'Save on Interest and Manage Leverage' Hyundai Commercial Secures 300 Billion Won Through Asset Securitization

Hyundai Commercial, a commercial vehicle specialized installment finance company affiliated with Hyundai Motor Group, secured more than 300 billion KRW in operating funds by securitizing installment loans (Auto Loans) secured by commercial vehicles such as buses and trucks. It is interpreted that the company chose the loan securitization method to secure operating funds while reducing interest expenses. When funds are raised through asset securitization, the leverage ratio (total assets/equity capital) regulated by financial authorities does not increase.

According to the investment banking (IB) industry on the 15th, Hyundai Commercial raised 280 billion KRW by securitizing commercial vehicle Auto Loans under the management of Shinhan Investment Corp. After transferring 300.9 billion KRW in principal amount and 3,911 commercial vehicle loans to a trust at Citibank Korea, securitized bonds were issued based on the trust beneficiary rights received as proceeds from the sale of Auto Loans. As commercial vehicle Auto Loans are sequentially repaid in the future, the proceeds will be used to repay the securitized bonds. To prepare for cases where commercial vehicle loan recoveries occur faster than expected, early repayment of the securitized bonds is allowed. NH Nonghyup Bank provided a credit facility of up to 28 billion KRW to ensure the stability of senior bonds repayment.

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Hyundai Commercial has mainly used bond issuance (credit specialized financial bonds, specialized finance bonds) and Auto Loan securitization as means to secure operating funds. In October last year, it also raised more than 300 billion KRW by securing funds backed by about 300 billion KRW of commercial vehicle Auto Loans. In the past, it issued dollar-denominated asset-backed securities (ABS) targeting global investors. Loan securitization is a method for specialized finance companies to secure operating funds without increasing leverage. Since it is a method of selling assets (loans), it does not lead to leverage expansion. If specialized finance bonds, the main funding source, continue to be issued, leverage increases and interest burden also rises.

Financial authorities limit the leverage of specialized finance companies to within 9 times. Among specialized finance companies, credit card companies are subject to an 8 times limit. Due to criticism that capital companies are less regulated compared to card companies, the leverage limit for non-card specialized finance companies has been lowered from 10 times to 9 times starting this year. It will be further reduced to within 8 times from next year. Also, if more than 30% of net profit is paid as dividends, the leverage limit will be reduced to 8 times (this year) and 7 times (next year), respectively.

Hyundai Commercial’s leverage ratio had worsened in the past due to large dividends paid to major shareholders. It once rose to 9.8 times but significantly improved the following year due to bargain purchase gains from acquiring Hyundai Card shares and issuing hybrid capital securities. In 2021, exercising the call option on convertible preferred shares for cancellation caused leverage to increase. About 100 billion KRW worth of shares were canceled, reducing equity capital and expanding leverage. Despite continuous reduction efforts, leverage has not fallen below 8 to 9 times, and dividends have not been paid in recent years. Major shareholders appear to be managing leverage by foregoing dividends.

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, "The exercise of the perpetual bond early redemption option (call option) may cause capital outflow and increase leverage." An IB industry official said, "Since the proportion of perpetual bonds in equity capital is high, early redemption could expand leverage," and predicted, "The loan securitization method of funding, which does not increase leverage, will continue to grow."

Hyundai Commercial was established in 2007 after spinning off from Hyundai Capital. It has grown focusing on commercial vehicle-related finance for Hyundai Motor, Kia Motors, Hyundai Heavy Industries, and corporate finance for group affiliates. As of the end of the first quarter this year, total assets approached 12 trillion KRW. Hyundai Motor holds 37.50%, Jung Myung-i, president of Hyundai Commercial and sister of Hyundai Motor Group Chairman Chung Euisun, holds 25.00%, her husband Chung Tae-young, vice chairman, holds 12.50%, and the private equity fund Affinity Equity Partners’ special purpose company ‘Centurion Resources Investment Ltd.’ holds 25.00% of the shares.

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