Fitch Ratings has upgraded South Korea-based Hyundai Commercial Inc.'s (HCI) Long-Term Issuer Default Rating (IDR) to 'BBB+' from 'BBB' and Short-Term IDR to 'F2' from 'F3'.

The Outlook on the Long-Term IDR is Stable. The agency has also upgraded the Shareholder Support Rating (SSR) to 'bbb+' from 'bbb'.

The rating action follows the upgrade of parent Hyundai Motor Company's (HMC) Long-Term IDR to 'A-' from 'BBB+' (see Fitch Upgrades Hyundai Motor and Kia to 'A-'; Outlook Stable, published 16 February 2024).

Key Rating Drivers

Parent's Stronger Ability to Support: HCI's ratings are driven by our belief that it would receive extraordinary support from HMC, if needed. The upgrades reflect the parent's stronger ability to provide support to HCI as the automaker's credit profile has significantly improved on enhanced brand recognition and stronger market position in key markets. The Stable Outlook on the Long-Term IDR mirrors that on the parent.

Synergies as Captive Financier: HCI finances about 40% of total commercial vehicles sold domestically by HMC and Kia Corporation (A-/Stable/F1), which are the flagship automakers of the HMC group. It also extends credit to enterprises within the group's value chain, such as small- to mid-sized auto parts suppliers and construction projects undertaken by group affiliates. These synergies within the group continue to underpin the SSR.

Large Non-Captive Operations: The SSR is a notch below HMC's Long-Term IDR because of the smaller size of HMC's commercial-vehicle business segment, and HCI's meaningful non-captive business lines. Nevertheless, the parent has sufficient control over HCI's management with a 37.5% direct stake and another 37.5% owned by group family members, who also manage HCI. We believe a default by HCI would carry high reputational risks for HMC, given management and operational linkages and common branding.

Contingent Liquidity Needs: The Short-Term IDR reflects our belief that HCC may be of lower priority in receiving shareholder support than HMC's core subsidiaries, such as Hyundai Capital Services, Inc. (A-/Stable), whose operation is dominated by captive auto financing. This assessment also takes into consideration the potential requirements from HMC's other major financial subsidiaries, which have notable leverage and a large business scale in aggregate relative to HMC and could have simultaneous significant contingent liquidity needs.

Asset-Quality Risks Linger: Risks to HCI's asset quality is likely to linger for the short term due to the lagged impact from significant interest rate hikes, South Korea's slower economic growth and property market downturn between 2022 and 2023. That said, we expect the risks to credit costs and profitability to be mitigated by its risk mitigation measures implemented in recent years such as tighter underwriting and reinforced collection. The high likelihood of monetary easing in Korea in 2024 would also help mitigate the asset-quality slippage.

Broadly Stable Funding: We believe HCI's broadly stable funding access reflects investor confidence due to its links to HMC. A turnaround in monetary policy could help HCI maintain a steady funding profile.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

HCI's ratings are sensitive to Fitch's assessment of HMC's ability and propensity to provide extraordinary support to the financing affiliate. Negative action on HMC's Long-Term IDR would indicate a weakening shareholder credit profile and prompt similar action on HCI's SSR and Long-Term IDR.

HCI's ratings may be downgraded if HMC were to pare back its shareholding in the finance company significantly, or if management and operational linkages were to loosen materially. A significant decline in HCI's captive financing business - as indicated by its share of HMC's commercial-vehicle sales and the proportion of captive financing on HCIs' balance sheet - could also signal waning synergies that may weaken the major shareholder's propensity to support HCI. Any breach of the regulatory leverage requirement (HCI: 8.8x at end-2022), which is scheduled to tighten to 8x in 2025 from 9x currently in the absence of HMC's timely support, could be perceived as a weaker propensity to support and could trigger a downgrade.

A significant deterioration in HCI's financial profile due to non-synergistic or higher-risk businesses, such as real-estate project financing, would test the shareholder's support commitment and place pressure on the ratings. This is especially if broader economic developments begin to burden HMC's own credit profile.

The Short-Term IDR would be downgraded to 'F3' if the Long-Term IDR is downgraded.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Positive action on HMC's Long-Term IDR would prompt similar action on HCI's SSR and Long-Term IDR.

The Short-Term IDR could be upgraded to 'F1' if the Long-Term IDR is upgraded to 'A' or above, or if Fitch assesses that required contingent support would be less material compared with the group's financial resources.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

The ratings on HCI are driven by shareholder support from HMC. A change in Fitch's assessment of HMC's ratings would result in a change in HCI's ratings.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores

(C) 2024 Electronic News Publishing, source ENP Newswire