Pre-1997
The issuance of asset-backed securities (ABS) has been discussed for many years in Korea but the easy availability of bank credit, and legal obstacles, forestalled implementation of the technique until after the crisis of 1997. In the region, securitization of bank loans, mortgages, consumer credit and other assets was developing in Japan, Hong Kong, Thailand and other countries. 

The recent growth of securitization in Korea parallels the maturing and liberalization of the country's securities market. Securities trading in Korea began in 1956 when the Korea Stock Exchange (KSE) opened for business with 12 listed companies. The KSE was first opened to direct portfolio investment from abroad in 1992 and the domestic bond market was completely deregulated in 1997. In the following year, the cap on foreign ownership of most Korean companies was removed. Foreign investors have become an increasingly important influence on the Korean stock market since then. According to KSE statistics, shares held by foreign investors now account for around 29% of total market value, as against 20% in May 1998. Korean securities laws are modeled on those of the US, making cross-border deals relatively straightforward. A second wave of legislation in September 1998 strengthened procedures for restructuring financial institutions and introduced asset-backed securities and mutual funds. New accounting standards adopted at the end of 1998 and closely modeled on those of the International Accounting Standards Committee (IASC) have also allowed foreign investors to place greater reliance on Korean financial statements. 

Korean Exim  Bank
Dec 1998
Korea's first significant asset-backed transaction was the December 1998 deal by the Korean Export-Import  Bank, KEXIM. The bank was engaged in financing overseas operations of Korean companies and had 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.

To provide a further boost to the ABS market, the Ministry of Finance and Economy (MoFE) revised the current ABS law to remove some remaining regulatory hurdles for potential issuers and investors. Most importantly, the scope of eligible ABS issuers was expanded to include the Korea Deposit Insurance Corporation, trust companies, mortgage banks and local governments

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.

Korea Mortgage Corporation
Yet another significant initiative from the Government was the setting up of a mortgage-securitization body, on the lines of Fannie Mae. Called Korea Mortgage Corp. (KOMOCO), it was be a joint venture with International Financial Corp. (IFC) and some domestic banks. KOMOCO was expected to issue MBSs collateralized by mortgage loans acquired from National Housing Fund (NHF).

Korea Asset Management Company (Kamco): Asia's first cross-border securitization of non-performing loans. 
July 2000
Korea Asset Management Company (Kamco) launched a $367 million deal earlier this week on an issue price of par to yield 200bp over Libor. The deal, led by Deutsche Bank and UBS Warburg, has a final maturity of 8.5 years, and an average life of 4.8 years. 

Rated at Korea's sovereign Baa2/BBB+/BBB ceiling, the offering is classified as a true sale collateralized loan obligation (CLO) securitization under the republic's Asset Backed Securities (ABS) Law enacted in September 1998. The sovereign rating was obtained because of a high level of credit concentration deriving from government-owned Korea Development Bank (KDB), which sits at the
heart of the deal. 

The portfolio itself is is held by a bankruptcy remote Korean special purpose vehicle (SPV) KOREA1st International ABS Specialty Co. This SPV has issued a senior note to a Cayman's registered SPV Korea Asset Funding 2000-1 Ltd. 

The key credit component of the deal, however, lies in the fact that all of the underlying portfolio incorporates recourse provisions to each of the orginating Korean banks in the form of a series of put options. In this respect, KDB accounts for 60% of put option exposure, Korea Exchange Bank 19%, Cho Hung Bank 12%, Hanvit Bank 6%, Shinhan Bank 2% and Kookmin Bank 1%. 

Sogeko lease receivable securitization
March 2000
Korea French Banking Corp (Sogeko)  issued USD 81 million asset-backed securities, based on USD 40 million worth of equipment leases and term loans. Of the issuance, International Finance Corporation  (IFC) purchased  USD 20 million worth securities, while the remaining amount will be placed in the capital market in form of floating rate notes.

The transaction was the first cross border securitization of Korean domestic assets. The deal was arranged and managed by Societe Generale Asia Ltd.

KDB Capital Corporation
April 2000
The Hong Kong office of Credit Lyonnais arranged 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. Mandated in early December 1999, the transaction was one of the fastest completed ABS deals in ex-Japan Asia with both efficient pricing and credit enhancement.

KAMCO's securitization of NPLs
November 2000
Korea Asset Management Corporation (KAMCO) completed its first international securitization of non-performing loans (NPLs). It was the first securitization of non-performing assets by a Korean Government agency. 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. The Korean SPV issued notes which were purchased by the Cayman SPV. The Cayman SPV in turn issued notes secured on, amongst other things, the Korean SPV's notes and the NPLs.

The law firm Simmons & Simmons, which advised KAMCO, looks at some of the legal issues in an article by Sean Bulmer: Korea: non-performing loans securitization - FinanceAsia.com

Korea Mortgage Corporation (KoMoCo)
November 2000
Internationally-known mortgage-market-maker Fannie Mae, mortgage lender Countrywide International Holding, and global investment banking firm Merrill Lynch have teamed up with Korea Mortgage Corporation (KoMoCo) as foreign technical partners to assist KoMoCo in various aspects of its mortgage securitization business. KoMoCo is the Fannie-Mae-type body for securitization of mortgages in Korea. In September 2000, KoMoCo issued 500 billion won worth of mortgage-backed securities, its second issuance.

Samsung Capital auto loan securitization
March 2001
Korean finance company Samsung Capital securitized 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 200 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. The notes were purchased by an asset-backed commercial paper (ABCP) conduit operated by ING Bank. This was the first time an ABCP program involved a Korean issuer and won-denominated receivables.

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.

DaeWoo Securities
May 2001
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 in the 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.

The transaction was split into a senior class of Won 130 billion and 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 stabilization 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.

KoMoCo MBS and IFC
May/June 2001
International Finance Corporation (IFC) Washington has made its debut investment in emerging market mortgage-backed securities with USD 41 million  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". 

KoMoCo, Korea's first specialized secondary home mortgage market entity, was established in September 1999 with IFC's assistance. The latest 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.

Samsung Capital Consumer Loan ABS
September 2001
In a $234 million deal, Samsung Capital, the consumer finance company. conducted its second major securitization of the year -- this time backed by consumer loans. Once again it featured a revolving structure, and was privately placed -- presumably with an ABCP conduit managed by ING Bank. 

Hanareum International Funding
September 2001
Hanareum International Funding Ltd., a special-purpose vehicle of Korean Deposit Insurance Corporation, issued a US$278 million guaranteed floating rate note. The issue was rated AAA with a wrap cover from AMBAC. The transaction represented AMBAC's first involvement in a Korean transaction.

The 305 leases and loans in this transaction owe their origin to 16 failed Korean merchant banks which were purchased from Hanareum Mutual Savings and Finance Co. 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.

The Samsung Card deal, issued through the Challenger special purpose vehicle, securitizes a portfolio of card loan receivables originated by the issuer. This is the first time such receivables have been used in a Korean cross-border deal. The transaction also used a revolving structure, which is becoming something of a signature touch from ING  Barings and was used on both Samsung Capital issues. The structure adds flexibility because collections on existing receivables can be used by Samsung to originate new card loans. The revenues of these can then be added to the underlying pool that backs the bonds. 

A triple-A rating was achieved because the deal was wrapped by MBIA Insurance Corp, the triple-A rated monoline insurer. 

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