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Hyundai Card Hyundai Capital Ratings Negative Outlook On Both Entities Reflects That On The Parents

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HONG KONG--8 Sep--S&P Global Ratings

HONG KONG (S&P Global Ratings) Sept. 8, 2017--S&P Global Ratings said today that it raised its long-term issuer credit rating on Hyundai Card Co. Ltd. (HCC) to 'BBB+' from 'BBB'. The outlook is negative. HCC is a Korea-based credit card company.

At the same time, we revised the outlook on Hyundai Capital Services Inc. (HCS) to negative from stable. We affirmed our 'A-' long-term and 'A-2' short-term issuer credit ratings on HCS, a Korean consumer finance company.

The upgrade of HCC reflects our opinion that the company has capacity to sustain a strong capital buffer against a spike in credit losses in the next 18-24 months. This view is based on the company's ongoing controlled growth appetite and focus on managing asset quality. HCC has strengthened its track record in improving its asset quality and credit costs while maintaining broadly stable profitability and capitalization in recent years. This is despite a challenging operating environment characterized by stiff competition, regulatory pressure on decreasing merchant commission rates, and high household indebtedness in Korea.

We expect HCC to remain moderately strategic to Hyundai Motor group, given its importance to the group's long-term strategy to promote new car sales in at least the coming two years. HCC continues to benefit from one notch of uplift from its 'bbb' stand-alone credit profile because of its moderate importance to the group. However, the benefit would dissipate if Hyundai Motor group's 'a-' group credit profile (GCP) weakens by one notch.

We do not expect HCC's overall management and strategy to significantly change in the next 24 months despite a recent change in the ownership structure. GE Capital Corp., which had held a 43% stake in HCC for more than 10 years,

divested its entire stake earlier this year. Hyundai Commercial Inc., a subsidiary of Hyundai Motor Corp. (HMC), acquired 19% of this stake and the remainder was acquired by a consortium formed by a private equity fund. Hyundai Motor group owns a majority 73% stake in HCC, and is likely to retain its controlling ownership going forward, in our view.

We estimate HCC's risk-adjusted capital (RAC) ratio before diversification and concentration will remain 11%-12% over the coming 18-24 months, well above our threshold of 10%. The ratio was about 12.6% at the end of 2016. We attribute the decline mainly to modest pressure on profitability due to lower merchant fees, annual card receivables growth of about 5%, and a dividend payout that we assume will be moderately higher than the industry average. We anticipate that HCC will comply with the regulatory guideline of sustaining its leverage (asset-to-equity ratio) below 6x. That gives the company little room to sharply increase dividend payout or to sustain high growth considering its leverage of 5.5x as of end-2016.

We revised the outlook on HCS to negative following a similar action on the company's parents HMC and Kia Motors Corp. We expect HCS to remain a core subsidiary of Hyundai Motor group at least for the coming two years. The

rating on HCS will move in tandem with the GCP. As of end-June 2017, HMC holds about 60% in HCS and Kia holds 20%.

In our view, HCS is Hyundai Motor group's most important finance arm for new car buyers--it fulfills approximately 70% of the group's financed new car sales. HCS has been expanding overseas to support the group's auto sales in global markets. HCS is an integral part of the group and shares the Hyundai brand name. In our opinion, the parent group has a strong commitment to provide support to HCS either through equity infusions or letters of support.

The negative outlooks on both HCC and HCS reflect our view that Hyundai Motor group's 'a-' GCP could weaken due to deteriorating profitability over the next one to two years. While we expect HCC to remain a moderately strategically important subsidiary of the group for at least the coming two years, the one-notch benefit from parent group support would dissipate if the GCP weakens by one notch.

We may lower the ratings on HCC and HCS if we lower the GCP. We could lower the GCP if the combined EBITDA margin of the group's key operating affiliates, HMC and Kia, weakens to near 6% on a sustained basis. Such deterioration could happen because of a lower utilization rate due to a decline in sales volume, high incentive levels to customers because of intense competition, and continuing labor-related issues in Korea. In addition, a higher cost structure from tighter regulation and fast-moving technology trends could lead to such weakening.

We may also lower the rating on HCS if the company's importance to the group declines, which could happen if HCS' captive market share of the group's new car sales falls significantly. But, we believe this is unlikely in the next 12-24 months.

We could revise the outlooks on HCC and HCS to stable if we take a similar action on the parents. We could revise the outlooks on HMC and Kia if they maintain their combined EBITDA margin at close to, or above, 7% on a sustained basis. Earnings that are stronger than we expect owing to a successful expansion of the product line up, normalization of dividend from Chinese joint ventures, and control over costs could lead to such an improvement.


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