OREANDA-NEWS. Fitch Ratings has today affirmed Hyundai Capital Services Inc.'s (HCS) Long-Term Issuer Default Rating (IDR) at 'BBB+', its Short-Term IDR at 'F2', and its senior unsecured debt rating at 'BBB+'. At the same time, the agency has affirmed Hyundai Card Co., Ltd's (HCC) Long-Term IDR at 'BBB' and Short-Term IDR at 'F3'. The Outlook on the Long-Term IDRs is Stable, reflecting the Outlook of Hyundai Motor Company (HMC; BBB+/F2/Stable), the parent of both companies.

KEY RATING DRIVERS
HCS'S IDRS AND SENIOR UNSECURED DEBT
HCS's Long-Term and Short-Term IDRs are equalised with those of HMC because Fitch views HCS as a core subsidiary of HMC. HCS is a captive auto financier of HMC and Kia Motors Corporation (Kia; BBB+/Stable), and is highly integrated with them in terms of management and operation. HMC and Kia raised their combined ownership in HCS to 80% by acquiring General Electric Capital Corporation's 23% stake in 1Q16.

HCS's strong franchise in South Korea is underpinned by the dominance of HMC and Kia in the domestic car market. HCS's loan growth in the near term is likely to be supported by an extension of a reduction in special consumption tax and the weaker Korea won, which makes HMC cars more price competitive against imported cars in the domestic market. However, Fitch expects HCS to face rising competition from banks and consumer financing companies, which could erode its share of financing for HMC and Kia vehicles and its underlying profitability in the medium term.

HCS's asset quality remains relatively stable in a low interest environment. Fitch does not expect household debt leverage in Korea to escalate to a credit crunch in the near term, given Korea's low unemployment rate of 3.6% in 2015, and accommodative fiscal and monetary policies. However, rising household leverage poses greater risk in the long term, particularly if interest rates rise at a rapid pace. HCS's risky assets, such as personal loans, used-car financing and mortgages, which formed about 25% of its receivables at end-3Q15, are likely to be more vulnerable in such a scenario.

HCS's liquidity remains adequate despite its heavy reliance on wholesale funding. Modest growth and relatively stable receivable collection would curb the need for funding. HCS's access to wholesale funding has been sustained by the linkage with HMC. HCS's funding needs would be reduced in times of economic downturn as auto sales by HMC and Kia are likely to shrink.

HCS's senior unsecured debt rating is equalised with its Long-Term IDR, in line with Fitch's criteria for rating senior unsecured bonds.

HCC'S IDRS
HCC's Long-Term IDR of 'BBB' is one notch below that of HMC, which reflects Fitch's view that the credit card business is not a core operation of HMC and there is less synergy between HCC and HMC than in the case of HCS. Nonetheless, Fitch believes that HCC is a strategically important subsidiary and there is a high probability of support from HMC. HCC management's linkage with HMC and Kia, 54% majority ownership by HMC and its affiliates, and the use of a same brand name support this view.

HCC's Short-Term IDR of 'F3' reflects HCC's high reliance on wholesale funding and as a result, potential liquidity risks, though this is mitigated by the assumption that there is a high probability of support from the parent, if needed.

HCC's profitability will be strained by a regulatory cut in merchant fees in the near term. Fitch expects the merchant fee to remain low while interest rates remain low and the political climate favours merchants. HCC's internal cost-saving measures (such as cutting marketing expenses and acquisition fees) may partly offset the negative impact of reduced merchant fees, but could shrink its market share, which has already been in gradual decline.

HCC's portfolio mix is geared towards risky assets, such as cash advances, card loans and revolving assets, which represented over a half of receivables at end-3Q15. HCC's credit costs were higher than major credit card peers' over the last three years. In Fitch's view, HCC's below-peer delinquency ratio does not fully represent its asset quality because it frequently sells delinquent loans to HCS, which has a dedicated, established collection department.

HCC is exposed to volatility in capital market conditions as it depends solely on wholesale funding. Fitch expects HCC to be more vulnerable than HCS to a sudden shutdown of wholesale funding because HCC's funding pressure would remain high due to continued usage of cards and rising demand on cash advance and loans, even in times of stress. That said, HCC's linkage to HMC has supported its access to wholesale funding. Its liquidity at end 3Q15 comprised about KRW1.6trn of cash and liquid assets and KRW0.5tn of credit lines.

RATING SENSITIVITIES
HCS'S IDRS AND SENIOR UNSECURED DEBT, AND HCC'S IDRS
The ratings of HCS and HCC would be reviewed if there is any change in HMC's IDRs. The ratings would also be reviewed if HMC's ability to provide support to the subsidiaries or the relationship among HCS, HCC and HMC materially changes. Negative rating action could also result if a material deterioration in the financial profiles of HCS and HCC impacted HMC's own financial profile or rendered the subsidiaries less important to the parent's business strategy.

If HCC's financial profile improves significantly in a sustainable manner, its ratings could be upgraded, but this is an unlikely prospect in the near term.

Any action on HCS's IDRs would trigger a similar change in its senior unsecured debt rating.

The rating actions are as follows:

HCS
Long-Term IDR affirmed at 'BBB+'; Outlook Stable
Short-Term IDR affirmed at 'F2'
Senior unsecured debt rating affirmed at 'BBB+'

HCC
Long-Term IDR affirmed at 'BBB'; Outlook Stable
Short-Term IDR affirmed at 'F3'.