We expect HCS's underlying pre-tax income/average assets to remain at around 2% over the rating horizon. HCS's asset quality should remain broadly stable in a low-interest-rate environment, barring any sharp and drastic rise in the yield curve. Fitch does not expect Korea's rising household leverage to be a material risk over the rating horizon - given the stable unemployment and housing income trajectory, which are also supported by the accommodative fiscal and monetary policies. HCS's liquidity profile remains adequate despite its reliance on wholesale funding. Its access to both onshore and offshore capital markets has been supported by its strong linkages with HMC. HCS's senior unsecured debt rating is equalised with its LT IDR, in line with Fitch's criteria for rating senior unsecured bonds. HCC'S IDRS HCC's LT IDR of 'BBB' reflects Fitch's view that HCC is a strategically important subsidiary of HMC, primarily underpinned by Hyundai Motor Group's indirect 73% ownership in HCC through HMC and other affiliates. HCC's management linkages with HMC and its shared operation in human resources, collection platform and premises with HCS also support this view. However, the one-notch IDR differential reflects Fitch's view that HCC's credit card business is not a core operation of HMC and that there is less synergy between HCC and HMC than in the case of HCS. HCC has weathered its profitability challenges - which have arisen from a regulatory cut in merchant fees and declining average product yield - by raising the credit card transaction volume and executing various cost-cutting measures. Cheap funding and managed credit costs have also contributed to the stabilised performance. Nonetheless, Fitch does not expect HCC's profitability (measured by pre-tax income/average assets) to improve significantly above 2% because the aforementioned challenges are likely to persist over the rating horizon. HCC has a higher-than-peer average percentage of total card assets in high-risk assets including cash advances, card loans and revolving assets (54% at end-3Q16 versus 51% of the major peer average). As a result, HCC's credit costs were higher than those of its peers over the last four years, although these have stabilised in the low-interest environment. HCC is exposed to volatility in capital markets due to its reliance on wholesale funding, even though its linkages with HMC have supported relatively stable funding access. Fitch expects HCC to be more vulnerable than HCS to a sudden shutdown of wholesale funding because HCC's funding pressure should remain high due to continued usage of cards and rising demand on cash advance and loans, even in times of stress. Its liquid assets and committed credit lines covered only about 70% of its short-term debt at end-2016. HCC's 'F3' ST IDR reflects Fitch's view that the parent's support would be less prioritised for HCC compared with the core subsidiaries including HCS. RATING SENSITIVITIES HCS's IDRS AND SENIOR UNSECURED DEBT; HCC'S IDRS The ratings of HCS and HCC would be reviewed if there is any change in HMC's IDRs. The ratings would also be reviewed upon any major deterioration in HMC's ability to provide support to the subsidiaries or with a substantial weakening of the relationships between HCS, HCC and HMC, which can be reflected in a material decline in the relative contribution of HCS and HCC to HMC's financial profile. Negative rating action could also arise if a significant deterioration in the financial profiles of HCS and HCC were to have an impact on HMC's own financial profile or rendered the subsidiaries less important to the parent's business strategy. HCC's ratings would be upgraded if its financial profile - as reflected in its asset quality and capitalisation - improves significantly in a sustainable manner. Any action on HCS's IDRs would trigger a similar change in its senior unsecured debt rating. The rating actions are as follows: HCS LT IDR affirmed at 'BBB+'; Outlook Stable ST IDR affirmed at 'F2' Senior unsecured debt rating affirmed at 'BBB+' HCC LT IDR affirmed at 'BBB'; Outlook Stable ST IDR affirmed at 'F3' Contact: Primary Analyst Matt Choi Associate Director +82 2 3278 8372 Fitch Australia Pty Ltd, Korea Branch 9F, 97 Uisadang-daero, Yeongdeungpo-Gu, Seoul 07327 Korea Secondary Analyst Jonathan Lee Senior Director +886 2 8175 7601 Committee Chairperson Mark Young Managing Director +65 6796 7229 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. 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