Hyundai Capital America (HCA) finances purchases of Hyundai andKia vehicles across the United States. The business has grownrapidly over the past decade along with sales of Hyundai- andKia-branded cars. For HCA, this growth led to a heavy reliance ondebt and stretched the company's capital structure toward the upperlimits of internal targets for debt-to-equity leverage.

“The perception of the quality of our brands has reached aninflection point since the financial crisis, and our business hasgrown in lockstep with those brands,” says Frank Boroch, directorof treasury for HCA. “That has been tremendous, but becauseborrowed money is the raw ingredient for the finance division, wewere pounding the pavement looking for organizations willing andable to lend to us on a repeat basis and at the lowest ratepossible.”

Moreover, the company historically had utilized mostly asset-backed financing. The debt required HCAto pledge plain vanilla assets whose risk profile would bestraightforward for lenders to analyze. This reduced the company'sability to innovate with new financing products for auto buyers andconstrained its operational flexibility.

“We were having to focus on customers with the best creditquality for loans and leases,” Boroch says. “That was good from arisk management perspective but limiting to the businessdevelopment side. If the franchise dealers wanted to sell vehiclesto a broader cross-section of consumers, we weren't always able toaccommodate that.

“In addition, looking forward, we saw that within a few years wewould need to be much more agile in order to compete,” hecontinues. “There are new competitors producing new types ofautomobiles, like electric vehicles, and ride-sharing businessesare growing as well. These types of companies often don't use theauto industry's traditional distribution model. But many of ourlenders were interested in offering us (and our peers) asset-backedloans only if they were based on very traditional types ofpurchases by traditional types of customers, for whom we might have20 years of loan performance history. To better support the autosales business over the next decade, we needed to be structured andcapitalized more flexibly and to have a stronger balancesheet.”

Treasury leaders at HCA begandiscussing what the treasury function of the future should looklike. They benchmarked the function across a variety of industries.They looked at ratings-agency analyses of their business. Theyconsidered the pain points distributors and dealers had in workingwith HCA and how the company could better serve those businesspartners, both currently and in the future.

“We were reading the tea leaves and looking at what washappening in other parts of the industry,” Boroch says. The result:HCA treasury mapped out a bold plan to shift its capital structuretoward more unsecured funding, transform its debt maturity ladderto reduce refinancing risk, and engage with new banking partners toensure access to increased liquidity.

One fundamental challenge to instituting this plan was anorganizational bias throughout Hyundai leadership toward the legacycapital structure. “Our asset-backed funding was very low-costbecause it was secured by the title to the asset,” Boroch says. “Itwas low-risk for the lenders, so we got lower rates. Theorganization as a whole was very comfortable with that approach tofinancing. Treasury had to make the case that our asset-backedfunding structure was not forward-looking and we might end up in aliquidity crunch down the road—that the long-term benefits of ourplan were worth the possibility of paying a bit more in the shortterm.”

The treasury team engaged with multiple levels of leadershipboth in the United States and in the Korean parent company,educating business managers and corporate executives about theprofound changes speeding toward the U.S. auto industry. “Weessentially went door-to-door with a tailored message to explain toeach group how our plan would benefit the organization,” Borochsays. “We described our core mission, then focused on theadditional attributes of the initiative that would help us gaininternal consensus to move forward.”

They explained to sales leadership that changing the corporatefinancing structure would facilitate sales to new types ofcustomers in the future. They explained to the risk team the waysin which their plan would minimize financial and competitive risksmoving forward. They explained to Korean executives how the changeswould make the U.S. business more competitive in the future.Because they understood and tailored their message to each part ofthe company, treasury gained buy-in across the organization.

Expanding HCA's use of unsecured funding also required intensiveinvestor-marketing efforts. Treasury teams crisscrossed the globefrom Hong Kong to Frankfurt to San Francisco, introducing HCA toprospective unsecured-bond investors at tradeshows, auto-focusedinvestor conferences, and one-on-one meetings. They undertooksimilar marketing to upsize HCA's commercial paper program by 30percent, to $3 billion.

The HCA treasury team also worked with their Korean parentcompany to secure an injection of additional equity into HCA, andthey emphasized to domestic leadership the importance of improvingprofitability to keep funding costs low under the new capitalstructure.

Then they initiated an innovative financing move to sell theclaims to HCA's assets that were pledged to secure debt. “Webasically transferred the risk of customer default on thoseassets,” Boroch explains. “In some ways, we used a traditionalasset-backed lending structure, but we layered on some additionalaspects so that we were selling the risk of the debt to a differentset of investors than those who held the debt. We structured it toensure it was a true sale, and then we no longer had any financialobligations associated with those assets or debt. It is aninfrequently used capital market strategy that, in this case,allowed us to make the assets and related debt disappear from ourbalance sheet.”

Finally, the treasury team worked with lenders to change thetiming of asset maturities to spread out HCA's refinancing riskthroughout the year. “That required a lot of communication,” Borochsays. “We had to explain to everyone why we were asking formaturities that were either longer or shorter than our typicalyear-long maturity.”

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Boroch emphasizes how important effective communication was atevery stage throughout the project. “The success of our initiativewas dependent on agreement from a lot of other stakeholders aboutthings that weren't always within our department's control,” hesays. “We knew we were not operating in a vacuum; every change wemade tended to have external dependencies or impacts. For example,if one of our debt holders suddenly wanted to charge us more toexecute a longer maturity, that would impact other parts of ourorganization. For this project to be successful, treasury had tobecome expert communicators and consensus builders.”

All the attention to consensus building has paid big dividends.HCA's funding flexibility has dramatically increased. Itsunencumbered assets have grown by more than $4 billion, toencompass more than 60 percent of the company's total debt.Increasing liquidity through senior unsecured bonds and commercialpaper has helped HCA attract new investors. Treasury increased thesize and lengthened the tenor of the company's largest revolvingcredit facility. Finally, the rating agency implied rating forHCA's capital adequacy (leverage) improved by four full notches,from B to Ba1.

“The dramatic reduction in our leverage projects a strengthenedfinancial profile, which has helped reduce our borrowing costs evenas we have reduced our usage of secured funding,” Boroch says.“Treasury is in a unique position in the organization. We'reinterfacing with lenders, ratings agencies, and institutionalinvestors. We're able to bring a lot of feedback from thosestakeholders back to our leadership teams and other parts of thebusiness. It's critical for treasury to be forward-looking and notjust stay in the operational mode of moving cash from point A topoint B.

“Sometimes treasury teams have to go out of our way, and shoutfrom the mountaintops, to be heard and seen as a strategicpartner,” he concludes. “It can be hard to change internalperceptions, and a shift in those mind-sets has to be earned. Onepart of getting a seat at the table in significant corporatedecisions is to try to be a change enabler. Treasury needs toalways be looking forward and preparing to support the company'sresponse to whatever may be coming down the pike.”