[Corporate Financing] Hyundai Heavy Holdings Accelerates Liquidity Securing Amid 'Increased Cash Burden'

Raised 150 Billion KRW Over Three Times in June
Continued Support to Affiliates Despite Major Subsidiaries' Performance Decline
Cash Injection Despite Dividends and Share Buybacks

[Asia Economy Reporter Lim Jeong-su] Hyundai Heavy Industries Holdings is accelerating private fund raising in June. On the 24th, it issued 45 billion KRW worth of private bonds and additionally secured about 100 billion KRW through successive bank loan securitizations. Although funding needs are increasing due to financial support for subsidiaries spun off through physical division and shareholder-friendly policies, the burden of securing liquidity is growing amid deteriorating subsidiary performance.

◆ Borrowed 150 billion KRW through private bonds and loan securitization... Early repayment and interest rate hike clauses if rating falls

According to the investment banking (IB) industry on the 1st, Hyundai Heavy Industries Holdings recently received a loan of 50 billion KRW from a special purpose company (SPC) created by Kookmin Bank. The maturity is 5 years, and the interest rate is known to be around 3.6%. Earlier, on the 8th, it also borrowed 50 billion KRW from an SPC organized by Hana Bank. The loan maturity, interest rate, and securitization method are similar. Kookmin Bank and Hana Bank provided credit facilities such as purchase guarantees for securitized securities during the loan securitization process.

Hana Bank attached a condition that if Hyundai Heavy Industries Holdings' corporate bond and commercial paper (CP) credit rating falls below BBB- or A3-, the loan will be repaid early. Also, if the credit rating falls, the interest rate will be increased. Hyundai Heavy Industries Holdings' current credit ratings are A- and A2-, leaving three notches before the early repayment trigger.

On the 24th, Hyundai Heavy Industries Holdings issued private bonds worth 45 billion KRW underwritten by KB Securities. The maturity is 3 years with an interest rate of 3.70%. KB Securities underwrote and then sold them to institutional investors. This is the first bond issuance in a year since issuing 150 billion KRW worth of private bonds in June last year.

An IB industry official explained, "Hyundai Heavy Industries Holdings has not been able to issue public bonds for a long time due to subsidiary performance deterioration combined with the COVID-19 pandemic." The official added, "Since transitioning to a holding company system, private bonds and loan securitization have been used as major funding methods."

◆ Financial improvement by selling Hyundai Oil shares but... Increased funding burden due to affiliate support and dividends

Hyundai Heavy Industries Holdings significantly improved its financial structure by selling its stake in Hyundai Oilbank to Saudi Aramco in December last year. By selling 17% of Hyundai Oilbank shares, it received 1.375 trillion KRW. Due to cash inflow, net borrowings, which were close to 2.5 trillion KRW, decreased by about 1 trillion KRW to 1.4509 trillion KRW at the end of last year. The burden of short-term borrowings repayment was greatly reduced, and the double leverage ratio (total affiliate investments/equity capital) also fell to 122.6%.

However, while cash flow worsens due to subsidiary performance deterioration, funding needs are increasing due to affiliate support and shareholder-friendly measures. Hyundai Heavy Industries Group spun off its robot and investment divisions into Hyundai Heavy Industries Holdings, Hyundai Electric & Energy Systems (electric and electronics), and Hyundai Construction Equipment (construction machinery) in 2017. In June last year, it completed the physical division of the intermediate holding company Korea Shipbuilding & Offshore Engineering and Hyundai Heavy Industries.

During the restructuring process, Hyundai Heavy Industries Holdings supported Hyundai Heavy Industries with 333.7 billion KRW in a paid-in capital increase in 2018. Last year, it invested 40.2 billion KRW in a paid-in capital increase and 9 billion KRW in share purchases for Hyundai Electric. It continues affiliate support by investing 5 billion KRW in the newly established Hyundai Future Partners. Also, if the merger between Korea Shipbuilding & Offshore Engineering and Daewoo Shipbuilding & Marine Engineering is successful, it plans to provide about 400 billion KRW in paid-in capital to Korea Shipbuilding & Offshore Engineering.

Funding needs have also increased due to dividends and treasury stock purchases. It paid dividends totaling 270.5 billion KRW in two installments in April last year and April this year. For the first time since its founding, it purchased treasury stock worth 124.2 billion KRW. After the board resolution for treasury stock purchase in February this year, it bought treasury stock over about three months until May.

On the other hand, due to COVID-19, subsidiary performance has deteriorated, and dividend income from subsidiaries is expected to decrease significantly. Hyundai Heavy Industries Holdings posted an operating loss on a consolidated basis in the first quarter of this year due to the performance decline of cash cows like Hyundai Oilbank. The consensus is that performance deterioration is inevitable in the second quarter as well.

An industry insider said, "Hyundai Heavy Industries Holdings' funding burden will continue to expand for some time," adding, "If the performance of key affiliates such as Hyundai Heavy Industries and Hyundai Oilbank does not improve, it will be difficult to maintain the improved financial structure achieved through the sale of Hyundai Oilbank shares."