Fitch Ratings on April 9 affirmed the long-term issuer default ratings of Hyundai Motor Co. and its subsidiary Kia Motors Corp. but revised the outlook to negative from stable, citing the coronavirus outbreak's adverse impact on the companies' operating performance and financial profile.
As of early April, most of Hyundai's and Kia's overseas production facilities are temporarily suspended, except the Chinese plants, which are slowly increasing capacity. However, production in South Korea, which makes up 40% of Hyundai's global shipments and 55% of Kia's, is close to normal levels after being closed from late February to early March due to shortage of a component manufactured in China.
As South Korea has been able to avoid drastic measures such as lockdowns, Fitch expects Hyundai's and Kia's domestic sales will remain less affected. Domestic sales account for less than 20% of both companies' sales volume but enjoy higher average selling prices and account for a larger share of profit.
Nevertheless, Fitch expects Hyundai and Kia to post lower earnings and negative free cash flow in 2020 with reduced operating cash flow and higher working-capital needs. The companies' global retail sales volume is expected to decline by 13% to 14% year over year in 2020 and rebound by 7% in 2021.
The rating agency also expects combined industrial revenue to fall by 12% in 2020 and increase by 6% in 2021, and combined industrial EBIT margin to decline around 1% in 2020 and gradually improve from 2021.
Fitch said it believes the companies have the financial flexibility to deal with the downturn. At the end of 2019, the two carmakers had combined net cash of over 14 trillion South Korean won and total cash of around 31 trillion won. The companies have excellent access to domestic banks and capital markets, Fitch added.
According to Fitch, it could stabilize or upgrade Hyundai's and Kia's ratings if the companies' combined adjusted net debt/EBITDA from its industrial operations gets sustained below 0.5x and combine operating EBIT margin from its industrial operations is sustained above 4%. Otherwise, the ratings could be downgraded.
Meanwhile, it said it could downgrade the ratings of the companies if there is a material increase in negative free cash flow.
As of April 9, US$1 was equivalent to 1,209.54 South Korean won.