The W174.94 billion ($134 million) offering follows on the heels of a W280 billion transaction for Hanvit Bank led by ABN Amro, which used documents against acceptance - short-term revolving credit lines provided by banks to manufacturing companies - being securitized for the first time.
Morgan Stanley's deal, issued through the Resurgence Korea One special purpose vehicle (SPV), is the first time that an international real estate fund - in this case Morgan Stanley Real Estate Fund (MSREF) - has gone to the domestic Korean capital markets.
MSREF is a wholly owned subsidiary of Morgan Stanley that buys real estate assets from anywhere in the World. For this transaction, the fund purchased the underlying asset pool of loans and properties from the Korea Asset Management Company (Kamco) and resold them to the SPV, which then issued the bonds.
The issue was split into three tranches, each of which has a legal maturity of four years. The W131.21 billion senior notes, rated triple A by both the Korea Management and Credit Corporation and Korea Investors Service, carry a fixed annual coupon of 5.57%.
There is no four-year benchmark, but according to figures published by the Korean Securities Dealers Association at the close of play yesterday, this represents a pick up of 76bp over three-year treasuries and 17bp below the five-year market-to-market base yield of 5.74%.
In addition, the deal featured W28.43 billion of double-A rated notes carrying a 6.51% coupon and a W15.3 billion single-A piece that comes with a 7.52% coupon.
According to the lead manager, the deal was over subscribed and sold to a number of investment trusts, asset management companies and life insurance companies looking for higher yield against other benchmarks.
Ho Yang, managing director and president of Morgan Stanley's Seoul office, believes that while investors were attracted by the yields, the issuer benefited from the fact that this is a non-recourse deal. That makes it a truly bankruptcy remote transaction because the sponsor is not liable in case of default.
"The deal is important for a number of reasons," says Yang. "Firstly, it is a new type of asset class being securitized in Korea. Also it is a non-recourse deal and it uses a genuine pass through structure rather than a bullet structure. This serves to expand the range of opportunities for fixed income investors in Korea.
"Traditionally with ABS in Korea, most deals feature a recourse-clause back to the sponsor, which means that if there are any problems, the sponsor has to pay interest and principal out of its own pocket," adds Yang. "This creates a lingering financial burden to the sponsor but we wanted to eliminate this on this transaction."
Obviously, one thing that attracts investors to ABS deals is that they typically carry extra credit protection. Resurgence Korea One features a liquidity facility provided by the Korea Development Bank to support interest payments and subordination on the lower rated tranches.
Aside from that, the main reason for investor confidence would seem to come from the fact that the transaction has an expected average life of just six months, so it is extremely likely to be able to fully redeem bondholders way before legal maturity.
Consequently, investors were more than interested in the paper. "Investors looked at the cash flows that have already have gone into the SPV and continue to do so on a daily basis," explains Yang. "They looked at the expected average life of the deal and realized it is one with high credit quality and little risk. It also has higher yields than they would find with other transactions so investors were very enthusiastic."
Karl Essig, global co-head of the securitized products group at Morgan Stanley, believes the deal could pave the way for other similar deals in Korea. "The issue was over-subscribed, reflecting broad based investor interest for highly-rated securitizations of Korean real estate assets," he asserts. "Capital market solutions to non-performing mortgages, which have already provided liquidity to the real estate markets in Japan, the US and Europe can do the same in Korea.
Morgan Stanley has created a niche for itself in this particular asset class, having also executed the first such deals in Japan, the US and Italy.
