Financial Institution Risk Management: The Impact of Securitization
Prof. Ian H. Giddy, New York University
presented at
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

Pre-1997
Prior to the Asian crisis of 1997, some securitization deals in Korea were being talked about but nothing much happened. In the region, securitization of bank loans, mortgages, consumer credit and other assets was developing in Japan, Hong Kong, Thailand and other countries.



1998
One of the main reasons for the slow start to securitization was Korean law. During 1998, Korea issued the Asset Backed Securitisation Law.

Korean Exim  Bank
Dec 1998
One of the most high profile transactions was the Dec. 1998 deal by Korean Exim  Bank. The bank is engaged in financing overseas operations of Korean companies and has receivables in foreign exchange. The bank securitized USD 265 million worth of these receivables representing promissory notes drawn by its clients. The senior notes in this transaction were rated AAA and were funded at 1.5% above LIBOR.



1999
Activity in securitisation market started picking up during 1999.

Industrial Bank of Korea
Feb 1999
Industrial Bank of Korea securitized its international loan receivables in a USD 106 million transaction. The deal was guaranteed by FSA, a monoline insurance company.

KOMOCO

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.



2000

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 receivables
Korea 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
4th April, 2000
The Hong Kong office of Credit Lyonnais recently (31st March) closed the KDBC Leasing Receivables notes of USD 144.356 million in three tranches. The notes are backed by dollar-denominated equipment lease receivables of Korean obligors originated by KDB Capital Corporation in Seoul, Korea. The senior tranche of USD 101.0 million was offered to investors across Asia, Europe and the US while the remaining subordinated tranches were held by KDB Capital Corporation. The coupon on the senior notes was indexed to 3-month Libor with a margin of 140bps and an issue price of par. The Senior Notes have an average life of approximately 1.05 years with an expected final maturity of 2 years. The Senior Notes are rated Baa2/BBB by Moody's and Duff and Phelps.

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.

Summary

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

The 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
not engage in any business other than the securitization transaction itself and certain activities ancillary to such securitization.  The shares of the Korean SPV are owned by its sole director and KAMCO. KAMCO, in its capacity as master servicer, is responsible for the management of the NPLs on behalf of the Korean SPV inaccordance with the Act.

True sale of NPLs

 Each 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 selling bank on the occurrence of certain events such as a payment default in respect of the NPL continuing for six months or longer.

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,
                         the transferee has the right to profits in respect of the assets and the right
                         to dispose of such assets,
                         the transferor has no right to demand the return of the assets and the
                         transferee has no right to repayment of the purchase price for the assets,
                         and
                         the transferee assumes all of the risks associated with the assets, except
                         that the transferor may provide certain warranties in respect of the assets.

In 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.
 The transfer of the NPLs had to be registered with the FSC.

Korean SPV notes

The 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
 subordinated note, further credit enhancement for the senior notes was provided by way of an irrevocable credit facility from The Korean Development Bank to the Korean SPV in respect of amounts payable under the Korean SPV senior note.

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.

Cayman SPV

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.

Korea: non-performing loans securitization - FinanceAsia.com

By Sean Bulmer 07 November 2000
Sean Bulmer is a Partner, International Finance Group, with Simmons & Simmons, Hong Kong.

© 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.



2001

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.

This 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.
The primary CBO format allows smaller firms to draw from the CBO vehicle, the vehicle in turn benefits from economies of scale, and investors get both diversification and credit enhancement.

LG Investment and Securities
LG Investment and Securities launched the first offering in August 2000  amounting to Won 1.55 trillion for 60 companies via four SPVs. During year 2000, there have been CBOs worth about Won 5 trillion.



May/June 2001

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.


Back to Main Page ("Financial Institution Risk Management: The Impact of Securitization")
Supplement 1: Requirements for successful ABS
Supplement 2: Typical structures of ABS in Asia
 

See also asiansecuritization.com

Go to Giddy's Web Portal Contact Ian Giddy at ian.giddy@nyu.edu