Bold capital and liquidity transformation gives HCA solid platform for future growth
After almost a decade of rapid growth, Hyundai Capital America’s (HCA) balance sheet had expanded dramatically requiring significant reliance on debt, which had stretched the capital structure towards the upper limits of HCA’s internal target of 10-11x gross debt to equity leverage.
In the halcyon days of the automotive sector, business evolved in five to ten-year product planning cycles, whereas today upstart technology firms and new entrants are permanently impacting industries in a fraction of that time. Recognising the dramatic disruption on the horizon approaching the automotive and automotive finance industries, HCA leadership determined that a radical transformation of HCA’s capital structure and liquidity profile were paramount to maintain its relevance and to strengthen its ability to support Hyundai and Kia vehicle sales into the next decade.
As HCA exited 2016, its capital structure was characterised by elevated leverage of over 11x gross debt to equity, its debt mix was majority collateral-based, with more than 50% coming from asset-backed borrowings including term asset-backed securities (ABS) and asset-backed conduit facilities.
HCA mapped out a bold transformation plan that would take a period of six to eight quarters and financial planning colleagues were engaged to quantify and ideally minimise any impact to sales from increased borrowing costs that might result.
The transformation blueprints entailed pulling multiple levers: pivoting HCA funding from secured to unsecured transactions; modifying its US$29bn debt maturity ladder to reduce refinancing risk; engaging with potential new banking partners to ensure access to increased liquidity; and securing a longer liability duration profile.
Best practice and innovation
Language barriers, a traditional organisational hierarchy, internal stakeholders with competing priorities and an ingrained approach to capitalising the business were tackled head-on successfully for this transformation.
The project team implemented multiple workflows with a focus on recapitalising the business by increasing the portion of equity relative to debt; shifting incremental funding from secured debt to unsecured debt; lengthening the duration of its liabilities; bolstering the overall liquidity profile and destacking liability maturity ladders.
The initiatives implemented reduced HCA’s debt to equity leverage by around 2.5x in six quarters. US tax reform at the end of 2017 unexpectedly provided a further tailwind to its recapitalisation efforts. The commercial paper programme was upsized by 30% to US$3bn.
HCA also pioneered an innovative and somewhat controversial US dollar bond issuance format by beginning its bond borrowing during Asia market hours, following the sun to the European day, and then carrying on into the US market, which more than doubles its borrowing hours, enabling it to cast a wider net but also exposing it to much more market risk.
Funding flexibility dramatically increased – unencumbered assets grew by more than US$4bn. The secondary liquidity in HCA senior unsecured bonds and commercial paper improved with their larger outstanding balances, which helped attract new and retain existing investors who valued liquidity.
Unsecured funding mix increased by 13% pts to over 60% pts, the highest in HCA’s history. The rating agency implied rating for its capital adequacy improved four notches from B to Ba1.
Over US$1bn of annual debt maturities was shifted out of the overcrowded summer months, and HCA’s largest committed revolving credit facility was upsized and its maturity extended to US$4bn due in 2023.
The transformed funding flexibility has enabled the front-end of the business to pursue new and innovative products, such as auto finance subscription and bundled offerings, partnering with mobility/ride-share providers, used vehicle financing, longer-term loans, and eContracting, all of which help increase revenue opportunities and improve ease of doing business with HCA.