Seoul’s Audi Invasion Spurs VW’s First Korean Won Bonds

Volkswagen AG’s South Korean finance unit is offering its first bonds in the country after the lure of interest-free credit and a strengthening won doubled its business.

“More and more people around me are buying imported cars,” said Nam Gyu Kwang, 31, a finance-industry worker who bought an Audi A6 on credit in March. “I like the diesel engine’s acceleration and having a fancy car seems to show higher social status. I used their finance because they offered me some benefits including a price discount.”

Volkswagen Financial Services Korea Co., which funded 3,416 such Audi purchases in the first quarter, plans to sell 100 billion won ($99 million) of three-year notes this month, according to a regulatory filing yesterday. Its loan book jumped to 1.3 trillion won by March 31, from 692 billion won a year earlier, according to the local unit of Moody’s Investors Service Inc., which rates the debt A+. Similar-rated three-year notes sold by non-bank financial firms yielded an average 3.493 percent on July 9, 38.5 basis points lower than on Dec. 31.

The German company controls the biggest share of an imported auto market that accounted for a record 14.6 percent of South Korea’s vehicle sales in January, compared with 4.9 percent in 2009, according to data from the Korea Automobile Importers & Distributors Association. Lower trade barriers and a 30 percent rally in the won versus the euro since mid-2009 have made foreign luxury vehicles easier to buy. Daimler AG’s Mercedes-Benz finance unit sold bonds in April.

‘Captive Market’

“Since their lending business is growing so rapidly, it’s natural for the company to sell bonds locally because there’s a limit to the extent to which they can rely on their parents for funding.” Kim Se Yong, a credit analyst in Seoul at Shinyoung Securities Co., said in July 4 interview. “Investors may snap up the new bonds and the company may sell with favorable premium due to its solid asset quality.”

Mercedes Benz Financial Services Korea Co., which started to sell bonds in November 2012, sold 50 billion won of 2-year notes on April 23 at 3.406 percent, 0.1 percentage points lower than the average yield on similar-rated bonds sold by non-bank financial firms. A sale of similar notes in October last year had to be boosted by 30 percent to meet demand.

German automakers, including Bayerische Motoren Werke AG and Daimler AG, accounted for 71.1 percent of total imported car sales in Korea in the first half.

Sales Target

Audi Volkswagen Korea Ltd. aims to sell 25,000 Audis in South Korea this year and 30,000 Volkswagen-branded vehicles.

VW sales jumped 41.4 percent to 15,368 and Audi’s surged 44 percent to 13,536 in the first half, according to the Korea Automobile Importers & Distributors Association. Volkswagen financing of Audis jumped 73 percent from a year earlier during the first quarter. The total number of Audi vehicles bought through the company’s finance arm in 2013 was 9,976.

“We’re able to make rapid growth offering a variety of financial products based on Korean customers’ lifestyle,” Frank Czarnetzki, president at VW Financial Services Korea, said by e-mail yesterday. “We’ll try to contribute to the development of Korean automobile market and achieve sustained growth by providing customer-friendly finance programs.”

Tariff Reduction

Sales of foreign cars increased 26.5 percent to 94,263 in the first half from a year earlier, while domestic car sales increased 5.9 percent to 585,369 vehicles, according to the websites of KAIDA and the Korea Automobile Manufacturers Association.

“The company may continue to expand further as lower prices and tariff removal drive a steady increase in imported car sales,” Chung Yeon Hong, Seoul-based credit analyst at Daewoo Securities Co., a brokerage of KDB Financial Group Inc., said on July 8.

The gains by foreign brands have coincided with the introduction of a free-trade agreement with the European Union, according to Bloomberg Industries analysts Kevin Tynan and Steve Man. Tariffs on cars from the EU are due to drop to zero by mid-2016.

The value of automobile installment loans in Asia’s fourth largest economy doubled to 15.2 trillion won at the end of last year from 7.6 trillion won in 2009, Credit Finance Association of Korea data show. Motor-vehicle leases increased by 56 percent to 6.4 trillion won as of end-2013.

Volkswagen Financial’s China unit last month said it planned to sell yuan-denominated notes backed by car loans. China overtook the U.S. as the single biggest consumer of vehicles.

Won Gains

The won is the best-performing currency versus the euro since the end of March among 16 major peers, strengthening 6.2 percent. It has risen from 1,787.75 per euro at the end of June 2009 to 1,380.52 as of 12:28 p.m. Seoul time, and closed at an all-time high of 1,372.55 on July 4.

The VW unit, established in 2010, is owned by Volkswagen Financial Services AG. The company had 799 billion won of debt as of March 31, 415 billion won of which was funded by an affiliate, Korea Investors Service said.

“The company needs to be capable of funding in local markets in accordance with its asset growth,” Kwon Dae Jung, chief analyst at Korea Investors Service Inc., said on July 7. “Most of the assets are new-car loans, which are considered sound assets because car owners’ creditworthiness is typically good. Also, it may be easy to convert them into cash considering the active used-car market.”

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