Banking. Hyundai Capital Services, Inc. Korea. Credit Analysis. Moody s Global. Overview. March Table of Contents: Analyst Contacts:

www.moodys.com Moody’s Global Banking Credit Analysis March 2008 Table of Contents: Overview Financial Discussion Issuer Background Company Annual ...
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Moody’s Global

Banking

Credit Analysis March 2008 Table of Contents: Overview Financial Discussion Issuer Background Company Annual Statistics Moody’s Related Research

1 6 10 11 15

Analyst Contacts: Hong Kong

852.2916.1121

8 Leo Wah, CFA Vice President/Senior Analyst 8 Jerry Chien Managing Director

Singapore

65.6398.8308

24 Beatrice Woo Vice President/Senior Credit Officer

Hyundai Capital Services, Inc. Korea Overview The Baa2 senior unsecured debt and issuer ratings of Hyundai Capital Services, Inc. ("HCS") incorporate the steady improvements that have taken place in HCS' fundamental credit strength over the past three years, the strong commitment to HCS that General Electric Capital Corporation ("GECC," rated Aaa) has shown, and the continued expected support from Hyundai Motor Company ("HMC", unrated). In Moody's opinion, it is now possible to assume that GECC may be willing to provide support even if HMC were to be in difficulties. HCS is the dominant provider of auto finance in South Korea, thanks to its position as the captive finance company of Hyundai Motor Group, the country’s major auto producer which enjoys a domestic market share of approximately 70%. HCS’ auto finance business is strategically important to HMC and it has enjoyed substantial past support from HMC (which has a 57% shareholding) in the form of capital injections as well as ongoing support to ensure a stable financial and operating profile. With the integration of HCS’ business with HMC’s automobile production and marketing plans and the fact that HCS’ balance sheet is about four times larger than its closest competitors (i.e. the second largest in the market), we believe that HCS and HMC need each other equally. GECC has directly invested KRW1,281bn into HCS in the form of equity and subordinated debt since October 2004 to take a 43% stake. It has also provided staff and board members and exercises significant influence over HCS' operations, and in particular, risk management. GECC has made a US$600m credit line available to HCS and agreed to provide funding for mortgage lending. GECC now carries out all its consumer finance business in Korea through HCS and Hyundai Card (a separate investment).

This Credit Analysis provides an in-depth discussion of credit rating(s) for Hyundai Capital Services, Inc. and should be read in conjunction with Moody’s most recent Credit Opinion and rating information available on Moody's website. Click here to link.

Credit Analysis

Moody’s Global Banking

Hyundai Capital Services, Inc. Moody's also notes that the proportion of non-HMC related business carried out by HCS has steadily increased. As a result, Moody's believes that this is a strategic investment for GECC and now considers it possible to envisage scenarios where GECC may continue to support HCS even were HMC to be experiencing financial difficulties. Moody's believes, after having observed GECC's commitment to this JV over a longer period of time, that GECC may provide support beyond its financial investment in the JV. Undoubtedly, it is harder to assess the level of support that may be available during times of stress than in periods of improving profitability we currently observe. Nevertheless, we consider the US$600m credit line to be a very concrete demonstration of willingness to provide support in times of stress. In addition, we note that Korea is an important market to GECC, and the increase in non-HMC related activities carried out by HCS increases the probability that HCS will remain an attractive vehicle for GECC, even in the event of financial distress at HMC. In the case of HCS, we note that as HCS is not fully owned by HMC, GECC would be in a position to prevent creditors of HMC accessing the assets of HCS. We also believe that in Korea, a major automobile manufacturer is more likely to receive financial support from creditor/policy banks than to be pushed into bankruptcy during financial distress. Liquidity position is the area we monitor the closest currently given the tight overseas capital markets and, as is typical of most non-deposit taking consumer finance companies, HCS relies on wholesale funding. The company steadily improved its financial profile over the last three years by reducing its dependence on ABS and commercial paper funding; further diversifying its funding base in terms of regions and currencies; and extending its funding maturity profile, thereby reducing its liquidity risk. The funding plan in 2008 has been carried out as scheduled so far despite the difficult overseas capital market environment. Meanwhile, its successful tapping of both the Korean and international capital markets for longterm funding since mid-2007 (when the capital market was tightening) also provides a degree of comfort. It has successfully issued Samurai bonds, cross-border ABS, etc. Even if international capital markets continue to be subdued for a prolonged period, we believe HCS should be able to meet funding requirements, although there may be disruption to the company’s normal operations such as the need to limit loan growth and pressure on interest margins. If the situation worsens, then HCS will need to turn to other funding sources, namely: 1) a US$600m binding credit line from GE; 2) a US$400m binding credit line from the banks; 3) raising money in Korea through issuance of ABS and CP etc; and/or 4) delaying account payable for three months to its business partners legally for about US$2.0bn. We expect GE to consider increasing HCS’ credit lines further if necessary. HCS has significantly improved its financial profile since Moody's assigned its initial rating of Baa3 in August 2005. In addition to the liquidity positions, it has also improved its managed debt to equity ratios, increased available credit lines, enhanced loan quality (as seen in lower delinquency ratios) and bad debt charges, and steadily grown core operating profitability. HCS does not have any exposure to any investments in relation to US sub-prime, CDO, SIV, etc. The Baa2 rating assumes that HCS will maintain its current satisfactory financial profile. Before considering any further upward pressure on the rating, Moody's would expect HCS to have built up a strong profitability track record and maintain a stable financial profile even during potential downturns in economic activity. Downward rating pressure could result from any sign of reduced support from either of its shareholders, a significant deterioration in operating performance, including liquidity-related issues, and substantial market share loss.

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March 2008 „ Credit Analysis „ Moody’s Global Banking - Hyundai Capital Services, Inc.

Credit Analysis

Moody’s Global Banking

Hyundai Capital Services, Inc. Consumer Finance Environment: Debt Level is High, but Leverage is Improving The credit card crisis of 2003, high personal debt levels and substantial delinquencies contributed to a severe slump in consumer confidence in Korea. The worst is now over, with the number of bad credit individuals having declined significantly. Although household debt has reached an all-time high, driven by mortgage lending on the back of rising house prices, household leverage has declined.

1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

52% 50% 48% 46% 44% 42%

2Q

1Q

02 3Q 0 4Q 2 02 1Q 03 2Q 03 3Q 0 4Q 3 03 1Q 04 2Q 0 3Q 4 04 4Q 04 1Q 0 2Q 5 05 3Q 05 4Q 0 1Q 5 06 2Q 06 3Q 06 4Q 0 1Q 6 07 2Q 07 3Q 07

40%

02

KRW tn

Korea: House hold debt to Monetary Assets

Household monetary assets (LHS) Source: Bank of Korea

Household debt (LHS)

Debt to Assets (RHS)

In the domestic car market, total sales are expected to have grown 7.7% from 1.16m units in 2006 to 1.24m units in 2007 and HMC's own domestic sales are expected to increase 5.4% in 2007.

HCS Portfolio – Auto Financing is still core, but other Products are Growing Auto financing still represented the majority of HCS’ KRW 13.8trn finance managed earning assets and revenues at the end of June 2007 (see table below), but the proportion of auto lease, personal lending, and mortgages has been growing and is expected to grow further.

HCS Finance Managed Assets at

December 2004

June 2007

New car financing:

71.70%

61.70%

Used car financing:

5.60%

8.40%

Auto lease - captive:

4.20%

10.50%

Auto lease – non captive:

4.50%

4.80%

Personal loan:

4.90%

7.60%

Mortgage loan:

2.40%

5.80%

Others:

6.70%

1.20%

December 2004

June 2007

New car financing:

62.30%

39.00%

Used car financing:

7.60%

12.80%

Auto lease - captive:

7.20%

20.50%

Auto lease – non captive:

9.30%

10.40%

Personal loan:

7.60%

13.40%

below 1%

2.40%

5.00%

1.50%

HCS Revenues at

Mortgage loan: Others:

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March 2008 „ Credit Analysis „ Moody’s Global Banking - Hyundai Capital Services, Inc.

Credit Analysis

Moody’s Global Banking

Hyundai Capital Services, Inc. HCS’ core sales network consists of 59 automobile financing or leasing branches, 22 personal loan branches and seven mortgage loan branches. It also benefits from very close links with the distribution network of Hyundai Motor Company/Kia Motor Company (HMC/KMC).

Auto Financing: Still the market leader HMC has enjoyed a stable share of approximately 70% of the Korean auto market since acquiring KMC in 1999. Meanwhile, HCS had a dominant 63% share of the KRW15.4trn auto financing (new and used vehicles) market in Korea at the end of June 2007. We expect the company to largely maintain its overall position in the medium term, although due to muted consumer confidence, asset growth of new car financing may weaken in the near term. HCS financed dominant shares of 86.4% and 86.2% of total new HMC and KMC vehicles sold respectively for 2006 and 1H2007, even though HMC does not have an exclusive contract with the two car makers. HMC benefits from customer referrals by, and cooperation with, HMC and KMC in marketing and customers. It also has access to their extensive national distribution network of 879 sales offices and 758 independent dealerships. We thus believe these advantages put HCS in a position to secure its dominant position. HCS is targeting the smaller auto lease market as a faster growing market where it has room to increase its share (27% as at 1H07). Although auto lease has created problems for auto finance companies in other countries -- such as the US -- due to over optimistic forecasts for residual values, HCS benefits from an upfront guarantee of the residual value by Glovis (an HMC subsidiary). We believe that the arrangement helps protect the downside of the transactions. The agreement is on a oneyear term and it has been renewed automatically. We expect the renewal to continue given that both Glovis and HCS are in the HMC camp.

Consumer Finance: Personal Loans and Mortgages are the Key Products HCS experienced high delinquencies with its unsecured personal loan product, called Dream Loan, in the wake of the consumer credit crisis of 2003 and has subsequently discontinued this product. Since GECC’s investment in HCS, it has launched a product called PrimeLoan targeted at prime and sub-prime customers, and CashVill, a GECC product already in operation in Thailand and Japan and targeted at lower-prime and sub-prime customers. In December 2005, the Company combined Cashvill and PrimeLoan products under the Prime Loan brand. Also, on June 14, 2006, the company acquired GE Capital Korea's mortgage loan business to strengthen its existing mortgage loan business. Through its other consumer loan businesses, HCS has been focusing on increasing cross sell opportunities. Moody’s believes this is a good strategy to boost business without sacrificing cost efficiency. The asset quality of this business is discussed below.

Overseas Expansion: Go Slow with Limited Experience There are a number of other areas where HCS is looking to expand, with the focus on leveraging off GE’s expertise and HMC’s franchise. They include fleet business (auto lease business for corporates, to be launched in tandem with GE Fleet Services) and mortgages. As the majority of HMC/KMC sales are in overseas major markets such as North America, Europe, India and China, it is possible that HCS will in the future also provide auto financing for HMC/KMC customers in other countries. However, as HCS' expertise and experience are solely in the Korean market place, this could lead to an increase in HCS' risk profile. Nevertheless, Moody’s expects the expansion to take place gradually and conservatively. We take comfort from the fact that GECC will be an active partner in this expansion. An office has been set up to examine the potential for auto finance in China and will start to operate in the near future. Over the long run, HCS plans to limit overseas operations to 20% of businesses, limiting risks but offering some diversification benefits.

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March 2008 „ Credit Analysis „ Moody’s Global Banking - Hyundai Capital Services, Inc.

Credit Analysis

Moody’s Global Banking

Hyundai Capital Services, Inc. HMC: Support Expected to Continue HMC has supported HCS financially in the past, and clearly sees the company as an integral part of its business. We expect this support to continue. HMC subscribed to a HCS’ rights issue in June 2002 (about KRW 75bn), purchased subordinated bonds in June 2003 to help liquidity and subscribed to the recent rights issue in October 2004 (about KRW217bn). HMC also underpins HCS’ operating stability by guaranteeing HCS a 2.3% spread above a Korea Won benchmark bond yield for the same rating as HCS (fixed each time a new loan is taken out) on auto finance loans (the ‘instalment structure agreement’), allowing HCS to reduce interest rate risks by locking in the return. With the integration of HCS’ business with HMC’s automobile production and marketing plans, twinned with the fact that HCS’ balance sheet is about four times larger than its closest competitors (i.e. number two in the market), we believe that HCS and HMC need each other equally. HMC has four out of seven representatives on the board. It also has at least half of the representatives of the risk control committee, executive finance committee and compliance review board.

GE Capital: Significant Investment of Capital and Expertise HCS is GECC’s sole consumer finance vehicle in Korea and GECC’s commitments and investments in HCS are explained below. HCS represents about 2% of assets of GECC and we believe GECC will provide support for HCS if needed, though probably not in all circumstances. We believe GECC has built up its commitment to HCS and Korea over the past three years through the following actions: „

Since October 2004, GECC has invested KRW 1,281bn in HCS through equity and subordinated debt, including the exercise of an option to increase its initial 38% shareholding to 43%.

„

Since January 2006, GECC has provided a US$600m 1-year revolving credit line which can, if drawn down, be converted to equity. We see this credit line as an important indication of GECC's willingness to provide support to HCS in time of need, and any reduction or withdrawal of this line would be viewed by Moody's as a negative rating factor. Additional credit lines are also being discussed.

„

GECC has transferred all its previous consumer finance activities in Korea, including its mortgage book, to HCS and has agreed to make funding available to expand mortgage lending.

„

GECC made a 43% investment in Hyundai Card (total investment of KRW 678bn) in 2005 and GE has links with other parts of the Hyundai Motor Group.

„

HCS represents 27% of GE Consumer Finance assets in Asia (and one of their largest JVs globally).

„

GECC is an active shareholder: it has three out of seven board members, has sent senior and workinglevel personnel to the JV and has representation in all important committees. In particular, it has introduced GECC best practice to treasury and risk management.

GECC, based in Connecticut, USA, is the legal entity which holds GE’s investments in the commercial finance and consumer finance businesses. It has about US$600 billion in assets as of September 30, 2007.

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March 2008 „ Credit Analysis „ Moody’s Global Banking - Hyundai Capital Services, Inc.

Credit Analysis

Moody’s Global Banking

Hyundai Capital Services, Inc.

Financial Discussion Improved profitability HCS' returns were negative in 2003-4 due to high credit write-offs. However, HCS turned the corner with pretax income of KRW404bn (KRW222bn, if the positive impact of securities sales is excluded) and KRW 417bn in 2006 (see table below). A major factor in the return to profitability has been the reduction in bad debt expense, from KRW830bn in 2003 to KRW222bn in 2006 (see also section on asset quality). HCS is targeting a minimum RoE of 20%, RoA of over 2% and annual asset and revenue growth of 15%.

(KRWbn)

2003

2004

2005

2006

H107

Revenue

1,646

1,570

1,862

2,209

1,059

Operating expense

1,037

1,036

1,266

1,604

773

-63.00%

-66.00%

-68.00%

-72.60%

-73.00%

368

334

418

443

198

-23.40%

-21.70%

-23.50%

-22.30%

-18.60%

608

534

597

605

286

(% of revenue) SGA Costs (% of revenue) Pre-provision profit Bad debt expense

830

746

556

222

7

Operating Income

-221

-212

41

383

278

Pre-tax income

-262

-407

404

417

276

Operating income has improved significantly. Core profitability is expected to be more stable going forwards as HCS has absorbed the impact of more conservative provisioning for personal loans in 2006, and upfront costs for the expansion of the auto lease business (depreciation costs) and personal loans (2% upfront commission to sales channel). The company expects profits from the lower margin auto financing product sector to remain stable, but profits from higher margin auto lease and personal loans to grow. HCS’ SGA costs have remained relatively stable over the past few years. HCS however estimates that investments related to the growing auto lease product sector will lead to higher operating costs in the initial stages of the sector’s expansion (see P&L above). HCS’ operating profitability is underpinned by the settlement yield agreement between HCS and HMC. The agreement guarantees HCS a margin of 2.3%, regardless of the loan rate offered to the customers, on its auto finance loans. This arrangement has been in place since the mid-1990s, but the margin was increased from 1.8% to 2.3% in July 2003, and in October 2004 a long term contract, which expires in 2014, was agreed. HCS also benefits from the fact that its actual funding rate is below the benchmark yield rate.

Asset Quality: Better credit risk management makes bad experience unlikely to be repeated The credit quality of the auto finance portfolio has proven resilient and delinquencies have remained at manageable levels. During the credit card crisis of 2003, precautionary and below loans for auto finance (3m+ delinquencies) peaked at 4.5%, but subsequently fell back to 1.2% in 2004 and were 1.4% as at June 2007. The write-offs ratio new car financing, which accounts for about 62% of HCS’ net earning assets, has averaged just 0.08% per month from February 2005 to January 2008. HCS is protected by the collateralisation of the car itself, salary, housing, etc. While the average loan-to-valuation ratio of 71.4% at origination as of September 2007 was not too low, the cushion, coupled with other collateral, should give HCS enough protection under normal market conditions.

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March 2008 „ Credit Analysis „ Moody’s Global Banking - Hyundai Capital Services, Inc.

Credit Analysis

Moody’s Global Banking

Hyundai Capital Services, Inc. The auto lease portfolio is relatively new but is growing quickly. Precautionary and below assets were low at 0.7% of the portfolio as at June 2007. It is positive that potential losses of leased vehicles are protected by the agreement with Glovis, as explained above. HCS’ unsecured personal lending, on the other hand, experienced very high delinquency levels during the crisis: the precautionary and below loan ratio reached 33.1% in 2003 (see table below). HCS has relaunched its consumer lending in close association with GECC and outstandings have now grown to KRW1.845trn; the precautionary and below ratio was 2.2% at the end of 1H07. As the new portfolio is unseasoned, it is possible delinquencies could increase to some extent, but we do not believe that HCS will experience the same problems it suffered before with consumer lending. The factors which led to high delinquencies on the earlier consumer loan product were threefold: it was established without a proper credit risk management system in place, involved open-end product, and it relied on a non-specialist sales force. The key features of the new consumer loan product, PrimeLoan, are that they employ risk-based pricing, involve closed-end products and are sold by trained sales agents. In addition, a high proportion of HCS’ new consumer loan customers have an existing relationship with HCS. Nevertheless, we will continue to monitor the growth and delinquency performance of this sector carefully. HSC offers mortgage loans at a loan-to-valuation ratio of 60-80%. In response to the competition, HCS needs to offer more attractive terms, like higher loan-to-valuation ratio than its competitors. Nonetheless, the risks are mitigated by the residual value insurance for mortgages with loan-to-valuation ratios of 65% or higher (as the insurance could compensate HCS’ losses up to 30% of the loan amount). Underwriting strengths at HCS include prime customers for auto financing; advanced underwriting skills for auto financing based on 10 years’ customer payment history; well equipped collection organization; and good IT systems. Improvements that have been introduced by GECC include multiple way authority on credit risk management; a reserve policy based on internal loss forecasting; fraud detection infrastructure; data-driven limit controls; and pricing strategies. In addition, GECC provides five out of ten members of the Risk Control Committee.

Managed asset basis

2002

2003

2004

2005

2006

1H07

Auto finance KRW bn:

9,516

10,051

9,263

9,176

9,795

9,646

*Prec & below

3.2%

4.5%

1.2%

0.6%

1.0%

1.4%

Sub & below

1.3%

2.6%

0.5%

0.3%

0.9%

0.9%

Personal loan KRW bn:

3,160

1,267

584

847

1,533

1,845

Prec & below

9.3%

33.1%

4.7%

2.2%

1.6%

2.2%

Sub & below

2.3%

24.4%

2.1%

0.7%

1.4%

1.1%

Auto lease KRW bn:

151

560

1,028

1,516

1,940

2,100

Prec & below

-

0.9%

0.8%

0.8%

0.9%

0.8%

Sub & below

-

0.4%

0.4%

0.4%

0.8%

0.7%

13,295

13,255

11,979

12,049

13,472

13,754

Prec & below

6.04%

15.98%

8.99%

3.8%

1.9%

2.0%

Sub & below

2.27%

6.30%

3.24%

2.0%

1.4%

1.2%

TOTAL (managed)

*FSS classification for non-bank financial institutions assets: Normal: 0-1 months and sufficient debt-servicing capability Precautionary: 2-3 months or borrowings exceed sales, or 0-6 months’ overdue reaged loans Substandard: expected repayment amount from 4 months and more delinquent Doubtful: 4 months ~ 6 months delinquent, amount that is expected to be a loss, but not yet realized Estimated loss: over 7 months delinquent, collection not possible

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March 2008 „ Credit Analysis „ Moody’s Global Banking - Hyundai Capital Services, Inc.

Credit Analysis

Moody’s Global Banking

Hyundai Capital Services, Inc. Improved loan loss coverage HCS has taken an aggressive stance towards increasing provisions and writing off loans since 2004, and has provisioned in excess of FSS guidelines. Leveraging GE’s recommendation, HCS has adopted the concept of expected loss in the calculation of reserves required. We believe this will allow HCS to more accurately estimate reserves needed, and enjoy improved risk-based pricing (particularly important for a higher-risk consumer finance company), strengthened portfolio management and more sophisticated monitoring. The coverage of NPLs by loan loss reserves has improved from 88% in 2003 to 201% in 1H07 for the total portfolio (see table below):

Reserves on a managed basis in KRWbn (and NPL coverage ratio)

2003

2004

2005

2006

1H07

740 (88%) 510 (131%) 468 (198%) 364 (195%) 344 (201%)

Liquidity: Three-year effort to improve liquidity profile relieves funding pressure, supported by GE and other binding credit lines As is typical of most non-deposit taking consumer finance companies, HCS relies on wholesale funding. The company has steadily improved its financial profile over the last three years by reducing its dependence on ABS and commercial paper funding; further diversifying its funding base in terms of regions and currencies; and extending its funding maturity profile, thereby reducing its liquidity risk. The funding plan in 2008 has been carried out as scheduled so far despite the difficult overseas capital market environment. Meanwhile, its successful tapping of both the Korean and international capital markets for longterm funding since mid-2007 (when the capital market was tightening) also provides a degree of comfort. It has successfully issued Samurai bonds, cross-border ABS, etc. HCS’ asset/liability maturities are well-matched; it usually keeps its liability maturity at 100-120% of its asset maturity thereby limiting the liquidity gap. Although HCS sources more than half of its funding in foreign currencies, it does not have foreign currency assets. Currency risk is nonetheless limited, because its overseas funding and liabilities are entirely covered by currency swaps. Even if international capital markets continue to be subdued for a prolonged period, we believe HCS should be able to meet funding requirements although there may be disruption to the company’s normal operations, such as the need to limit loan growth, and pressure on interest margins. However, if the situation worsens then HCS will need to turn to other funding sources, namely: 1) a US$600m binding credit line from GE; 2) a US$400m binding credit line from the banks; 3) raising money in Korea through issuance of ABS and CP etc; and/or 4) delaying account payable for three months to its business partners legally for about US$2bn. In addition, we expect GE to consider increasing HCS’ credit lines further if necessary. Moody’s believes HCS’ heavy reliance on wholesale funding and the absence of a stable, relatively cheap pool of customer deposits is adequately reflected on its Baa2 foreign currency senior debt rating. Previously HCS relied heavily on short-term debt -- which could leave the firm vulnerable in a liquidity crisis -as well as on securitization, which risks subordinating senior debt holders to holders of securitized debt issues. However, over the past two to three years, HCS has shifted its funding sources to emphasize longer-term funding, as follows:

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March 2008 „ Credit Analysis „ Moody’s Global Banking - Hyundai Capital Services, Inc.

Credit Analysis

Moody’s Global Banking

Hyundai Capital Services, Inc. Funding Breakdown

1Q05

4Q05

3Q06

3Q07

Bonds

43.60%

48.00%

55.10%

61.60%

ABS

36.90%

25.60%

22.80%

19.10%

CP

16.80%

17.20%

10.90%

11.50%

2.70%

9.10%

11.20%

7.80%

Short-term debt

61.80%

52.40%

41.40%

41.10%

Long-term debt

38.20%

47.60%

58.60%

58.90%

405

480

598

661

Loans

Remaining maturity (days)

The firm has made efforts to lengthen the maturity profile of funding and diversify the investor base through overseas bond issues and syndicated loans (with FX and IR risks hedged). This has replaced some of the shorter-term CP funding, and long-term debt has increased from 38.2% of funding as of Q12005 to 58.9% of funding as of 3Q2007. This has lengthened remaining maturity and reduced liquidity risks. It is noteworthy that HCS still has for the most part managed to improve its net interest margins during the period, although improving asset quality has also played a role. HCS is one of the biggest securitisers in Korea, and launched its first domestic deal in 1999 and its first overseas ABS deal in 2002. Although HCS' access to the securitisation market is an important part of its funding profile, we view positively the fact that it has reduced its heavy reliance on securitisation, which represented 19.1% of funding at 3Q07, compared to 36.9% of funding at Q105. HCS’ liquidity profile has improved as it has reduced its reliance on short-term funding. Also, a US$600m committed facility provided by GECC in January 2006 and additional credit lines from banks such as ING, JP Morgan, ABN AMRO, MUFJ, etc., mean that credit lines of USD1bn without MAC clauses are available. Other sources of liquidity include cash balances, an asset sale structure in place with Citibank, and potential further securitizations. CP issuance is now covered about 100% by cash and credit lines.

KRWbn

CP outstanding

Cash

Credit lines

CP Coverage

1Q05

2,169

476

0

21.90%

4Q05

2,165

405

700

51.00%

4Q06

1,668

401

931

80.50%

3Q07

1,494

422

931

90.60%

Capital levels have improved in line with company's forecasts and could improve further HCS’ regulatory capital adequacy ratio increased from 11.3% at the end of 2004 to 13.6% at the end of June 2007 on a reported basis (the FSS regulatory capital ratio minimum is 7%). On a managed basis, the debt to equity ratio has improved significantly from 22.5x at the end of 2004 to 9.5x at the end of June 2007. As the managed debt to equity ratio has fallen below HCS’ target level of 10x, HCS may leverage up slightly by paying dividends again. Moody’s will assess whether this will signal the beginning of an upward trend of the leverage, which may be rating negative.

2004 Managed debt / equity Regulatory capital ratio

9

March 2008 „ Credit Analysis „ Moody’s Global Banking - Hyundai Capital Services, Inc.

2005

2006

Jun-07

22.5x

14.6x

10.7x

9.5x

11.30%

12.70%

12.80%

13.60%

Credit Analysis

Moody’s Global Banking

Hyundai Capital Services, Inc.

Issuer Background Hyundai Capital Services, Inc. (HCS) was established in 1993 and started providing auto loan finance for Hyundai Motor Corporation (HMC) from 1996 and auto lease from 2001. In 2001 it took a 43% stake in Diners Club Korea, which was renamed Hyundai Card, and started consumer finance lending. HCS sold its stake in Hyundai Card to HMC and affiliates in 2003 when the card company experienced liquidity difficulties. GECC took a 38% stake in Hyundai Capital in October 2004, and both HMC and GECC contributed to a capital increase. HCS has wound down its previous consumer finance lending and launched new products in collaboration with GECC.

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March 2008 „ Credit Analysis „ Moody’s Global Banking - Hyundai Capital Services, Inc.

Credit Analysis

Moody’s Global Banking

Hyundai Capital Services, Inc.

Company Annual Statistics Hyundai Capital Services, Inc. 2006

2005

2004

2003

2002

Cash & Equivalents

305

282

235

153

165

Securities

140

135

219

127

181

REPORTED BALANCE SHEET (Won billions) Current Assets:

Other short-term assets (net)

278

413

587

300

255

Financial Assets (net):

9,563

7,365

5,315

5,618

7,908

Installment financial assets

3,522

2,743

2,321

2,246

3,337

669

450

393

234

151

Operating lease assets

1,343

1,118

723

470

156

Loans

4,002

3,053

1,864

2,643

4,226

27

0

15

26

38

Finance lease receivables

Others New technology financial assets

1

4

8

9

18

LT investment securities:

1,459

2,376

2,737

2,253

1,124

ABS (sub-portion etc)

1,277

1,861

2,107

1,488

516

Non-current assets

323

281

306

320

174

12,069

10,857

9,409

8,780

9,825

463

841

282

762

556

Commercial paper

1,671

2,165

2,284

1,120

3,286

Current portion of LT debts

2,717

1,702

2,812

2,978

1,491

TOTAL ASSETS

Current liabilities: ST Borrowings

Other current liabilities

362

285

319

493

293

Non-current liabilities:

5,678

4,998

3,123

2,801

3,553

LT Borrowings

566

294

15

0

0

Bonds payable

4,345

4,274

2,796

2,475

3,457

767

430

312

326

97

10,890

9,992

8,820

8,155

9,179

0

0

0

0

0

Equity

866

870

746

399

399

Retained earnings

356

44

(359)

39

255

Other non-current liabilities TOTAL LIABILITIES Minority Interest

Capital adjustments TOTAL CAPITAL TOTAL LIABILITIES & CAPITAL

11

March 2008 „ Credit Analysis „ Moody’s Global Banking - Hyundai Capital Services, Inc.

(44)

(49)

201

188

(8)

1,178

865

588

626

646

12,069

10,857

9,409

8,780

9,825

Credit Analysis

Moody’s Global Banking

Hyundai Capital Services, Inc. Hyundai Capital Services, Inc. 2006

2005

2004

2003

2002

Cash & Equivalents

969

1,158

1,931

673

165

Securities

140

135

219

127

181

MANAGED BALANCE SHEET (Won billions) Current Assets:

Other short-term assets (net)

278

413

587

300

255

13,059

11,580

11,388

12,510

13,815

(Securitised assets)

3,496

4,214

6,073

6,892

5,906

Installment financial assets

5,786

6,473

7,243

7,262

n.a.

695

484

393

234

n.a.

Operating lease assets

1,343

1,118

723

470

n.a.

Loans

5,208

3,504

3,015

4,519

n.a.

27

0

15

26

n.a.

1

4

8

9

18

182

515

630

765

607

Financial Assets:

Finance lease receivables

Others New technology financial assets LT investment securities Non-current assets

323

281

306

320

174

14,534

14,086

15,072

14,704

15,215

463

841

282

762

556

Commercial paper

1,671

2,165

2,284

1,120

3,286

Current portion of LT debts

2,717

1,702

2,812

2,978

1,491

TOTAL ASSETS

Current liabilities: ST Borrowings

Other current liabilities

362

285

319

493

293

Non-current liabilities:

5,678

4,998

3,123

2,801

3,553

LT Borrowings

566

294

15

0

0

Bonds payable

4,345

4,274

2,796

2,475

3,457

767

430

312

326

97

Other non-current liabilities ABS bonds etc. TOTAL LIABILITIES Minority Interest Equity

3,230

5,664

5,924

5,390

13,222

14,484

14,079

14,569

0

0

0

0

0

866

870

746

399

399

Retained earnings

356

44

(359)

39

255

Capital adjustments

(44)

(49)

201

188

(8)

1,178

865

588

626

646

14,534

14,086

15,072

14,704

15,215

TOTAL CAPITAL TOTAL LIABILITIES & CAPITAL

12

2,466 13,356

March 2008 „ Credit Analysis „ Moody’s Global Banking - Hyundai Capital Services, Inc.

Credit Analysis

Moody’s Global Banking

Hyundai Capital Services, Inc. Hyundai Capital Services, Inc. 2006

2005

2004

2003

2002

SUMMARY INCOME STATEMENT ( Won billions) Operating Revenue:

1,986

1,775

1,536

1,574

1,481

Income from installment financing receivables

346

384

395

439

414

Income from lease assets

598

429

284

144

38

Interest on loans etc.

973

847

725

853

877

69

116

132

139

153

Other operating income & expenses (net) Operating Expenses (excl. LLP):

1,381

1,178

1,002

969

772

Interest expenses

532

468

480

505

439

Lease expenses

406

293

188

96

18

SGA

443

418

334

368

316

Pre-provisioning profits

605

597

534

605

709

Loan loss provisions

(222)

(556)

(746)

(830)

(547)

Operating Income

383

41

(212)

(225)

162

Gain/Loss on LT investment securities

(27)

246

(262)

(126)

(45)

82

126

79

88

35

(21)

(8)

(11)

(3)

(7)

Non-operating income Non-operating expense Extraordinary items

0

0

0

0

0

417

404

(407)

(266)

146

0

0

0

79

(43)

417

404

(407)

(187)

103

0

0

0

0

21

417

404

(407)

(187)

82

Allowance / Receivables (%)

9.01

11.92

10.99

12.26

5.07

Loan Loss Coverage (x)

1.92

2.51

0.34

1.19

2.99

Provision / Net Charge-off (x)

0.67

1.46

0.75

1.76

2.36

Net credit losses / Avg. managed receivables & leases

1.80

4.85

6.24

6.30

4.63

1,230

2,377

3,526

5,936

5,172

333

382

991

472

232

8.29

10.73

13.92

11.73

13.61

10.38

14.46

23.55

21.20

21.96

12.46

16.19

15.81

8.07

22.17

Other ST debt

23.72

19.02

21.43

26.94

13.80

LT Debt

36.63

34.16

19.46

17.82

23.32

ABS

18.39

24.16

39.22

42.67

36.36

Pre-tax income Income tax expense Net Income Dividend Declared Undistributed Profits

Asset Quality & Reserves

Net Sales of Receivables Net Charge-off

Capital Adequacy Debt to equity (x) Managed debt to equity (x) As % of total capitalization: Call money

Common Equity Total

13

March 2008 „ Credit Analysis „ Moody’s Global Banking - Hyundai Capital Services, Inc.

8.79

6.47

4.07

4.51

4.36

100.00

100.00

100.00

100.00

100.00

Credit Analysis

Moody’s Global Banking

Hyundai Capital Services, Inc. Hyundai Capital Services, Inc. 2006

2005

2004

2003

2002

Liquidity Commercial paper outstanding (period-end)

1,671

2,165

2,284

1,120

3,286

Commercial paper outstanding (average)

n.a.

n.a.

1,841

2,099

n.a.

Total committed lines

708

708

0

n.a.

n.a.

0

0

0

n.a.

n.a.

Return on Avg. Assets

3.64

3.99

(4.47)

(2.01)

1.31

Return on Avg. Equity

40.84

55.62

(67.02)

(29.46)

18.35

Return on Average Managed Assets

2.92

2.77

(2.73)

(1.25)

0.78

Net Interest Margin

7.24

6.81

5.48

6.07

7.14

Pre-tax Interest Coverage (x)

1.78

1.86

0.15

0.47

1.33

Dividend Payout

0.00

0.00

0.00

0.00

20.64

Pre-tax Margin

21.00

22.76

(26.48)

(16.91)

9.84

Capital Formation Rate

48.24

68.70

(65.03)

(29.00)

17.09

Asset Growth Rate

11.16

15.39

7.16

(10.63)

65.18

22.29

23.53

21.73

23.37

21.31

SGA % Average Owned Assets

3.86

4.12

3.67

3.96

4.00

SGA % Average Managed Assets

3.09

2.87

2.24

2.46

2.39

Coverage of CP (x)

Profitability

Efficiency SGA % Total Revenue

14

March 2008 „ Credit Analysis „ Moody’s Global Banking - Hyundai Capital Services, Inc.

Credit Analysis

Moody’s Global Banking

Hyundai Capital Services, Inc.

Moody’s Related Research Analysis: „

Korea, June 2007 (103526)

„

Hyundai Capital Services, Inc., January 2007 (101914)

Special Comment: „

Analysis of Rating Linkages between Manufacturers and their Captive Finance Subsidiaries, November 2001 (71958)

Rating Methodology: „

Rating Non-guaranteed Subsidiaries: Credit considerations in Assigning Subsidiary Ratings in the Absence of Legally Binding Parent Support, December 2003 (80304)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

15

March 2008 „ Credit Analysis „ Moody’s Global Banking - Hyundai Capital Services, Inc.

Credit Analysis

Moody’s Global Banking

Hyundai Capital Services, Inc.

Report Number: 108218 Authors

Editor

Production Specialist

Leo Wah, CFA Seung Jun Lee

Jonathan Barlow

Nita Desai

© Copyright 2008, Moody’s Investors Service, Inc. and/or its licensors and affiliates (together, “MOODY’S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided “as is” without warranty of any kind and MOODY’S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings and financial reporting analysis observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,400,000. Moody’s Corporation (MCO) and its wholly-owned credit rating agency subsidiary, Moody’s Investors Service (MIS), also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually on Moody’s website at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

16

March 2008 „ Credit Analysis „ Moody’s Global Banking - Hyundai Capital Services, Inc.

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