Morningstar DBRS Assigns Credit Ratings of "A" to the Senior Debt and R-1 (low) to the Commercial Paper of Hyundai Capital Canada Inc. With Stable Trends
Autos & Auto SuppliersDBRS Limited (Morningstar DBRS) assigned a credit rating of "A" to the Senior Debt of Hyundai Capital Canada Inc. (Hyundai Canada). Concurrently, Morningstar DBRS assigned a Commercial Paper rating of R-1 (low) to Hyundai Canada. The trends on both credit ratings are Stable. Hyundai Canada is wholly-owned by Hyundai Motor Company (Hyundai or the Company) through controlled subsidiaries and entities subject to joint control, with Hyundai Canada being the Company's Canadian financial services subsidiary. Hyundai Canada's credit ratings incorporate Morningstar DBRS' credit view of Hyundai, taking into account the support agreement provided directly to Hyundai Canada by Hyundai in addition to Morningstar DBRS' assessment of Hyundai Canada as a strategically important subsidiary of the Company.
KEY CREDIT RATING CONSIDERATIONS
The credit ratings are supported by Hyundai's solid market position as a major automotive original equipment manufacturer (OEM). Hyundai, combined with its subsidiary Kia Corporation, represents the world's third-largest auto conglomerate (2024 sales data) while also having a dominant position in its home market of South Korea. Additionally, the Company's operating performance has persisted at strong levels with its 2024 earnings, while moderating slightly year over year in line with higher labour and wage-related expenses, remaining solid. This strong earnings performance, amid Hyundai's highly conservative financial policy, is the reason behind Hyundai's very strong financial profile , which provides meaningful cushion in the context of the assigned credit ratings.
CREDIT RATING DRIVERS
The Stable trends reflect Morningstar DBRS' expectation that Hyundai Canada's credit ratings will remain constant over the near to medium term. Morningstar DBRS notes that Hyundai's financial profile, including its strong liquidity position, affords some flexibility against unexpected challenges, rendering a downgrade to the credit ratings unlikely. Conversely, an upgrade to the credits ratings in the medium term is also unlikely given the limited earnings visibility of the automotive sector, with Hyundai (as with its peers) facing substantial costs and investments associated with the progressive electrification of the automotive industry and development of new mobility services.
EARNINGS OUTLOOK
Over the near to medium term, Morningstar DBRS expects the Company's profitability to remain sound, with levels ranging from essentially constant to slightly weaker vis-à-vis strong earnings performances in recent years. Industry conditions are mixed, with Morningstar DBRS projecting modest volume growth globally. While visibility in the Chinese and European regions remains limited amid ongoing economic challenges, Morningstar DBRS notes that Hyundai's overall exposure to these markets is readily manageable and somewhat favourable relative to that of its immediate peers. However, ongoing high costs amid anticipated moderations in pricing and product mix represent additional headwinds to earnings. In aggregate, the Company is expected to remain solidly profitable over the forecast time horizon, with operating margins estimated to remain in the high single-digit range.
FINANCIAL OUTLOOK
Cash flow from operations is projected to remain solid, but is likely to decline somewhat over the medium term amid some slight anticipated earnings pressure. Capital expenditures (capex) are estimated to persist at sizeable levels for the foreseeable future, consistent with Hyundai's recently announced 10-year investment plan outlining capex, research and development expenses, and strategic investments collectively totalling KRW 120.5 trillion (approximately USD 84 billion). Regarding shareholder initiatives, Hyundai has targeted share repurchases to total approximately KRW 4.0 trillion over the following three years. Dividends are also forecast to progressively increase with the Company targeting a total shareholder return (consisting of dividends and share buybacks) ratio of at least 35% of net earnings. Notwithstanding the higher projected capex and dividends, Morningstar DBRS anticipates Hyundai's free cash flow to persist at substantially positive levels. Combined with the Company's very conservative financial policy, Hyundai's financial profile is expected to persist at very strong levels, likely providing some cushion in the context of the current credit ratings.
CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): AL
The CBRA reflects the Company's status as among the world's largest automotive OEMs, with sales being reasonably well diversified by geography. Hyundai has also made significant gains over the past several years in increasing its presence in the larger crossover and sport utility vehicle segments that now ostensibly dominate the automotive landscape while also usually generating considerably higher contribution margins relative to car segments. Additionally, the Company is making inroads into the luxury vehicle segment, which typically commands higher margins while being more resilient to cyclical downturns, with its Genesis brand that represented 5.6% of Hyundai's 2024 wholesale volumes and recent model launches that received positive reviews. In terms of electrification, the Company appears to be well positioned with a meaningful presence in both battery electric vehicles (EVs) and hybrid vehicles (which have recently increased in popularity amid the uncertainty in the near-term transition to EVs), with EVs and hybrid s representing 5.3% and 12.0% of 2024 wholesale volumes, respectively. Hyundai's financial services business provides further benefits of diversification and plays an important role in supporting vehicle sales as well as being a source of stable earnings.
Comprehensive Financial Risk Assessment (CFRA): AAH
The CFRA reflects consistent and visible earnings and cash flow generation amid the Company's conservative financial policy, with the industrial operations having substantial net cash and liquidity positions. Accordingly, the associated credit metrics are strong and provide moderate cushion in the context of the assigned credit ratings.
Intrinsic Assessment (IA): A
The IA is based on the CFRA and CBRA. Taking into considerations peer comparisons, among other factors, Morningstar DBRS place Hyundai Canada's IA in the middle of the IA range.
Additional Considerations: None
Hyundai Canada's credit ratings include no further negative or positive adjustments because of additional considerations.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factor
Morningstar DBRS considered the environmental factor, specifically costs relating to carbon and greenhouse gas emissions, as relevant as Hyundai is subject to a wide range of environmental compliance requirements relating to carbon dioxide emissions, fuel efficiency, emissions control, and other factors. Accordingly, the Company is targeting to achieve 100% electrification (through EVs and fuel cell electric vehicles) in the European market by 2035, and 100% electrification in major markets by 2040. To help achieve these objectives, Hyundai is aiming to launch 21 EV models by 2030. The Company also plans to use hydrogen power for other vehicles such as vessels, trains, and urban air mobility aircraft in the mid to long term. Correspondingly, the Company recently announced a 10-year investment plan that combined capex, research and development expenses, and strategic investments totalling an estimated KRW 120.5 trillion (approximately USD 86 billion). In the event that the Company did not comply with applicable regulations, significant penalties and reputational harm could result. (For further details, please refer to the Morningstar DBRS commentary "The Future is Electric: Climate Change and the Global Automotive Sector," published May 3, 2023.
There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.
Notes:
All figures are in Korean won unless otherwise noted.
Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in Manufacturing and Production Industries (February 3, 2025), https://dbrs.morningstar.com/research/447185
Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.
The following methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781
-- Morningstar DBRS Global Corporate Criteria (February 3, 2025), https://dbrs.morningstar.com/research/447186
The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.
A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.
Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
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