Hyundai Capital Services has kicked off Korean issuance this year with a well-received $700 million 5.5-year bond which closed early Friday morning. Notably, the new Reg-S/144A bonds priced inside the auto financing company’s secondary market yield curve.
The bonds priced to yield 245bp above US Treasuries, which was at the tight end of guidance at 255bp over Treasuries +/-10bp. At around noon on Friday the bonds had tightened by a further 6bp in the secondary market and were quoted at Treasuries plus 239bp/238bp.
The deal gathered an order book of $4.8 billion from 300 accounts. The coupon was fixed at 4.375% and the notes were reoffered at 99.407 to yield 4.498%.
ING, J.P. Morgan, Morgan Stanley, Royal Bank of Scotland and Standard Chartered Bank were joint bookrunners.
Hyundai Capital is the auto financing arm of Hyundai Motors, which owns 56.5% of the company. The remainder is held by General Electric Capital. The company enjoys a dominant position in the domestic Korean auto market as it has a captive market through its parent as well as strong support from General Electric Capital.
Hyundai Capital last tapped the US dollar market in 2009. The new Hyundai Capital bonds, which mature in July 2016, came at mid-swaps plus 206bp, or about 4bp inside the company's existing bonds due in May 2015.
They also priced inside bonds issued by Korean commercial banks, despite the fact that the banks enjoy better ratings. Specifically, Hyundai Capital's new bonds priced inside Woori Bank's January 2016 bonds, which traded at mid-swaps plus 214bp, and flat to slightly inside Hana Bank's October 2015s and Shinhan Bank's September 2015s, which were quoted at mid-swaps plus 207bp and 205bp respectively.
Hyundai Capital’s outstanding 2015s also similarly traded inside Woori’s 2015s. According to Nomura analyst William Mak, based on pure fundamentals alone, the Hyundai Capital 2015s should trade wider than the Korean commercial bank’s senior 2015 bonds.
However, they have been trading inside the latter for some time because Hyundai Capital has stronger “technical support” from US investors due to the scarcity of auto-financing names in Asia; and because of its strong support from GE Capital. The Hyundai Capital issue is rated Baa2/BBB+ by Moody's and Standard & Poor's respectively.
Hyundai Capital also received a strong take-up as investors sold Hyundai Motors' outstanding April 2016 bonds to buy Hyundai Capital's new bonds, thanks to an attractive yield pick-up.
Hyundai Motors’ April 2016s trades at a yield of 4.05%, whereas the new Hyundai Capital July 2016 bonds offered a yield of 4.498%. According to a banker, based on the five-year and six-year mid-swap levels, a six-month extension on the curve is worth 18bp. That works out to 9bp for the three-month tenor difference between Hyundai Capital's new July 2016 bonds and Hyundai Motors' April 2016 bonds.
After adding 9bp to 4.05%, investors were still left with a 36bp pick-up over the existing Hyundai Motors’ 2016s. This compensated for the difference in the relative risk between a financing arm of Hyundai and the group's operating company.
“Investors switched out of Hyundai Motors’ 2016s into the new Hyundai Capital 2016s as they felt that 36bp is a fair pick-up,” said a banker. “It is also worthwhile to note that the rating of Hyundai Capital is one notch higher than that of Hyundai Motors, based on S&P’s ratings and many accounts factored this in,” he added.
Hyundai Capital drew strong participation from US investors, which took up 65% of the deal. Investors based in Europe and Asia bought 14% and 21% respectively. By type, funds received 69%, insurance companies 12%, private banks 10% and banks 9%.
The strong participation from US investors was largely attributed to their familiarity with the parent’s name. When Hyundai Motors (through its wholly owned subsidiary Hyundai Capital America) tapped the US dollar market with a $500 million 5.5-year bond last year, US investors bought 67% of the transaction.
