During the last three years, the asset-backed securitization market (ABS) in Korea has been a haven for many corporates struggling to borrow the kind of amounts that had previously made available through the loan or straight bond markets. In the wake of the Asian financial crisis, investors became reluctant to take direct exposure to companies. They have become comfortable with securitization issues on the other hand, because deals carry extra credit enhancement and typically expose investors to only one asset type.
"Following the Asian crisis, there were many problems with some Korean conglomerates and investors were less keen to buy straightforward fixed income products," explains Ho Yang, managing director and president of Morgan Stanley's Seoul office. "In the last couple of years, ABS has become the main alternative to the corporate bond market and we've seen somewhere between W40 trillion and W45 trillion ($31 billion to $34 billion) of issuance."
In common with Japan and some of the more advanced markets in the West, the Korean securitization market has seen a wide range of assets being securitized from credit card receivables and non-performing loans (NPLs) to real estate and future flow transactions.
Up until this year, activity had been mainly limited to won-denominated deals with a few notable exceptions including last year's offering by the Korea Asset Management Company. This $367 million issue, jointly lead managed by Deutsche Bank and UBS Warburg, marked the first Asian cross-border NPL transaction and was the winner of FinanceAsia's best ABS deal for 2000.
This year, however, has easily been the biggest for international issuance by Korean corporates. The signs suggest that it has not been an anomaly and the prospects for growth look very encouraging. So far this year, there have been two deals by Samsung Capital: a $200 million issue in March backed by auto loans and a $234 million consumer loans transaction in September.
In the same month, Samsung Card launched the largest ever non-Japan cross-border deal from Asia. The $500 million issue represented the first instance of credit card receivables being securitized in an international transaction out of Korea. ING Barings acted as sole lead manager on all three deals.
The Korea Deposit Insurance Company (KDIC) also came forward in September with its own $278 million offering via Credit Suisse First Boston, Daewoo Securities, Hyundai Securities and SG.
Despite lengthy delays because of legal issues launch was initially targeted in March the deal, backed by a pool of performing leases and loans, was placed privately at final pricing of 30bp over three-month Libor at the low end of initial price talk.
Three more dollar denominated deals are expected before the end of the year: a $300 million credit card deal for LG Card being jointly arranged by CSFB and UBS Warburg for expected mid-November, as well as another Samsung Capital issue and an auto loans deal for Hyundai Capital, being handled by JPMorgan.
International ABS issuance is consequently pushing the $2 billion mark for 2001, and is also starting to show diversity in assets being securitized.
"In the last year or so, I think the most significant development is that we're starting to see cross border deals for the traditional asset classes," comments Kevin Lam, joint head of Asian securitization at ING Barings. "We're seeing consumer assets like auto loans and credit card receivables being securitized and these are the assets that will drive growth in the future.
"I also think it's possible we'll see a mortgage-backed securitization (MBS) market develop, because there are some big housing lenders such as H&CB," he adds. "In the near future though, activity will mainly be concentrated in consumer assets."
Michael Ye, managing director of the structured finance group for Moody's in Hong Kong, concurs with Lam and adds that increasing diversity is not just limited to asset classes.
"In 2001 the Korean cross-border market has seen great interest in the securitization of consumer assets," Ye comments. "This is a marked difference from what has happened over the last two years, when securitization of commercial assets such as equipment leases and non-performing assets provided the main stream. Another noticeable change is that the main sponsors of transactions in 2001 have been finance companies, while banks were the most active securitizers in 1999 and 2000."
While believing that most volumes in 2002 will come from consumer assets, Ye also thinks that there will once again be deals involving equipment leases, primary collateralized bond obligations and banks making a return as originators.
Korea is becoming the Asian pot of gold for ABS professionals based in the region, and one head of securitization at a European investment bank is impressed with the progress that has been achieved over the year.
"Korea is now a very significant market," the banker argues. "This year we are going to see more than $2 billion of issuance: that is more than what has been securitized in the ex-Japan Asia cross-border market for the last five years."
The same banker is even more bullish about prospects for 2002. "I think we'll see a lot more deals next year from Korea, probably between eight and 10," he says. "Probably four of these deals will be public deals [as opposed to the private placements and conduit deals done this year], but that obviously will depend on conditions in the swap market, the domestic market and the willingness of monoline insurers to support deals."
The last point is important, since the one factor linking the transactions completed this year is that they all carry an external wrap from a monoline insurance company, enabling them to get triple-A ratings. Given the current global uncertainties, it is unlikely that Korean ABS issuers would find it so easy to attract international investors without third party guarantees provided by the likes of Ambac Assurance, FSA or MBIA Insurance.
The reasons are twofold. Firstly the current cautiousness of international investors in buying paper rated the same as Korea's sovereign rating - triple-B - and more importantly the lack of value to both investor and issuer of unwrapped deals at this time.
"We're definitely seeing interest from some large international institutional investors and you hear rumours that some of these have met with potential issuers with a view to buying a lot of paper," says Lam. "I think that Korea has shown that deals can be rated at a very high level, triple-A for the wrapped deals, and investors are comfortable at that level. Going forward, I think investors will become comfortable buying paper without wraps at the single-A and even triple-B level, but the wrapped deals make sense at the moment."
Another banker agrees. "There's good demand emanating from international accounts and some of them will be looking for paper further down the credit spectrum so that could be interesting," he comments. "But it is really is a question of pricing - does Korea present good value to investors?
"At the moment you would have to say no because pricing is so tight," he continues. "The Korea 08 [government bond] is trading at around 110bp US Treasuries while the Korea Development Bank [quasi-government bond] is only 175bp. That's not much pick-up for a triple-B country. I do not see that changing any time soon so it does not make sense to buy an unwrapped Korean ABS for, say, 190bp over when you can buy a triple-A wrapped deal for between 30bp to 40bp over Libor."
Lam argues that as Korean companies continue to adopt best international practices, ratings will improve, although wrapped deals are still the best way to go at the moment.
"As an example, you have big credit card companies in Korea which would like to emulate the success of the big card companies in the United States, such as MBNA and Citibank," he continues. "These firms securitize around half of their receivables and the Korean firms have the ambition to emulate them in the long-term.
"We just have to make sure that companies are growing sufficiently and managing credit well enough so existing deals do not deteriorate," he adds. "That's why the current deals are structured to withstand multiples of the current worldwide economic problems - there is a lot of cushion there."
Lam, like other ABS bankers, is optimistic the international market will move on to the next level: more deals, higher volumes, greater international investor interest and unwrapped deals. Issues that are common features in advanced markets like the United States, the United Kingdom and Japan. The high hopes highlight just how far Korea has already come as an ABS power.
Korea has developed way in advance of other Asian countries, because it worked hard to put the right framework in place. Recent legislation put in place in Malaysia and concerted efforts to stimulate activity in the Philippines and Taiwan indicate that other countries are trying to take the Korean path as well.
Patrick Lines, partner with Freshfields, was involved with the Korean international market before the Asian crisis. His firm has handled the legal issues on most of the Korean deals this year, including the first Samsung Capital deal, the Samsung Card transaction and the ones for LG Card and Hyundai, so is well-positioned to comment on what facilitates an Asian ABS market.
"We were working on two deals before the crisis that were cancelled due to the currency crisis among other things, but the process was made a lot easier when the ABS Act was introduced about three years ago," states Lines. "It's not perfect, but if you do a sale of assets into the special purpose vehicle (SPV) and your securitization plan - which shows how the deal works - is accepted by the authorities, then that does allow for a true transfer of assets under Korean law."
That is not the same as a true sale of assets - crucial to the bankruptcy remote characteristic of SPVs in the US or UK for example - because if the originator of the assets goes bust, under Korean insolvency laws, investors can claim the assets and the transaction can be reversed.
There are other issues that need clarification, such as whether the SPV is tax neutral - i.e. not subjected to tax - or whether the interest payments received by foreign investors should be taxed.
In principle, these should have created bigger problems for the Korean market than they have done. "Korea is ruled under civil law unlike the US or UK which use common law," explains Lines. "In common law, you can do something until the law tells you otherwise, but civil law puts constraints on what you can do because you have to fit into the structure.
"As soon as you want to do something different such as securitize a new asset class, in theory you are moving into uncertain territory," he goes on. "But, although some things are not set in stone, you can usually get the opinion that you want. These issues have not prevented deals getting done."
According to Ye, the government must take a lot of credit for the growth of the ABS market. "After the financial crisis, the Korean government was determined to bring its economy back on track by introducing reforms and restructuring using tools such as securitization," he states. "The ABS Law cleared a number of legal and regulatory obstacles that hindered the development of asset securitization and simplified certain procedures in executing transactions.
"Such determination by the government and the enactment of the ABS Law have certainly helped to propel the development of the Korean market," adds Ye. "In addition, the need to improve balance sheets and to access relatively cheap and diverse funding sources, the abundance of suitable assets, the availability of the swap market and the return of monoline insurers' appetite for Asian exposure have also facilitated the growth of the market."
There are still minor imperfections in the Korean framework but the country has succeeded in developing an ABS market - initially domestically and now internationally - because all parties, from the government and the SFC to issuers and investors were intent on developing it.
That is why, in the eyes of the region's securitization professionals, it is streets ahead of the rest of Asia, excepting Japan of course.
