300 Billion KRW Corporate Bonds in H1 Followed by Additional 80 Billion KRW Loan
Increased Financial Burden, Downward Pressure on Sale Price
Hanon Systems, whose management rights sale is being delayed, is increasing external funding for North American investments and other purposes. Although sales continue to grow, the burden of borrowings has increased due to deteriorating profitability and expanded investments. There are concerns that the sale price could fall due to the borrowing burden.
According to the investment banking (IB) industry on the 30th, Hanon Systems received a loan of 80 billion KRW with Korea Investment & Securities as the lead manager. The maturity is two years, with a kind of option loan allowing Hanon Systems to make early repayment after one year. In April this year, Hanon Systems issued corporate bonds worth 300 billion KRW for facility investments in the North American region. Even this year, external financing continues through bond issuance and loans.
During this loan process, Hanon Systems agreed to immediately repay the principal and interest if its credit rating falls to A or A2 (short-term credit rating) or below. Such an agreement is a special clause that financial companies require separately when lending to companies whose creditworthiness is deteriorating. Hanon Systems’ credit rating was downgraded one notch to AA- last year. This means it is two notches away from the trigger.
Hanon Systems has also entered into several financial covenants with existing creditors during its investment expansion. When borrowing 550 billion KRW from the Export-Import Bank and others to acquire the hydraulic control (FP&C) division of global parts company Magna, it agreed to manage net debt so that it does not exceed four times earnings before interest, taxes, depreciation, and amortization (EBITDA).
Regarding the 300 billion KRW borrowings from KDB Industrial Bank and NongHyup Bank, it agreed to maintain net borrowings below four times EBITDA. For the 2.3 trillion KRW public corporate bonds, it agreed to keep the debt ratio below 300% and not to set collateral rights or sell assets beyond a certain level.
However, due to successive borrowings, Hanon Systems’ financial ratios once approached the covenant levels that pressured debt repayment last year. Borrowings increased from 756.9 billion KRW in 2017 to 4.2801 trillion KRW at the end of last year. Consequently, the debt ratio rose from 103% to 284% during the same period. The net debt to EBITDA ratio increased from 0.3 times to 3.5 times.
A financial industry official said, "Financial ratios improved in the first half of this year as profitability improved. However, since external financing is increasing due to overseas factory investments recently and profitability is likely to decline again due to cost burdens in the second half, we are closely monitoring the financial ratio trends."
There are also concerns that the increased borrowings could act as a downward factor for the company’s sale price. Hanon Systems’ largest shareholder, Hahn & Company, is pushing to sell a total of 70% of shares, including its 50.5% stake and the 19.49% stake held by Hankook Tire & Technology. Considering Hanon Systems’ market capitalization of about 5 trillion KRW, the market value of the shares for sale is around 3.5 trillion KRW. The sale price, including the management premium, is expected to be around 4 trillion KRW.
An IB industry official expressed concern, saying, "Recently, Hyundai Motor Group has started developing thermal management systems independently through its affiliate Hyundai Wia, emerging as a variable that could negatively affect Hanon Systems’ future cash flow generation. Increased competition intensity and financial burdens could act as factors that weaken negotiation power on the sale price."
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