[Funding] Hyundai Commercial Secures 180 Billion Won Operating Funds Through 'Loan Securitization' Reason

[Asia Economy Reporter Lim Jeong-su] Hyundai Commercial, an affiliate of Hyundai Motor Group, secured 180 billion KRW in operating funds by securitizing installment loans (Auto Loans) collateralized by commercial vehicles such as buses, trucks, and construction machinery. This method was chosen to secure operating funds without increasing leverage (total assets/equity capital).

According to the investment banking (IB) industry on the 11th, Hyundai Commercial raised 180 billion KRW by securitizing auto loans under the lead management of Shinhan Investment Corp. They transferred 201.7 billion KRW in principal amount, consisting of 3,422 commercial vehicle loans, to a trust, then issued securitized bonds based on the trust beneficiary rights received as payment for the loan sale.

As commercial vehicle loans are sequentially repaid in the future, the proceeds will be used to repay the securitized bonds. To prepare for cases where loan recovery occurs faster than expected, early redemption of the securitized bonds is allowed. Shinhan Bank provided a credit facility of up to 20 billion KRW to ensure the stability of senior bond repayments.

Hyundai Commercial has secured operating funds primarily through general bonds and commercial vehicle loan securitization. In December last year, it also raised 98 billion KRW using the same method. In the past, it issued dollar-denominated asset-backed securities (ABS) targeting global investors.

Loan securitization is a way for financial companies to secure operating funds without increasing leverage. Since it involves selling assets (loans), it does not lead to leverage expansion. On the other hand, as the issuance volume of financial company bonds, a major funding source, increases, leverage rises.

Financial authorities limit the leverage of financial companies to within 10 times. Among them, credit card companies are subject to an 8 times limit. However, criticism has been raised that regulations are weaker compared to card companies, so financial authorities plan to reduce the leverage limit for non-card financial companies to 9 times from next year and 8 times from 2025. Additionally, if more than 30% of net profit is paid out as dividends, the leverage limits will be lowered to 8 times and 7 times, respectively.

Hyundai Commercial has maintained a leverage ratio around 7 times since 2018. It once rose to 9.8 times in 2016 but improved significantly the following year due to bargain purchase gains from acquiring Hyundai Card shares and issuing hybrid capital securities.

However, recently Hyundai Commercial decided to exercise the call option on convertible preferred shares and cancel them, which is expected to increase the leverage ratio somewhat. Canceling approximately 100 billion KRW worth of shares will reduce equity capital accordingly, expanding leverage. After cancellation, leverage is expected to be around 7.5 times.

The high proportion of hybrid capital securities (perpetual bonds) at 23.5% of equity capital is also identified as a risk factor. An industry insider analyzed, "Perpetual bonds have characteristics similar to borrowings, so depending on changes in international accounting standards, their classification as capital may vary. Also, exercising early redemption rights on perpetual bonds can cause capital outflows, leading to increased leverage."

An IB industry official said, "Hyundai Commercial faces several potential factors that could materialize to increase leverage, such as the cancellation of convertible preferred shares and the high proportion of perpetual bonds," adding, "Funding through loan securitization, which does not increase leverage, is expected to continue growing."

Hyundai Commercial, established in 2007 after spinning off from Hyundai Capital, is a specialized installment finance company for commercial vehicles. It has grown focusing on financing linked to commercial vehicles of Hyundai Motor, Kia Motors, Hyundai Heavy Industries, and corporate financing for group affiliates. As of the end of the third quarter this year, its asset size reached 9.544 trillion KRW.

Shareholders include Hyundai Motor (37.50%), Jung Myung-yi, president of Hyundai Commercial and sister of Hyundai Motor Group Chairman Chung Eui-sun (25.00%), her husband Chung Tae-young, vice chairman (12.50%), and a special purpose company of private equity fund Affinity Equity Partners, ‘Centurion Resources Investment Ltd.’ (25.00%).

This content was produced with the assistance of AI translation services.