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.
This has led some bankers to argue that structurally the transaction does not make sense since it would be far cheaper for KDB to borrow money from the capital markets on its own and then lend the proceeds to Kamco, rather than embroiling itself in a complex securitization that has led to far higher pricing.
In essence, the deal comprises a portfolio of 135 restructured corporate loans from six local banks, including KDB. The portfolio has a face value of $419.96 million. Ten of the 45 obligors account for 75% of the total, led by Pan Ocean Shipping and Kia Heavy.
All of the loans are currently performing, but all have been restructured either by the courts or between lenders, and some benefit from grace periods that extend to the end of the year. Approximately 91% of the loans are denominated in US dollars and the rest in yen.
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 senior note is the principal asset of the vehicle, which has in turn issued bonds to investors. Proceeds from the bond issue, alongside a $52.8 million subordinated note retained by Kamco, are then used by the original SPV to purchase the underlying portfolio of loans.
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%.
In addition to this, KDB has provided a facility for credit support and liquidity coverage which represents approximately 30% of the original principal amount of the deal. However, this also incorporates a step-down feature as the deal is scheduled to amortize fairly quickly under a full sequential fast pay amortization structure.
In total, therefore, KDB accounts for 90% of total credit exposure. But at 200bp over Libor, pricing is roughly double what the bank would expect to pay were it to issue senior bonds into the international markets. It has, for example, an outstanding September 2004 bond currently trading about 190bp over Treasuries, equating to about 90bp over in Libor terms.
What KDB stands to gain
Other bankers argue that although the headline figures make the deal seem expensive, KDB has benefitted in other respects. "Firstly it is earning fees from its provision of a credit facility," says one. "Secondly it has broadened its experience by taking part in a cross-border securitization, and thirdly it has not had to set aside capital to cover provisions for a new senior bond issue."
He adds: "The put options are also shown as an off-balance-sheet item in the bank's 1999 annual report."
Neither of the lead managers was able to provide the usual geographical breakdowns or details about the order book. However, one banker does say that the deal appealed to a much broader cross section of investors than is normally the case with a deal of this type. In particular, alongside standard ABS investors in Europe and the US, a large number of tickets were also written in Asia to non-specialist funds.
Moody's agrees that the rating of the deal is highly dependent on that of KDB. "You could make an assumption that if the sovereign is upgraded, this transaction is also likely to be upgraded," says analyst Michael Ye.
"Because of a recent series of upgrades across the Korean banking sector, three of the six banks are now rated investment grade as well and the other three have high non-investment grade ratings," he adds. "The average credit quality is, therefore, already higher than it was a few weeks ago when we first assigned our rating."
While international securitization has been slow to take off again after the financial crisis, some domestic markets have been very active. In Japan there have already been two examples of domestic currency non-performing loans securitizations and in Korea, the overall ABS market has been very active. Having raising a total of $7 billion equivalent last year, for example, Moody's estimates that the total this year may climb to between $10 billion and $15 billion.
