The upgrades of both HMC and Kia, whose ratings are equalized due to their close shareholdings and strong business relationship, reflect our view that the companies are likely to maintain their sound financial risk profiles based on a stronger competitive position in the global auto industry and improved profitability. We expect both HMC and Kia to maintain their adjusted debt to EBITDA below 1.5x over the next two years as a result of fundamental enhancements they have made over the past two years. We believe the companies are likely to continue to make progress in key aspects of product quality, such as fuel efficiency and design. As a result, we expect enhanced product quality to lead to the automakers strengthening their brands, as evidenced in significant increases in the residual values of their cars. Also, the strengthened brands are likely to trigger improved sales in both quantity--increased unit sales and decreased inventory--and quality--higher average sales prices and lower incentives. Thus, the improved sales performance is likely to result in robust operating cash flow that would further support the solid financial risk profiles of the companies.
We raised the stand-alone credit profile (SACP) of Kia to ‘bbb’ from ‘bbb-'. Kia’s higher SACP reflects our view that the company is likely to improve its global market position and financial risk profile even faster than its parent, HMC, although its overall market position and brand still lag those of HMC.
Also, in our view, the solid financial risk profiles and strong liquidity of HMC and Kia are likely to allow the companies to weather any negative developments related to undisciplined financial policy due to weak corporate governance, rising competitive pressure, and volatile labor relations. Still, we believe these uncertainties are likely to constrain the upside potential in credit quality of the Hyundai Motor Group (HMG) companies for the time being.
The upgrade of Mobis, an auto supplier of HMC and Kia, mainly reflects our expectation that the company will be able to strengthen its business risk profile as HMC and Kia improve their operational outlooks-as captive customers account for 80% to 90% of its revenue--and maintain its solid financial risk profile. In addition, the upgrade reflects our view that the company is likely to maintain its strong operational ties with and its strategic importance to HMG. We raised the SACP of Mobis, which is equal to its rating, to ‘bbb+’ from ‘bbb’.
The upgrade of Glovis, the main logistics arm of HMG, reflects its strong operational ties with and strategic importance to the group. Glovis’ SACP remains ‘bbb’, and we applied one notch of support from HMG to the rating.
The stable outlooks on HMC, Kia, Mobis, and Glovis reflect our expectation that HMC and Kia will maintain their market positions and profitability in the increasingly competitive global auto industry, and that Mobis and Glovis will be able to benefit from their strong operational ties with HMC and Kia.
We may lower our ratings on HMC and Kia if HMC’s adjusted debt to EBITDA exceeds 1.5x for a protracted period. In addition to a significant erosion in profitability or global market position, negative rating factors include major additional investments as a result of weak corporate governance and deterioration in operating efficiency due to a lack of stability in labor relationships. Conversely, we could raise the ratings on HMC and Kia if there is significant improvement in 1) corporate governance, which would streamline the currently circular and complex HMG ownership structure; 2) profitability as a result of further brand enhancement; and 3) global market positions without significant deterioration in the companies’ sound financial risk profiles. In our view, however, the potential for an upgrade of HMC and Kia is limited over the next 12 months.
We may lower our rating on Mobis if its operational ties with HMG or strategic importance to HMG weaken notably or if its adjusted debt to EBITDA exceeds 1.5x for a protracted period, which would likely come as a result of a significant erosion in profitability or the global market positions of HMC and Kia. In our view, the potential for an upgrade of Mobis is limited over the next 12 months.
We may lower our rating on Glovis if its operational ties with or strategic importance to HMG weakens notably or if its adjusted debt to EBITDA exceeds 2.0x for a protracted period, likely as a result of weaker operations at HMG companies. In our view, the potential for an upgrade of Glovis is limited over the next 12 months.