The steadily improving credit story of Hyundai Capital Services has made it the kind of yen borrower that domestic Japanese investors scramble to make room for in their portfolios. Brad Frischkorn reports.
Just one year into its Samurai issuing history, Hyundai Capital Services (HCS) has already come to market three times, printing a total of ¥162bn in short-dated paper. It carried only an A- JCR rating at the time of its March 2005 Samurai debut but subsequent events have seen it assume a central role in investors' minds.
The first ¥44bn three-year deal (JPMorgan) enabled HCS to become the first public South Korean entity to access the market in almost 10 years. About 80% of the offer was absorbed by Japanese buyers eager for spread and sold on notion that at yen Libor plus 120bp, the paper was a bargain too good to pass up.
Things have only improved for HCS in the interim; the firm returned the following July with another ¥38bn Samurai, also in threes (JPMorgan/Mizuho), pricing it at 89bp over yen Libor. The blow-out success of this deal came at a time when international buyers seemingly could not get their hands on enough paper with Hyundai's name on it. A subsequent US$200m loan facility for Hyundai Motor Manufacturing Alabama closed 71% oversubscribed in general syndication. Another three-year US$200m term loan and FRN for HCS, a US$200m loan-style FRN for Hyundai Heavy Industries, and a US$50m term loan for Hyundai Motor Finance all appeared to sell well.
Moody's then added to the momentum with its first credit rating for HCS (Baa3) in August and things have continued to scale up for Hyundai Capital since. It scored its biggest yen-denominated coup of all in January, cracking open the 2006 Samurai market with a 100% upsized ¥60bn three-year offer, pricing at yen Libor plus 48bp via Daiwa SMBC, Mitsubishi UFJ and Mizuho.
The 41bp savings in fundraising costs over its prior Samurai deal largely reflected the ratings situation, by now helped by an S&P (BBB flat) credit ranking assigned in November. This increased investor familiarity, and there was also recognition of the synergies with General Electric Capital Corp and General Electric Capital International Holdings. Hyundai Capital, along with Hyundai Motor, entered into a strategic alliance with the pair in October 2004.
The boldness of the upsizing of its latest deal, however, raised some eyebrows in Tokyo, as it flew in the face of much uncertainty over whether issuing conditions had indeed recovered from late 2005, when a waterlogged market gave Merrill Lynch and Renault – the year's last Samurai issuers – a rough ride as the doors on an otherwise robust year slammed shut.
Just a few weeks later, however, the order book was oversubscribed for HCS. The bulk of its paper went to trust banks, asset managers and pension funds: even GPIF, one of the largest government retirement funds, was rumoured to be an investor.
While its own improving credit is certainly one driver behind Hyundai's historical Samurai successes, market conditions just ahead of the end of the Bank of Japan's quantitative easing policy also likely helped in pushing the January deal, as swap spreads pushed out to juicy levels in the short end of the curve. But the importance of maintaining good communication lines with conservative large-ticket Japanese investors is a fact whose importance cannot be overstated for the would-be Samurai issuer. From before its maiden offer, Hyundai executives were seen fervently insisting on the company's commitment to the yen market, appearing as forthright as more veteran visitors to the market regarding planned frequency and deal amount.
One Japanese DCM banker summed it up succinctly: "The Samurai market is not for opportunists. Relationships must be built and maintained. The Koreans understand this as well as anybody."
For now, HCS appears set on a soft target of biannual visits to the yen market. Daniel Lee of Hyundai's finance planning team said the firm aims to raise 35%–40% of its funding needs from a mixture of Samurais, ABS, cross-border syndication deals, and bilateral term loans. Funding needs for fiscal 2006 may include one more cross-border issue, via either Eurobond or Samurai. But the company is in no hurry to issue again, he said.
Lee went on to cite the soaring Korean economy as another reason to consider Hyundai's paper; the Bank of Korea estimates that the nation's fiscal 2006 GDP growth will likely tally 5.3%, up from 4.0% the prior year, while private consumption growth also looks good at plus 4.5% projected for fiscal 2006, up from plus 3.2% in 2005.