2005. 11.07
Experience of Newly Industrialized Economies
in Securitization : Korea
KFIRIKorea Fixed Income Research Institute
Gyutaeg Oh
ASEAN+3 Workshop on the Rise of Asset Securitization in East Asia
Table of Contents
I. Introduction
II. Financial Restructuring
III. Overcoming Credit Crunch Problems
IV. SME Financing
V. Mortgage Financing
VI. Student Loan Financing
VII. Recent Regulatory Improvement
VIII. A Comment: Demand for Securitization under Asian Bond Market Initiatives
Appendix: Cross Border ABS Deals from Korea
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
Introduction
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
Maturity and Credit Quality Gap
Asian
Bond
Markets
Asian
Savings
Asian
Issuers
Long-Term
Low Credit Quality
Short-Term
High Credit Quality
One of the major impediments is the credit quality gap between the low credit ratings of issuers and minimum credit requirement of investors
Credit guarantees coupled with securitization could play a significant role in promoting sound and deep bond markets
Securitization facilitates risk reallocation (sharing).
A guarantee agency can rent high rating by providing commercial and political risk guarantees for issuers
WG 2 studies a regional guarantee and
investment mechanism to promote ABMIDevelopment of regional capital markets for stable access to long-term funds to facilitate:
• Private Sector Development or• Sustainable infrastructure projects
Asian Bond Market Initiative and Securitization
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Example: SME Securitization – Pan Asia Bond P- CBO
Transaction date: December 13, 2004
The issuance of Japanese yen-denominated P-CBO between Korea and Japan is an important tangible outcome for the endorsement of the Asian bond market and also provides new sources for SMEs of other countries in this region.
The securitization of a portfolio of yen-denominated corporate bonds (Portfolio Securities) of 46 Korean small and medium enterprises (Portfolio Obligors)
Further credit-enhanced by the Industrial Bank of Korea (IBK) and JBIC.
The P-CBO interest rate is 20 to 30 basis points lower than that for Korean won-denominated P-CBO, even after taking the cost of hedging for foreign exchange risks into account.
Similar deals of SME securitization have taken place in Japan and Korea
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Establishment of a securitization vehicle
- Onshore ABS SPC
- Trust company
- Offshore ABS SPC
Registration of a securitization plan with the FSC
Acquisition of securitization assets by the securitization vehicle
Appointment of servicer and transaction administrator
Issuance of asset-backed securities
In September 1998, the Asset Backed Securitization Act (the “ABS Act”) was passed.
- The ABS Act provides a means to engage in securitization transactions with legal certainty.
- Tax benefits are conferred on transactions under the ABS Act.
- Processes such as perfection of security interests against third parties are streamlined.
The ABS Act was originally intended to facilitate the disposal of non-performing loans.
Securitization Process under the ABS ActThe introduction of ABS Act in 1998
Korea’s ABS system: Introduction
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Introduction Stage
(’99~’00)
Financial Restructuring &
Securitization of NPLs
Developing Stage
(‘00-’01)Financing tools for companies
to overcome flight-to-quality
(maturity concentration) problems
Maturing Stage
(’02~’04)
Deepening of
ABS market
Financing tools for SMEs,
credit card companies
mortgage, student loans,
Future Cash Flow Securitization
& others
Evolution of ABS Market in Korea
0.5
28.6
8.7
1.9
6.9
0.2
4
20.622.2
0.92.5
1
4.6 5.34.6
13.1
19.7
10.512.6
14.4
0.6 1.2 0.9 0.6 0.9 0.83 3.5
9.9 9.6
111
13.4%
25.4%
56.6%
41.2%
8.3%3.2%
0
5
10
15
20
25
30
35
1999 2000 2001 2002 2003 20040%
20%
40%
60%
80%
100%
Securities Card loans Lease, Auto loansAccountable receivables Real-estate Ratio of Credit loans
KRW trillion
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
Securitization can be an effective policy tool for overcoming credit crunch problems (or credit quality gap)
Public sectors can facilitate securitization
Securitization evolves as market need arises
USA : Mortgage Lease/Cards Junk Bonds/CBOs Future Cash Flows
Korea: NPLs CBOs Cards Future Cash Flows
Lessons from Korean Experiences
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Financial Restructuring
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
32.5 trillion(1997)
18.8 trillion(2001)
Increase : 137.6 (trillion won)
Criterion Change 44.5New 93.1
Decrease : 151.3 (trillion won)
by KAMCO 43.2by Banks 108.1
Troubled Loan by Banks
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
KDB
Principal and Interest Paymentto subordinated notes
Investors
The issuer
Korea Asset Funding 2000-1 Ltd.
Kamco
The purchaser
Korea 1st International ABS
Specialty Co. Ltd.
Swap CounterpartyYen/US$
Swap
Loan obiligors
Banks
Principal and Interest Payment
Creditfacility
Payment underPut options
KAMCO : NPL resolution
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
71.4%91%97%70%42%0%(B) / (C)
151,347.642,008.536,931.725,79838,264.18,345.3Total (C)
108,130.338,192.235,89118,036.916,010.2-Banks (B)
43,217.33,816.31,040.77,761.122,253.98,345.3KAMCO (A)
Total20012000199919981997
(billion won)
108,130.338,192.235,89118,036.916,010.2Total
96.7 (0.1)96.7Sales to CRV
23,476.1 (21)2,722.96,877.96,3227,553.3Other
3,276.2 (2.9)1,077.71,504.6693.9Debt – Equity Swap
5,769 (8.6)1,831.13,937.9Direct Sale
16,129.9 (14.4)10,894.14,433.7802.1ABS
30,514.9 (27.3)11,60010,7795,170.7265.2Write off
28,867.5 (25.8)9,969.78,357.95,048.25,491.7Collected
Total2001200019971998
by Banks (billion won, %)
Troubled Loan Disposed
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Overcoming Credit Crunch Problems
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Currency Crisis (97.11)
Daewoo Crisis (99.8)
SKG & Credit Card Crisis (03.3)
Credit shock Credit shock Credit shock
Market Impact(From Banks to ITCs)
• ABS development to handle NPLs
• Massive Corp. Bond Issuance to RefiBank Debts
• Book value accounting for ITCs
Market Impact• Issuance of P-CBOs
to Refinance Corp Bond Debts
• Rapid Pick-Up of ABS Markets
• MTM accounting for ITCs
• Introduction of bond pricing agents
Market Impact• Plunge of ABS
markets • Realizing the need for
systemic risk monitoring system
• Realizing the Importance of Credit Bureaus and Trustees
Securitization and Credit Crunch in Corporate Bond Markets
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Create a systemic risk (due to credit crunch problem)
A temporary problem: Chaebols paid off debts (low interest rate, higher earning, less investment)
0
5,000
10,000
15,000
20,000
25,000
1998/ 1 1999/ 1 2000/ 1 2001/ 1 2002/ 1 2003/ 1 2004/ 1 2005/ 1 2006/ 1
Above A BBB BB-B below CCC unrated
1 billion won
Maturity Concentration (Rollover) Problem
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
Credit guarantees for a pool of corporate bonds / loans
Combining mechanisms of ABS and credit guarantee
Facilitated corporate financing in a short period of time
Credit Guarantee Services by KCGF
Corporation
Originator(security
companies)
SPC
Investors
KCGF
Banks
bonds
bonds
CBO/CLO
proceeds
proceeds
credit line
cred
it gu
aran
tee
Credit Guarantee Services by KCGF
Securitization & Credit Guarantee : P-CBO / CLO Guarantee
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
Bond Pricing Agencies for Mark-to-Market System
KIS PRICING
Paid-in CapitalKRW 3 billion
BPBPKorea Bond
Pricing
Paid-In Capital KRW 5 billion
Paid-In Capital KRW 4.75 billion
The KSDA monitors these companies
-Nov. 1997: introduce “Mark to Market”-Dec. 1999:KSDA provided Matrix Pricing
- Jun. 2000:3 credit rating agencies launched 3 BPAs under government approval
-Oct. 2000: BPAs began pricing on M2M fund- 2002: M2M applied to Bank’s Trading book, Trust account , Insurance Co.’s special Trust account, securities Co.’s accounts
- Oct. 2003: KDSA stops matrix pricing
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SME Financing: Securitization with Credit Guarantee
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
Insufficient collateral
High transaction cost
Low credit risk assessment ability of financial
institutions
Importance Difficulties
Limited access to formal financing
Number of Companies
Number of Employees
Exports
SME 99% LE 1%
SME 86% LE 14%
SME 43% LE 57%
SMEs in the Korean Economy
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Credit guarantees for a pool of corporate bonds / loans
Combining mechanisms of ABS and credit guarantee
Facilitated corporate financing in a short period of time
Credit Guarantee Services by KCGF
Corporation
Originator(security
companies)
SPC
Investors
KCGF
Banks
bonds
bonds
CBO/CLO
proceeds
proceeds
credit line
cred
it gu
aran
tee
Credit Guarantee Services by KCGF
Securitization & Credit Guarantee : P-CBO / CLO Guarantee
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
151152004.09.218th Shinbo PartnerSecuritization
8th
342242004.11.169th Shinbo PartnerSecuritization
9th
341012004.01.096th Shinbo PartnerSecuritization
6th
241252004.06.157th Shinbo PartnerSecuritization
7th
428
62
102
77
44
36
No. of firms
1462003.12.225th Shinbo PartnerSecuritization
5th
1500Total
2822003.11.254th Shinbo PartnerSecuritization
4th
3022003.11.073rd Shinbo PartnerSecuritization
3rd
1402003.10.132nd Shinbo SME Securitization 2nd
652003.09.061st Shinbo SME Securitization1st
Amount(billion KRW)
Date of IssueTitle of SPC
Total Amount: 1,500 billion KRW
# of firms: 428
Average funding per firm: 3.5 billion KRW
P-CBO Programs for SMEs by KCGF
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23 SMEs23 SMEs
Small Business CorporationSmall Business Corporation
SPCSPC
Senior bonds(2yr 8.5billion, 3yr 36billion)
Senior bonds(2yr 8.5billion, 3yr 36billion)
Junior bonds(27.5 billion)
Junior bonds(27.5 billion)
₩Corporate bonds (72billion won)
Asset sales
Investor Repurchased by Small Business Corporation
Credit Enhancementby Korea Housing Bank
(10billion)
Credit Enhancementby Korea Housing Bank
(10billion)
Primary in the sense the program helps SMEs issue bonds
Basic Scheme of 1st P-CBO Program by SBC in 1999
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
B+460.1 Yen2004.12.13Yen CBO securitization(6th SME Securitization)
8th
B+4393.5 Won2004.10.87th SME Securitization9th
B+740.15 USD2004.12.14Piraruku Fund Ltd10th
B4198 Won2003.05.094th SME Securitization6th
B+3894.4 Won2004.2.275th SME Securitization7th
598
48
131
42
59
52
23
No. of firms
B+
B
B
BB-
BB-
BB
Credit Grade(WAR)
0.35 USD2002.11.14COROvoltin Fund5th
84.7 Won2005.6.308th SME Securitization11th
1,834.7 Won Total
81.5 Won2002.09.063rd SME Securitization4th
0.34 USD2001.12.11KOROmas Fund3rd
160 Won2001.01.312nd SME Securitization 2nd
72.0 Won1999.12.301st SME Securitization1st
Amount(billion)
Date of IssueTitle of SPC
target WAR: BB - B+
Total Amount:1,834.7 billion KRW
# of firms: 598
Average funding per firm: 3 billion KRW
Special attention to
2nd: together with KCGF
8th : ABMI related
P-CBO Programs for SMEs by SBC
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Mortgage Financing
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Establishment of Korea Housing Finance Corporation (KHFC)
Korea Mortgage Corporation was established in 1999
Establishment of State-run Secondary Mortgage Market EnterpriseKorea Housing Finance Corporation Act enacted in Dec. 2003KHFC officially established on Mar. 1, 2004Korean government & Bank of Korea are sole contributors of the capital
– Current capital base : 376 billion won (Authorized capital : 2 trillion won)
Losses, in excess of reserves, to be covered by the government (KHFC Act)
Major Lines of BusinessPurchases mortgages and issues MBS
– Provides guarantee on MBS (up to 50 times of capital)Purchases mortgages and Issues MBB (Mortgage-Backed Bond)Mortgage Portfolio Business (Issuance of MBS or MBB required)Provides credit lines to lenders to support the origination of mortgages
Issues unsecured Bonds (up to 10 times of capital) and Borrows from financial institutionsPurchases Student Loans and Issues KHFC guaranteed SLBSManages Student Loan Credit Guarantee FundManages Housing Finance Credit Guarantee Fund
– Guarantee for Individuals Chonsei Loan, Home Purchase Loan, Installments Loan
– Guarantee for Housing Builders
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Sales of Mortgages Trust Issuance of MBS
Borrowers
Monthly Repayment
of P&I
Servicing Fee
Guarantee FeeTrustee Fee
Lenders(Seller/Servicer)
KHFC Trust(Trustee: KHFC)
Investors
FSC
MBS P&I Repayment
Mortgages
Registration of Securitization Plan, Transfer/Trust
Guarantee on MBS P&I payment
MBS Issuance Structure (1)
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
KRW 400~500 billion (per issue) Issuance Amt.
KHFC provides 100% Guarantee on MBS P&I payment
Multiple tranches with different Maturities
Sequentially Partially Callable on a quarterly basis
Quarterly MBS P&I Repayment by the exercise of call option
3 yr Bullet tranche without call option, supported by 5 yr Fast-pay tranche
Issuance Structure
Fixed-rate MBS (Quarterly coupon payment)
AAA Credit rating, Listed in KSE, Deposited in KSD, Public Offering
MBS Terms
Trust (Trustee: KHFC)Issuer
Participating LendersServicer
Monthly in principle Issuance Freq.
Mortgages originated by participating lenders under securitization commitment program
Underlying Assets
Detailed terms of MBS issuance : KHFC Web Site (www.khfc.co.kr)
MBS Issuance Structure 2
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Mortgage Securitization Business
Analysis of ABS Issuance in 1H, 2005 - 1
Loan
Securities
Card loan
Auto loan, Lease
MBS
Accounts receivable(PF)
Real estate installment payment
7%7%
22%21%
22%
1%
SOC related
As of July 31, 2005
-The first MBS issuance completed in June, 2004
-13MBS Issuances successfully completed (Total 5.7 trillion won)
-6.5 trillion won of mortgages originated (88,928 mortgages)
-Currently mortgages are originated by 21 Approved Lenders
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Student Loan Financing
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Existing Subsidized Student Loan
Major Characteristics Subsidization of Interest Payment
– Borrowers pays 4.0% p.a. of interest to the banks
– Government subsidizes 4.25% p.a. of interest to the banks
Standardized Student Loan Product– Controlled by Ministry of Education & Human Resources Development
– Loan amount only covers Tuition
– Fixed Interest Rate
– Max. 14 years of Maturity including Max. 7 years of Repayment Period
Held under the Bank’s Balance Sheet– Funded by the Banks’ short-term deposits
– Banks assumes Credit Risks
Major Problems of the old Student Loan Program Government’s excessive burden for subsidizationNeed to support the cost of living besides the tuitionNeed to lengthen the Repayment PeriodMismatch in the bank’s Asset-Liability Management Need to develop stable supply system of student loans
– Heavily depends on the banks’ discretion or business strategy
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Student Loan Securitization(SLBS) Program
SLBS Issuance Structure
Sales of Student LoansTrust
Issuance of SLBS
Borrowers
Monthly Repayment of P&I
Servicing Fee
Guarantee FeeTrustee Fee
Banks(Seller/Servicer)
KHFC Trust(Trustee: KHFC)
Investors
FSC
SLBS P&I Repayment
Student Loans
Registration of Securitization Plan, Transfer/Trust
Guarantee on SLBS P&I payment
Student Loan Credit Guarantee
Fund
Guarantee
Guarantee Fee
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New Government-Guaranteed Student Loan
Establishment of Specialized Fund for Credit Enhancement
Korean Government established「Student Loan Credit Guarantee Fund」
– July 18, 2005
– To enhance the credit of student loans
– Provides 90% Partial Loss Coverage
Ministry of Education & Human Resources Development directs the Fund
KHFC appointed as the Manager of the Fund
– Borrowers apply for the guarantee through 15 designated Banks
Plans to provide 500~600 billion won of guarantee in the 2nd half of 2005
– From 2006, the Fund will provide 1.5 trillion won of guarantee annually
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New Government-Guaranteed Student Loan
Development of Long-term Student Loan Product
No Prepayment PenaltyPrepayment Penalty
Max. 20 years
Max. 10 years of Grace Period determined by borrower’s academic year(grade), sex or the completion of military services
Max. 10 years of Repayment Period
Maturity
Monthly P&I (or Principal only) level payment
Fully Amortizing (No Partial Amortization)Repayment Terms
Fixed Rate
Online Application : 6.95% p.a.
Application at Banks’ Windows : 7.0% p.a.
Some Borrowers, in lower income bracket, entitled to get 0% or 2% Subsidized Loans (Subsidization Period limited to Grace Period only)
Interest Rate
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Securitization Commitment Program
Summary Information
The program was developed to facilitate the origination and securitization of Government-Guaranteed Student Loans
Pre-commitment
– KHFC gives pre-commitment to purchase student loans from Banks
– Banks give pre-commitment to originate student loans and transfer them to KHFC
Banks will act as the Servicer of the student loans
KHFC funds the purchase of student loans by issuing SLBS
Current Status
15 Banks started to originate student loans from Aug. 12, 2005
The first Issuance of SLBS to be closed in Oct. 2005
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Student Loan Securitization(SLBS)
Summary of SLBS Issuance Structure
500~600 billion won (per issue) Amount
KHFC provides 100% Guarantee on SLBS P&I payment
Multiple tranches with different Maturities
Sequentially Partially Callable on a quarterly basis
Quarterly P&I Repayment by the exercise of call option
Noncallable Short-Term tranches, supported by 5 yr Fast-pay tranche
Issuance Structure
Fixed-rate SLBS (Quarterly coupon payment)
AAA Credit rating, Listed in KSE, Deposited in KSD, Public Offering
SLBS Terms
Trust (Trustee: KHFC)Issuer
15 Banks (Originators)Servicer
Government-Guaranteed Student Loans originated under KHFC’ssecuritization commitment program
Underlying Assets
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Expected Effects of the New Program
Reduces the Government’s Financial Burden
More Financially Effective than the old Subsidization Mechanism
Increases the volume of Student Loans
Higher Leverage Effect based on the same Government’s budgetAdditionally supports the cost of living of the borrowers
Replaces Bank Deposits with Long-Term SLBS Issuance in the Bond Market as the MajorSource of Funding for Student Loans
Lengthens the Maturity of Student Loan (Max. 20 years)
Reduces the Repayment Burden of the Borrowers
Contributes to Stable Supply of Government-Sponsored Student Loans
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New Regulatory Improvement
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ABS related business guideline
Market’s self-regulatory guideline for those engaged in ABS business (from ’05.5)
Clarify the role and responsibilities of ABS related party
Embody device for surveillance among ABS related parties
Strengthen ABS related disclosure
Minimize instability in the ABS market and create an environment
favorable to ABS investment
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A Comment:Demand for Securitization
under Asian Bond Market Initiatives
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Example: Residential Mortgage Securitization
Building on Existing Programs
Cagamas
Korea Housing Finance Corporation
Hong Kong Mortgage Corporation
Singapore CMBS and Residential Pre-sales
China Construction Bank pilot MBS - authorized.
Mortgages
Mortgage Finance Co
Mortgages
Securitization MBS Vehicles
RegionalMechanismGuaranty
InstitutionalInvestors
Equity & High YieldInvestors
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Example: Tuition Securitization/Student Loan Securitization
1.000.000 UF(23US$ Millions Approx.)
Chilean UF
May 9, 2003
8 years
Quarterly
Annual
UF 100.000 for the first 5 years
UF 120.000 (Years 6) 180.000(Years 7); 200.000(Year8)
1 Series
UF 1.000
AA – by the local affiliates of Moody’s, Standard & Poors,
and Fitch.
IFC irrevocably guarantees the due & punctual payment
in UF of the Guarantee Amount.
Initially 30% of principal. Reduces gradually with principal repayment to an amount equal to 25% outstanding principal
Amount:Amount:
Currency:Currency:
Issue Date:Issue Date:
MaturityMaturity
Interest Payment:Interest Payment:
Principal Payment:Principal Payment:
Series:Series:
Nominal Value:Nominal Value:
Rating:Rating:
Guarantee:Guarantee:
Guarantee Amount:Guarantee Amount:
Tuition Securitization by Diego Portales University in Chile
Korea - securitization of student loans similar to Sallie Mae
Philippines – Tuition bonds privately placed
Future tuition cash flows can be securitized to modernize higher educati
onal facilities
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SME Securitization
Benchmark: Pan-Asia Bond SME securitization deal
Similar deals of SME securitization have taken place in Japan and Korea
In 2005, Singapore starts SME ACCESS loan Scheme
There seems to be demand for SME securitization in Malaysia, Thailand, and other member countries
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Example:Financing Upgrading Public Transportation through Equity & Bonds
Shanghai intends to modernize its bus system
Being more environment-friendly
More comfortable to low-income bus riders
Extending to the inter-city rapid transit system in the Yangtze
Delta improving the city image for the World Expo 2010
The Project
Upgrading 1,000 buses a year for 10 years with an annual investment of US$100 million
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Example:Financing Upgrading Public Transportation through Equity & Bonds
How could the regional mechanism support this project?
Initial stage - Enhancing corporate bond readiness by an equity investment of $10 mil.
Improving corporate governance, accounting practice, and financial
management
Improving asset quality and risk profile, balance sheet restructuring
Building strategic partnerships with international industrial leaders
Establishing credit rating track records toward “investment grade”
Second stage - Securitizing future receivables for cross-border bond issuance
Third stage – Equity exiting through a planned IPO
Note that HSBC concluded HK$3 billion deal backed by taxi andpublic light bus loans in 2003.
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Thank you very much !
For more information or contact point send e-mail to [email protected]
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Appendix:Cross-Border ABS Deals from Korea
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____________________Source: Merrill Lynch from rating agencies reports
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1998 1999 2000 2001 2002 2003 2004
Auto Loan ABS Consumer Credit ABS Equipment Lease ABS CDO MBS Other
(US$)
Korean Offshore ABS New Issuance by Asset Type (1998-2004)
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
Asset Types in Cross-border Transactions
Residential Mortgages
Auto Loans
Credit Cards Equipment LeasesConsumer Loans
Airline Ticket Receivables
CDOs (SMEs)
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
PercentageAmount
(billion KRW)Category
100.01,500Total
49.7744.9Subtotal
3.552.5B
4.669B+
6.292.5BB-
14.5217BB
20.9313.9BB+
Non-Investment
Grade
50.3.
21.7
13.6
6.3
4.0
2.4
1.9
0.4
755.1Subtotal
204BBB
326.6BBB-
94.3BBB+
59.4A-
36.3A
28.5A+
6AA
Investment
Grade
Investment Grade : 50.3%
Non-investment Grade : 49.7%
P-CBO Programs: Credit Grade
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
No
No
No
No
No
No
No
No
No
Receivable
Backed
Local3SB
(Straight Bond)
8 th ShinboPartner
Securitization
8th
Local3SB
(Straight Bond)
9 th ShinboPartner
Securitization
9th
Local3SB
(Straight Bond)
6th ShinboPartner
Securitization
6th
Local3SB
(Straight Bond)
7th ShinboPartner
Securitization
7th
3
3
3
3
3
Maturity
Local
Local
Local
Local
Local
Currency Denominatio
n
SB
(Straight Bond)
5th ShinboPartner
Securitization
5th
SB
(Straight Bond)
4th ShinboPartner
Securitization
4th
SB
(Straight Bond)
3rd ShinboPartner
Securitization
3rd
SB
(Straight Bond)
2nd Shinbo SME Securitization
2nd
SB
(Straight Bond)
1st Shinbo SME Securitization
1st
TypeTitle of SPC
Based on SB
Not backed by receivables
Maturity : 3 years
Currency : KRW
P-CBO Programs: Underlying Assets
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
3.0%97.0%8th Shinbo Partner
Securitization8th
3.0%97.0%9th Shinbo Partner
Securitization9th
3.0%97.0%6th Shinbo Partner
Securitization
6th
3.0%97.0%7th Shinbo Partner
Securitization
7th
3.0%97.0%5th Shinbo Partner
Securitization5th
3.0%97.0%4th Shinbo Partner
Securitization4th
3.0%97.0%3rd Shinbo Partner
Securitization3rd
3.0%97.0%2nd Shinbo SME
Securitization 2nd
3.0%97.0%1st Shinbo SME
Securitization1st
JuniorSeniorTitle of SPC
Senior: market
Junior: Issuing Companies
Risk Sharing Structure of KCGF’s SME P-CBO
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
Minimum credit grade requirement
- SMEs : BB- or above
Ceiling amount for each company, each business group
Strict diversification
Mandatory issuance of junior CBOs
- Sub. CBOs repurchase by companies or SBC
Excess spread (spread account)
- difference between the rates of underlying assets & CBOs
Monitoring using SME credit database
The key is to prevent moral hazard of issuing companies.
Safeguard Measures by KCGF
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
Combined Rating beforeFiltering & AdjustmentNR
(Not Rated)
Yes
Quantitative Rating
Evaluated automatically
No
Financial Rating
Window Dressing Check
Qualitative Rating
Judged by Analyst
Biz Information Report
Financial RatioFactors
Non-financialQuantitative
Factors
Non-financialQualitative
Factors
Filtering Adjustment
Credit RatingCredit Rating
Industry Rating FAPs(Financial Filtering)
Corporate Credit Rating System (CCRS) by KCGF
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
5.86%1,12119,124Total
25.00%61.47%22.94%-100%416C
21.71%17.69%12.45%-22.94%33152CC
10.03%11.57%10.70%-12.45%39389CCC-
10.30%9.82%8.94%-10.70%82796CCC
10.21%8.06%7.19%-8.94%1781,744CCC+
7.75%6.74%6.30%-7.19%2182,814B-
5.87%5.86%5.42%-6.30%2043,478B
4.42%4.97%4.53%-5.42%1774,001B+
4.08%4.25%3.97%-4.53%741,813BB-
3.62%3.69%3.42%-3.97%571,574BB
2.57%3.14%2.86%-3.42%321,244BB+
3.91%2.69%2.52%-2.86%14358BBB-
1.47%2.34%2.17%-2.52%4272BBB
1.68%2.00%1.83%-2.17%4238BBB+
0.00%1.68%1.54%-1.83%81A-
0.00%1.39%1.25%-1.54%69A
0.00%1.10%0.96%-1.25%57A+
3.85%0.56%0.17%-0.96%126AA
0.00%0.01%0.03% – 0.17%2AAA
Actual Rate of Default Actual Rate of Default Average Average Estimated Default ProbabilityEstimated Default ProbabilityNo. of Default No. of Default No. of Financial No. of Financial Statements Statements
Credit Rating Credit Rating
CCRS - Estimated and Actual Default Ratio
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
Established Korea Enterprise Data in Feb. 2005 as a spin-off company of KCGF’s credit information services
Credit bureau specializing in credit information of SMEs
Capital: USD 72 million
Shareholders: KCGF(47.8%), KOTEC, KDB, IBK, KFB, SBC, etc.
Head Office (5 divisions, 2 departments, 19 teams) in Seoul and 8 branches nationwide
Currently providing 8 types of credit information services to domestic and overseas clients
To enhance the quality of the pool, systematic management and analysis of SME credit information is essential.
SME Credit Database – Monitoring tool
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
No
No
Partial(SB)
No
Yes
Yes
No
Yes
No
No
No
Receivable
Backed
JPY3BW/SB
Yen CBO securitization
(6th SME Securitization)
8th
Local3BW/SB/Loa
n7th SME Securitization
9th
USD5BWPiraruku Fund10th
Local3Loan4th SME Securitization
6th
Local3BW5th SME Securitization
7th
3
5,7,10
3
3
1,2
3
Maturity
Local
USD
Local
USD
Local
Local
Currency Denominatio
n
BWCOROvoltin Fund5th
BW8th SME Securitization
11th
Loan3rd SME Securitization
4th
BW (Bond/
Warrant)KOROmas Fund3rd
SB2nd SME Securitization
2nd
SB(Straight Bond)
1st SME Securitization1st
TypeTitle of SPCCurrency: local/G3
Maturity
3 years for local
5 year for G3
Why 3 years
benchmark corporate bonds has 3 year tenor
extending to 5 years is not economically viable
Structure:three stages
introduction: SB
(2nd with KCGF)
variation: Loan backed by receivables
mature: BW
P-CBO Programs: Underlying Assets
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
The main problems are that SMEs in Korea have high default risk
Rating 1 year 2 year 3 year 4 year 5 year 6 year
AAA 0.00 0.00 0.00 0.00 0.00 0.00
AA 0.00 0.00 0.00 0.00 0.00 0.00
A 0.00 0.00 0.00 0.00 0.00 0.00BBB 0.32 0.68 1.11 1.93 3.20 3.20
BB 3.94 6.77 9.12 10.18 11.29 12.48Below B 13.73 17.10 19.44 19.44 19.44 19.44
Investm ent 0.16 0.36 0.60 1.09 1.82 1.82
Speculative 6.50 9.47 11.81 12.59 13.37 14.21Average 2.22 3.41 4.47 5.07 5.82 6.13
P-CBO Programs: Underlying Assets
Cumulative Default Rate (by Korea Rating, Periods : 1998-2004, unit : %)
Korea Fixed IncomeKorea Fixed IncomeResearch InstituteResearch InstituteKFIRIKFIRI
Junior Bondholder
(SBC)
Korea Offshore
Interest Reserve Account
Swap Provider (Nomura)
Credit Facility Provider (IBK) Bond Issuer Note Issuer
Seller and Korean
Arranger (Daishin)
Shareholders
International Arranger (Nomura)
Portfolio Obligors
Security Trustee (HSBC)
Investors Note Guarantor
(JBIC)
3 years Interest +
Senior Fees
Issue Proceeds
(¥)
Senior Notes
Interest Rate Swap
Security Trust Deed
Issue Proceeds
(¥)
Senior Notes Note Principal
Guarantee (¥)
Portfolio Securities +
Mezzanine Bonds Subscription Price
(¥)
Purchase Price (¥) +
Mezzanine Bonds
Credit
FacilityIssue Proceeds (¥) + Subordinated Note
Senior Bond + Subscription Price
Junior Bond (¥)Subscription Price (¥)
Purchase Price
Warrant
Portfolio Securities
Mezzanine Bonds + Subscription Price
(¥)
Pan Asia Bond: Yen-denominated P- CBO
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