Hyundai Capital Services issues five-year Eurobond

Hyundai Capital Services (HCS), South Korea’s dominant supplier of auto finance, received a remarkably powerful response to its latest unsecured debt issuance which is part of the company's $2 billion global MTN programme.

Some $2.25 billion worth of orders were placed for the $400 million fixed-rate five-year issue. That demand helped push down the yield to mid-swaps plus 58 basis points, well inside the initial guidance range of mid-swaps plus 60-65bp.

“This is one of the cheapest Baa/BBB credits in Korea. It’s a great story which investors are only now beginning to understand,” enthuses one source.

The coupon and price were set at 5.625% and 99.335 respectively. The resulting yield came in at 5.780%, providing a spread of 99.6 basis points over the benchmark December 2011 five-year Treasury bond. The latter is currently trading at a price of 99.0975 with a coupon of 4.625% for a yield of 4.784%.

The offering also benefited from Moody’s upgrading the company’s long-term debt and issuer rating from Baa3 to Baa2 on January 11. The ratings agency also gave a Baa2 to the current takedown from the programme.

“The upgrade takes into account the steady improvements that have taken place in HCS’ fundamental credit strength since Moody’s assigned its initial rating in 2005; continued expected support from Hyundai Motor Group (which owns 57% of HCS) and the strong commitment from GE Capital Corporation (which owns 43% of HCS)", says Moody's report.

“This definitely caused investors to perk up and view the company with fresh eyes,” says one source.

Management of the company, which is the ‘captive’ financing company of Hyundai Motor, also reportedly did an excellent job on the roadshow in convincing investors about the company’s merits. In any case, given that Hyundai Motor has 70% of the market share in the country, HCS clearly has some strong cards to play.

“Thanks to an extensive roadshow in Asia and in Europe we built a strong book with some top-tier names very quickly. We rapidly refined the price guidance to mid-swaps plus 58-60 basis points and hardly lost any orders, so it was a really robust market,” says one source.

Some specialists also claim that the timing of the deal was good. “The market is in good shape with lots of liquidity looking for assets which can provide a bit more yield,” says one.

HCS has issued before to a less enthusiastic response, which may have left a lingering impression on investors’ minds – until this deal.

“The company did a deal a couple of years ago which was priced very tightly; the deal did not perform well and not a lot of people got involved. But when the ratings upgrade was mentioned people took a closer look and very much liked what they saw,” says another source.

One specialist used an issue from cash-rich Korean oil company LG-Caltex as a reference point; this has a superior rating of Baa1/BBB+ and now trades at Libor plus 50 for a 10-year maturity. The HCS bond comes in at the equivalent of around Libor plus 56.5, which puts the cheapness of the deal in the right context, he says.

Another obvious comparable is the company’s own previous outstanding issue, the 5 1/2 2010, which as the joint lead managers went out with price guidance, was trading at around Libor plus 55, meaning the new longer issue is trading impressively close to the older, shorter-dated bond.

The Reg-S issue saw two offshore US accounts enter the bidding, but demand from the 95 accounts came overwhelmingly out of Asia (60%) and Europe (40%). By investor type, the breakdown was asset managers 31%, banks 45%, central banks 3%, hedge funds 14%, insurance companies 4% and unspecified others 3%.

Deutsche Bank, JPMorgan Securities, Citigroup Global Markets, UBS and Barclays Capital were joint lead managers on the deal.