Hyundai Capital's assured handling

The wreckage of Korea’s credit card crisis in 2003 left Hyundai Capital with few competitors in the card business, thanks to the company’s strong risk management.
Ju Jyuk Lee, CFO of Hyundai Capital
Ju Jyuk Lee, CFO of Hyundai Capital

Back in 2003, the typical Korean worker was the proud owner of four credit cards. With pretty girls in miniskirts handing out applications on street corners and 7-Eleven stores, the country’s collective debt soon soared to $100 billion.

The boom in credit card issuance had been inspired by a simple idea — give people enough credit and they will eventually have no choice but to spend it, which in turn will stimulate the economy. It was a simple idea that didn’t work. Instead, filling people’s pockets with debt only led to trouble, and eventually to Korea’s crippling credit card crisis.

Two years earlier, in October 2001, Hyundai Capital had wanted a piece of the credit card action and set up Hyundai Card. When the crisis hit it also struggled through the meltdown.

Ju Hyuk Lee, chief financial officer for Hyundai Capital, managed the company through the thick of it all and, despite the company copping W597 billion ($718 million) in losses during 2003 and 2004, it was the only capital finance company that did not close its consumer finance business during the crisis. “Despite the crisis, 2003 gave us the quantum leap that we needed in order to emerge stronger at the next level,” said Lee.

Priding itself on its culture of innovation, Hyundai Capital took steps in the early 2000s to move away from being a pure capital finance business and a provider of auto financing for its parent Hyundai Motors. It started an auto leasing business for non-Hyundai cars, launched a programme that allowed customers to make their monthly repayments using a credit card and set up a strong risk-management function.

In 2003, Ted Chung came on board as chief executive and re-assessed the company’s goals. Together with Lee, the two focused on risk-management as a way of emerging from the crisis on top, as well as maintaining a strong focus on marketing — all while their competitors were sinking.

They also identified funding as a challenge. As a credit company without any depositors, Lee sought means to ensure a more stable and diverse source of funds, which led to a partnership in 2004 with GE Capital. Today, the US firm owns 43% of the company and extends a $1 billion credit line.

“With GE we were able to develop a very detailed customer segmentation process according to risk,” explained Lee, “and we are still one of the few Korean companies that continue to do risk-based pricing.”

This well-structured risk management approach helped the company in 2008 when Lehman went bankrupt. Like a replay of its 2003 card crisis, the 2008 credit crunch hit Korea’s consumer finance industry hard. Once again, most of Hyundai’s competitors closed down.

“For us it was a normal business situation,” said Lee. “This made us different from our competitors and has since helped us raise market shares and profits.”

Despite the crisis and the poor sector performance on the domestic front, Hyundai Capital made W377 billion and W412 billion in profits during 2008 and 2009, thanks in part to the diversification of its funding sources outside Korea.

“The Korean market was very small and underdeveloped at the time,” said Lee, “we needed long-term funding to do a thorough job of asset and liabilities management.”

In what seemed to be an impossible task coming out of the industry’s collapse, Hyundai Capital sought global credit ratings to help it gain offshore funding.

“As CFO I knew that even if I failed with this idea the company wouldn’t blame me,” said Lee, “which gave me the confidence to pursue this funding strategy. We don’t fear failure. It is more important to try than to not even make an attempt.”

Riding on the wave of the positive outlook received by other auto companies, such as Toyota and Honda, Hyundai Capital took this as inspiration and set about marketing its debut bond deal abroad. On a standalone basis it achieved an A- rating by Japanese agencies and successfully priced its debut ¥44 billion ($516 million) samurai bond.

Following the successful debut and with the support of GE Capital, Hyundai Capital attained an investment-grade ratings from Moody’s (Baa-3) and Standard and Poor’s (BBB) in 2005.

Since then, the company has returned to the Japanese bond markets another four times. It has also issued two euro bonds, one yankee bond and has a reputation as one of the more seasoned borrowers in Korea.

“Our principle is not to prefer any single market but diversify our funding sources as much as possible in order to take advantage of more favourable markets whenever there’s a crunch in any particular region,” said Lee.

And this is certainly the standing it has built for itself, issuing five ringgit bonds in Malaysia, as well as being the first Asian BBB corporate borrower to issue in Swiss francs. It now has its eyes set on the Australian, Canadian and sukuk markets. Korea is yet to issue rules governing companies accessing the sukuk market so the latter may take some time.

Hyundai Capital’s business model

All the funding abroad is paying off domestically with Hyundai Capital investing heavily into local initiatives for its consumer finance operations. One shining example is the My Business programme, which is targeted at entrepreneurs.

Personal loans in Korea have tended only to be available to people with stable incomes working for established companies — self-employed workers wanting a loan generally have a battle on their hands. With no regular income stream and a less transparent income source, proving creditworthiness can be difficult.

Where other firms saw too much risk, Hyundai Capital jumped on the business opportunity and in June 2008 launched the My Business programme, which is designed to provide comprehensive financial services for this niche market.

“Hyundai Capital offers the self employed business owner a full range of tailored financial services to meet their everyday needs,” said Lee. “The service includes easy and convenient loan products to fund their operations, auto leasing and long-term rental car service, as well as a specialised insurance for accident coverage,” he added.

In January 2009, Hyundai Capital enhanced the service with its sister company Hyundai Card launching the My Business Card as a cross-sell product. This credit card adds preferred interest rates for cash advances and instalment payment options to the existing My Business benefits. Since My Business was launched, sales volumes reached W89.1 billion as of July 1.

When competitors in Korea stopped their personal loan operations during the financial crisis, Hyundai Capital was the exception. In this time it continued to provide My Business loans to its prime self-employed customers. As for the My Business Card, since its launch it has taken on 240,000 customers.

The percentage of self-employed customers in Hyundai Capital’s personal loan business has increased year-on-year by 6.7% to 17.7% from 11%. Compared to other personal loan customers, My Business customers are said to have better credit ratings and lower delinquency rates of 0.29% versus industry average of 2.53%.


This story was first published in the September 2010 issue of FinanceAsia magazine.

¬ Haymarket Media Limited. All rights reserved.
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