Hyundai Motor Extends Contract by 2 Months to Acquire 20% Stake in Hyundai Capital

Existing 5-Year TRS Maturity Extended to Ultra-Short Term
Interpreted as a Preemptive Move for Equity Disposal Such as Sale
IB Industry: "A Move Linked to Governance Restructuring Efforts"

[Asia Economy Reporter Lim Jeongsu] Hyundai Motor Company has extended the maturity of the total return swap (TRS) contract with the special purpose companies (SPCs) that acquired a 20% stake in Hyundai Capital by two months. By extending the TRS contract maturity on a very short-term basis, attention is focused on how Hyundai Capital’s shares will be handled in the future. Some interpret this as a preemptive move to reorganize the financial affiliates’ shareholdings in line with Hyundai Motor Group’s governance restructuring.

According to the investment banking (IB) industry on the 19th, Hyundai Motor extended the TRS maturity with ‘Elysia Je-yuk-cha’ and ‘JSC Je-sam-cha’ by two months. IBK Investment & Securities, which managed the existing TRS contract, handled the securitization underwriting. Elysia Je-yuk-cha and JSC Je-sam-cha are SPCs each holding 9.99% of Hyundai Capital’s shares. The remaining 80% stake is divided between Hyundai Motor (59.68%) and Kia (20.10%).

A TRS is a transaction where the counterparty agrees to purchase the investment asset on behalf of the investor and assumes all returns and risks from the asset. The TRS contract Hyundai Motor signed with the SPCs means that the SPCs buy and hold Hyundai Capital shares, but Hyundai Motor receives all returns from those shares and compensates for any losses.

The SPCs receive a profit equivalent to the promised interest rate as compensation for purchasing Hyundai Capital shares on behalf of Hyundai Motor. Since Hyundai Motor bears the losses, there is no risk related to changes in share value. The parties simply net the profits and losses for settlement. For this reason, TRS is sometimes regarded as stock-secured borrowing.

Hyundai Motor Group acquired the shares held by GE Capital, the financial affiliate of the U.S. company General Electric (GE), five years ago in 2016. This was because GE Capital exercised the put option to sell its shares.

After a failed attempt at a third-party sale, Hyundai Motor and Kia acquired GE’s 23.3% stake for 730.1 billion KRW in January of that year, and later in October, acquired the remaining 20% stake for 600 billion KRW through an SPC.

With Hyundai Motor extending the TRS maturity by two months, the issue of how to handle Hyundai Capital’s shares has become a focus in the IB industry. The short two-month extension suggests that the contract will not be renewed on a long-term basis.

An IB industry official explained, “If Hyundai Motor had renewed the TRS contract on a long-term basis of 3 to 5 years, the shares would be locked until the contract’s maturity, but if it is renewed short-term continuously, flexible responses such as share sales become possible.”

This TRS contract maturity extension is attracting more attention as it coincides with the timing of Hyundai Motor Group’s governance restructuring. Whether Hyundai Motor Group reorganizes its governance into a holding company structure or a controlling company structure, it is expected that shareholding adjustments for financial affiliates such as Hyundai Capital, Hyundai Commercial, and Hyundai Card will be necessary.

An IB industry official said, “As Hyundai Motor Group is pushing for Hyundai Engineering’s initial public offering (IPO), it is expected that governance restructuring will be actively pursued soon,” adding, “In this process, plans to reorganize governance of financial affiliates, including the sale of Hyundai Capital shares, will also emerge.”