Prof. Ian H. Giddy, New York University
Seminar on "Risk Management in Financial Institutions"
Sogang University, Seoul, October 2001
Supplement 3: Deals illustrating evolution of the ABS market's role in Korea
One of the main reasons for the slow start to securitization was Korean law. During 1998, Korea issued the Asset Backed Securitisation Law.
Activity in securitisation market started picking up during 1999.
Bank of Korea
Yet another significant initiative from the Government is the setting up of a mortgage-securitization body, on the lines of Fannie Mae. Called Korea Mortgage Corp. (KOMOCO), it will be a joint venture with International Financial Corp. (IFC) and some domestic banks. KOMOCO is expected to issue MBSs collateralized by mortgage loans acquired from National Housing Fund (NHF) in the first half of this year.
15th Feb, 2000
KAMCO to securitize doubtful claims on Korean companies
Korean company Korea Asset Management Corp. (KAMCO) will securitize doubtful claims on Korean companies. KAMCO wants to become a world-class investment company by building expertise on handling distressed assets.
According to the company, the value of the world's total distressed assets is estimated at $4 trillion, including $500 billion in China, $900 billion in Japan and $1.8 trillion in Latin America and Eastern Europe. Only if 10% of this business could be handled, it would mean USD 4 billion in commission revenue.
For a starter, the company intends to buy claims of foreign banks on loans made to members of the Daewoo group and securitize the same. According to a report in The Korea Herald 12 Feb, the foreign banks who have receivables against Daewoo will sell the same to domestic banks, from where Kamco will pick them up. Finally these claims will be securitised to be sold to local and international investors.
16th March, 2000:
Sogeko securitizes lease receivablesKorea French Banking Corp (Sogeko) has recently issued USD 81 million asset-backed securities,based on USD 40 million worth of equipment leases and term loans. Of the issuance, International Finance Corp will purchase USD 20 million worth securities, while the remaining amount will be placed in the capital market in form of floating rate notes.
The transaction is the first cross border securitization of Korean domestic assets. The deal was arranged and managed by Societe Generale Asia Ltd.
The trustee to look after the SPV will be the Seoul branch of Chase Manhattan Corp.
KDB Capital Corporation
KDBC is the largest leasing company in South Korea and is majority owned by Korean Development Bank, one of the largest government owned financial institution in South Korea
Sole arranger and lead manager is CREDIT LYONNAIS. Co-lead manager is Deutsche Bank. Co-manager is Bayerische Hypo-und Vereinsbank AG. Mandated in early December 1999, the transaction is one of the fastest completed ABS deals in ex-Japan Asia with both efficient pricing and credit enhancement. [This news was contributed by Gregory Park, Head of Securitization Group at Credit Lyonnais, Hong Kong, and was embellished by a Press Release of DCR, Hong Kong].
7th November 2000
KAMCO's recent securitization of NPLs is a ground breaking deal. Simmons &Simmons' Partner, International Finance Group, examines some of the legal issues.
Korea Asset Management Corporation (KAMCO) recently completed its first international securitization of non-performing loans (NPLs). This transaction is one of the few international securitizations to have emerged from Korea. It is the first securitization of non-performing assets by a Korean Government agency. We outline some of the key features of this important transaction, which was arranged by Deutsche Bank and UBS Warburg (as joint lead managers). Simmons & Simmons advised KAMCO.
The transaction involved the establishment of two special purpose vehicles (SPVs), one in Korea and the other in the Cayman Islands. KAMCO sold a static portfolio of NPLs (denominated in US dollars and Japanese Yen) to the Korean SPV. TheKorean SPV issued notes which were purchased by the Cayman SPV. The CaymanSPV in turn issued notes secured on, amongst other things, the Korean SPV's notes and the NPLs.
The transaction required the approval of the Financial Supervisory Commission of Korea (FSC).
The Korean SPV
Korean SPV, Korea 1st International ABS Speciality Co., Ltd., was incorporatedas
an off-balance sheet limited liability company in accordance with the Korean
Act on Asset Backed Securitization of 1998 (the Act). Under the Act, the
Korean SPV may
True sale of NPLs
NPL is the subject of a settlement agreement made between KAMCO and the
Korean commercial bank from which it originally purchased the relevant
NPL. Each settlement agreement contains an option which allows KAMCO to
put an NPL back to
The NPLs and the settlement agreements were transferred to the Korean SPV undera loan portfolio transfer agreement governed by Korean law. KAMCO, as master servicer, is responsible for exercising the put options with the Korean banks onbehalf of the Korean SPV.
Under the Act, the transfer of the NPLs would constitute a true sale - rather than thecreation of a security interest over the assets in question - only if:
the transfer was by way of sale and purchase,
general, for a transfer of the NPLs to be perfected and enforceable against
a borrower, it is necessary for the borrower's consent to be obtained for
such transfer. However, the Act provides that it is sufficient for
a transfer to be perfected against a borrower if the transferor or transferee
sends a notice of transfer to such borrower.
Korean SPV notes
Korean SPV issued senior and subordinated notes, the proceeds of which
comprised the purchase price for the NPLs. The security for the senior
note included, amongst other things, a Korean law pledge over the NPLs.
In addition to the
For reasons of Korean regulation, the terms of the senior note prohibit redemption of principal (either in whole or in part) until after the first anniversary of the issue date of the senior note.
The Korean SPV senior note was sold to the Cayman SPV, Korea Asset Funding 2000-1 Limited, which in turn issued floating rate notes. Those notes are secured on, amongst other things, the Cayman SPV's interest in the Korean SPV seniornote. The Cayman SPV senior notes are rated BBB+ by Fitch and Baa2 by Moody's. They are listed on the Luxembourg Stock Exchange. These notes were offered to qualified institutional buyers in the United States pursuant to Rule 144A.
Sean Bulmer 07 November 2000
© Copyright FinanceAsia.com Ltd
10th November 2000
KoMoCo to get technical and equity support from global majors
Internationally-known mortgage-market-maker Fannie Mae, mortgage lender Countrywide International Holding, and global investment banking firm Merrill Lynch have tied up with Korea Mortgage Corporation (KoMoCo) as foreign technical partners to assist KoMoCo in various aspects of its mortgage securitisation business.
KoMoCo is the Fannie-Mae-type body to securitise mortgages in Korea. KoMoCo's website is here.
Under the contract signed on 31st Oct., IFC takes over equity stake in KoMoCo equal to KRW 15 billion. Besides, Merril Lynch will provide assistance in capital market development, Countrywide in business development & operations, and Fannie Mae in IT Development & Treasury Functions.
KoMoCo has already begun issuance of mortgage backed securities. In September this year, KoMoCo issued 500 billion won worth of mortgage-backed securities which was its second issuance.
March 30, 2001
Samsung Capital in first cross-border performing asset securitisation
Korean finance company Samsung Capital will securitise auto loan receivables in an interesting transaction credit-enhanced by Financial Security Assurance (FSA). Standard and Poor's has assigned AAA rating to the transaction, which it says "marks the first Korean cross-border securitization of auto loans" to originate from Korea.
The USD 187.5 million transaction follows this structure: the loans are originated by Samsung and sold to Credit Creator, a limited liability SPV formed in Korea. Credit Creator has issued a credit linked note to Credit Creator Ltd., a Cayman Islands company. The Cayman Islands company has been guaranteed by FSA.
Foreign currency exchange and interest rate risks associated with the Korean won-denominated auto loan pool have been hedged through a Korean won/U.S. dollar cross-currency swap provided by ING. This type of swap is difficult to obtain: illiquidity in the swap market has long been an impediment to the successful launch of cross-border transactions originating from Korea.
Non-performing loans have been securitised from Korea on cross-border basis.
1st May 2001
DaeWoo Securities pioneer in primary market CBOs: a new trend in Korea
This may well be a lesson for emerging markets with tight banking liquidity. A Korean experiment that allows companies with lower credits to raise resources directly from capital markets has succeeded and there have been several issuance of "primary market CBOs". The term "primary CBO" refers to a CBO which will subscribe to primary bond issues of entities, as opposed to common CBOs which pick up bonds from the market. A primary CBO essentially serves as a lending device to the bond issuers.
Earlier this year, Daewoo Securities entered the securitization market with a CBO that packages corporate bonds issued by 52 smaller domestic companies. The Won 160 billion deal (USD 124.8 million) has been jointly promoted by Daewoo with the Small and Medium Industry Promotion Corporation to promote this means of raising funds for smaller corporates.The collateral consists of bonds rated locally between B and BB-plus entities, having maturities of one to two years.
To allow investors to walk in, the transaction was split into a senior class of Won 130 billion a junior class of the balance that will be held by the small industry promotion corporation as credit enhancement. Thus, while the market funds the essential credit creation, the risk is parked with the promotional agency - a true splitting of roles rather than a common model of the State attempting to provide all funding and no risk absorption.
The senior tranche itself was sequenced into one-year bonds two-year paper, for finer pricing.
is not the only primary CBO in Korea, but is schematically designed as
a part of the financial markets stabilisation package by the Government.
Banks face a liquidity squeeze, which leaves small and medium enterprises
high and dry.
Investment and Securities
IFC makes first investment in KoMoCo securities; intends to play active role in emerging market MBS
International Finance Corporation (IFC) Washington has made its debutante investment in emerging market MBS by USD 41 million worth mortgage backed securities issued by KoMoCo, the Korean MBS agency. AN IFC press release of 7th June says that the move marks the beginning of IFC's stronger participation in emerging mortgage markets and "will stimulate more affordable long-term loans to homebuyers and develop a modern, transparent, and efficient housing finance sector in Korea". See earlier report (10th Nov 2000) on the in-principle accord signed by KoMoCo for this issuance.
KoMoCo, Korea's first specialized secondary home mortgage market entity, was established in September 1999 with IFC's assistance. The current MBS offering, christened as MBS 2001-1, consisting of a senior tranche of USD 174.4 million and a subordinated tranche of USD 7.4 million, both denominated in local currency, is backed by Won-denominated mortgage loans and collateralized by residential properties located in Korea. This is the fourth MBS issued by KoMoCo over a twelve month period which saw KoMoCo arranging about USD 1.2 billion equivalent MBS, listed on the Korea Securities Exchange.
1st September 2001
Hanareum International Funding
Hanareum International Funding Ltd., a subsidiary of Korean Deposit Insurance Corporation recently got a US$278 million guaranteed floating rate notes issue rated by Standard and Poor's. The issue was rated AAA with a wrap cover from AMBAC. The notes are backed by a portfolio of performing leases and loans originated by 16 failed Korean merchant banks and purchased from Hanareum Mutual Savings and Finance Co.
The transaction represents AMBAC's first involvement in a Korean transaction.
The leases in this transaction owe their origin to 16 failed Korean merchant banks. The portfolio consists of a carefully selected subset of well-seasoned, performing assets that have been sample audited to confirm that they meet specified legal and eligibility criteria. The transaction is also supported by a letter of commitment by KDIC relating to certain asset representations and warranties
The transfer of assets in this transaction is perfected against third-party claims under Korea's ABS act. Note payments ultimately depend on collections from the underlying loans and leases, and on the surety bond provided by AMBAC. The servicing of the underlying receivables will be performed by KDB Capital Corp., with Deutsche Bank AG contracted as back-up servicer.