OREANDA-NEWS. Fitch Ratings has affirmed South Korea-based Hyundai Motor Company's (HMC) and its subsidiary Kia Motors Corporation's (Kia) Long-Term Foreign-Currency Issuer Default Ratings (IDR) at 'BBB+'. Fitch has also affirmed the companies' senior unsecured ratings at 'BBB+' and their Short-Term Foreign-Currency IDRs at 'F2'. The Outlooks on the Long-Term IDRs are Stable. The ratings on notes issued by HMC's subsidiary Hyundai Capital America have also been affirmed at 'BBB+'.

The ratings and Stable Outlooks on HMC and Kia are supported by their robust financial profile, which make up for lower margins, higher capex and intensifying competition in the near term. The combined HMC and Kia still remains one of the most profitable mass market auto manufacturers in the industry despite reduced margins, thanks to the above-100% plant utilisation rates at both companies.

KEY RATING DRIVERS

Weaker Operations: The business performance of HMC and Kia deteriorated in 2014 and 1H15 due to slowing sales growth, unfavourable FX rates and higher costs. In 1H15, HMC posted EBITDA of KRW4.1trn in its industrial operations, down 13.6% yoy. Kia also posted similar decline in EBITDA to KRW1.9trn. Fitch expects profitability to rebound slightly in 2H15 and in 2016 with a more favourable FX environment, and planned product launches in 2H15.

Mixed Industry Fundamentals: Fitch expects global light vehicle sales to rise in the low to mid single-digit range in 2015, similar to what we saw in 2014. We expect demand to be driven by continued growth in US and Western Europe and recovery in India. However fundamentals in emerging markets such as Brazil and Russia are likely to remain weak. Sales in China, which has been a major growth driver until 2014, have slowed down and we expect growth to slow to a low single-digit pace in 2015.

Higher Spending: We expect HMC and Kia to post negative free cash flow in 2015 due to a large one-time payment for a land acquisition and higher capex. However we expect the company to return to generating positive free cash flow from 2016, although the amount is likely to be lower than in 2011-2014 due to lower profitability and higher capex.

Financial Profile Remains Robust: Fitch expects HMC and Kia continue to have solid credit profiles despite the slight deterioration in 2015. We expect the combined net cash position of HMC's industrial operations and Kia to drop to KRW10trn level in 2015 but start increasing again from 2016 as they return to positive free cash flow.

FX Exposure Significant But Declining: FX volatility continues to be an important factor in HMC's and Kia's profitability given their reliance on exports. Around 40% of HMC's manufacturing capacity was in Korea at end-2014, while Korea accounted for about 15% of total global sales. About 54% of Kia's output is from its Korean facilities as it started production overseas later than HMC. HMC and Kia have expanded their overseas manufacturing capacity in the past decade, which have reduced the impact of currency fluctuations on their earnings. We expect further capacity expansion to occur overseas, which should further reduce volatility in the two companies' earnings due to FX movements.

Kia's Rating Linked to HMC's: Fitch believes that Kia continues to be integral to HMC's long-term growth strategy as a global automaker, as well as to its group structure. As such Kia's ratings are equalised with HMC's ratings. Kia's credit rating is linked to HMC's due to the strong strategic and operational ties between the two companies. These include platform integration, shared R&D and procurement, and the same senior management team led by Hyundai Group Chairman Chung Mong Koo. While Kia's financial statements are no longer consolidated into HMC's, Fitch sees no change in the strong linkages between the two companies.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Hyundai Motor and Kia Motors include:
- KRW/USD exchange rate of 1,120 for 2015, 1,150 from 2016
- Retail sales volume to remain nearly flat in 2015, growth of 3% from 2016
- Capex to rise to above KRW5trn for HMC and KRW3trn for Kia from 2015 onwards excluding one-off payments

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:-

Hyundai Motor
- HMC's and Kia's combined adjusted net debt/EBITDA (industrial operations) is sustained above 0.5x (2014: -1.4x)
-Sustained negative free cash flow
-Major reversal of market recovery or sustained market share erosion in key markets

Kia Motors
-Downgrade in HMC's rating
-Weakening of linkages between HMC and Kia

Positive: Future developments that may, individually or collectively, lead to positive rating action include:-

Hyundai Motor and Kia Motors
-Positive rating action is not envisaged over the current rating horizon given the concentration of the companies' products on the volume segment.