Kia Extends TRS Contract on Hyundai Steel Stake for Another Year

Kia's (000270) total return swap (TRS) contract on its Hyundai Steel (004020) stake has entered its tenth year. While the Hyundai Steel shares tied up in the TRS have shrunk to one-third of the original amount since the first contract, efforts to unwind the circular shareholding structure within Hyundai Motor Group—strengthened after the merger of Hyundai Steel and Hyundai Hysco—appear to be turning into a prolonged battle. With Hyundai Steel's share price trading below the contract price, an early settlement would likely be burdensome for Kia.

According to investment banking sources on March 16, Kia extended its 60 billion won TRS contract with Korea Investment & Securities last month by one year. The contract uses 1,189,229 shares of Hyundai Steel as the underlying asset and is set to mature in February next year.

In 2016, Hyundai Motor and Kia signed TRS contracts worth a combined 440 billion won on Hyundai Steel shares with NH Investment & Securities. Hyundai Motor's contract was valued at approximately 290 billion won (5,745,741 common shares), while Kia's stood at 150 billion won (3,062,553 shares). The move was aimed at dismantling the circular shareholding structure that had intensified following the 2015 merger of Hyundai Steel and Hyundai Hysco, with both companies transferring their Hyundai Steel stakes to the securities firm. Hyundai Motor's stake in Hyundai Steel dropped from 11.2% to 6.9%, while Kia's fell from 19.6% to 17.3%.

Hyundai Motor fully settled its TRS contract with NH Investment & Securities in 2023, completely exiting its Hyundai Steel position. At the time of the original contract, Hyundai Steel common shares were valued at 50,400 won per share. NH Investment & Securities disposed of the stake at 32,650 won per share, reportedly compensating Hyundai Motor for losses of approximately 20 billion won.

Kia's TRS exposure has remained at the current level since being reduced to 60 billion won in 2019. In February 2024, Kia switched its TRS counterparty from NH Investment & Securities to Korea Investment & Securities. With Hyundai Steel shares currently trading in the mid-30,000 won range, the likelihood of Kia settling the TRS and disposing of its stake in the near term appears low.

A TRS is a derivative product in which a financial institution assumes share price volatility risk in exchange for receiving fees from the seller. If the share price falls during the contract period, the seller compensates the financial institution for losses; if it rises, the financial institution pays the gains to the seller. The structure allows companies to effectively divest large stakes while minimizing market impact from direct large-scale share sales.