As the primary financing arm of the largest automotive manufacturer in Korea, Hyundai Capital Services, Inc. (“HCS”) has announced the pricing of 2 USD bonds – a 3.25-year USD bond at an initial price guidance of CT3+110 basis points (estimated yield: 2.367%), and a 5-year USD Green bond at an IPG of CT5 + 125bps (estimated yield: 2.808%).
The issuer, HCS, is rated ‘BBB+’ / ‘BBB+’ (S&P/Fitch) and the bonds are expected to receive a credit rating of ‘BBB+’ / ‘BBB+’ (S&P/Fitch). Proceeds from the 3.25-year bond will be used for general corporate purposes, while proceeds raised from the 5-year Green bond will be used to provide green loans that are in line with HCS’s Sustainable Financing Framework. In addition, capital raised from the Green bond will be used to provide financing services to customers of zero emission vehicles.
HCS is a leading financial services firm in Korea that has historically captured the biggest share of the Korean automotive financing and automotive leasing market based on sales volume. Some of its business include (i) providing automotive financing to customers of new and second-hand vehicles, (ii) the provision of automotive leasing to individual and corporate customers, as well as (iii) issuing loans to individuals and small businesses.
The Hyundai Motor Group has a 99.76% stake in HCS. In the first nine months of 2021 (“9M21”), HCS achieved an operating revenue of about KRW 2.66t, up 15.8% year-on-year. The company's net profit was KRW 348.8b, up 20.2% year-on-year, and its operating margin rose slightly to 14.2%. Overall, we feel that the profit growth performance was acceptable.
In terms of its credit performance, the company's total assets reached KRW 34.9t at the end of September 2021, up 3.7% from the end of 2020. Although it had borrowed funds of KRW 28.5t, HCS held only KRW 1.9t in cash and short-term financial investments at 9M21. The level of borrowed funds is typical of automotive captive finance companies but the firm maintains that it has sufficient liquidity in excess of its immediate funding needs.
Considering that most of its assets are loan receivables, while the non-performing loans ratio has fallen to a new low of 2.4% recently, its adjusted capital adequacy ratio is also 14.6%, which represents an improvement compared with previous years, reflecting that the company's operating conditions are still healthy.
With its investment grade credit rating, we expect HCS to have a relatively low cost of issuing bonds and may continue to choose to refinance the debt if required. Referring to the issuer's existing bonds due August 2027, which is trading at an indicative yield of around 2.4%, we believe that the initial price guidance for the 5-year Green bond is relatively attractive at around 2.8%, but it is important to note that the final price guidance may not be as high as the initial guidance.
Declaration: For or specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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