KDB Capital, the leasing arm of the state-owned Korean Development Bank, recently became the first issuer to securitize onshore South Korean assets in the international markets without any external credit support, raising $101 million via arranger and underwriter Credit Lyonnais.

The transaction will stand as a benchmark in the increasingly busy Korean market, where several investment banks are working on deals and many more are fishing for mandates.

It comes only a few weeks after SG Asia arranged a lease-backed transaction for its affiliate Korean French Banking Corp. (known as Sogeko), though in that case the deal was structured using an International Finance Corp. A-loan/B-loan structure to mitigate transfer and convertibility risk. Other international Korean deals have been closed since the first deal in 1998, but all were backed by offshore assets.

The issuing vehicle, called KDBC Leasing Receivables Corp. 1, was based in Dublin, as the Korean-Irish double taxation treaty means that it will not incur withholding tax. The deal was rated at the sovereign ceiling, Baa2 by Moody's Investor Services and BBB by Duff & Phelps Credit Rating Co., and has an average life 1.05 years.

The one feature of the deal that stood out was the pricing, which at three-month Libor plus 140 basis points for the senior tranche was 110 basis points tighter than Sogeko's transaction, though both deals had similar average lives and were rated at the same level.

Greg Park, head of the Asian securitization group at Credit Lyonnais, said that the favorable pricing was mostly due to the company's ownership structure and the high quality of the underlying assets. "Clearly, the fact that KDB Capital is 86%-owned by KDB gave investors some comfort; furthermore, there was a well-diversified cherry-picked portfolio - we had 42 distinct eligibility criteria, so the leases in the pool are the cream of the crop."

The leases in question - 210 contracts with 86 obligors, all denominated in U.S. dollars, and with a principal value of $144.4 million - come from KDB Capital's portfolio of around $1 billion worth of assets and, according to a DCR ratings report, a very large proportion of them have at least three years seasoning and have performed even during the recent economic turmoil.

DCR's report also points to the importance of the link with KDB, saying that it considers "the implicit support of KDB as the major shareholder of KDB Capital and KDB's historical ability/willingness to support KDB Capital as an implicit strength to the overall transaction."

Credit support comes from two retained subordinated tranches worth around 30% of the senior notes, which because of the fully sequential payment structure of the deal - while the senior tranche pays down, the subordinated notes remain steady - mean that the level of subordination increases. There is also a fully funded reserve fund equal to 3% of the senior tranche.

One virtually unprecedented aspect of the deal, at least in Korea and perhaps also in ex-Japan Asia, is the speed at which it was done. While Credit Lyonnais was only mandated at the beginning of December 1999 the bankers faced a March 31st deadline, as tax and accounting pressures meant that KDB Capital wanted to close the deal before the financial year-end.

Credit Lyonnais brought in Deutsche Bank as co-lead and HypoVereinsbank as co-manager to take advantage of their distribution networks. Credit Lyonnais' portion of the paper - over half - was placed with investors in the U.S., Europe and Asia and was oversubscribed by the closing date.

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