The Korean Asset Management Corp., the country's bad debt agency, last week issued its first international securitization and one of non-Japan Asia's first cross border securitizations of non-performing loans.

The $367 million deal, which was joint lead managed by UBS Warburg and Deutsche Bank, seems to have been a runaway success, with all the paper sold prior to the official launch.

The deal is backed by a portfolio of restructured loans - worth $419 million - originated by six Korean banks and sold to Kamco after the onset of the Asian financial crisis caused the loans to turn bad. Over 90% of 135 loans to 45 obligors are denominated in U.S. dollars, with the rest in yen.

However, the deal is not a simple NPL transaction, because it relies on put options that Kamco has to put back the loans to the originators should the loans default. It is therefore the put options that give the deal its strength and allowed Moody's Investor Service and Fitch to rate the deal at Baa2 and BBB-plus respectively (ASRI 7/17/2000 p.1).

Both the agencies said that the focus of their analysis was not on the underlying obligors (most of which would be rated at triple-C, at best, if they were rated) but on the credit quality of the put option banks. Indeed, the agencies analyzed the transaction assuming that the vast majority of the loans would default.

The state-owned Korean Development Bank is exposed to 60% of the put options and also provides a credit facility equal to 30% of the investor notes.

Consequently, the deal can be viewed as both an asset-backed transaction and as a way for investors to gain exposure to the KDB. Because of this, the deal priced at 200 basis points over six-month Libor, between where KDB's straight bonds of similar tenors are trading and where comparable emerging market assets backeds are positioned.

The transaction has an expected average life of just under five years and a final maturity of 2009. Bankers said that KDB's own 2005 paper is trading on an asset swap basis well over a hundred basis points inside this deal, while comparable asset-backeds are trading around 250 to 275 basis points over.

"Although it's got a fairly high proportion of KDB puts and the credit facility, there is residual risk on the other banks," said Anthony Cutcliffe, head of Asian structured debt capital markets at UBS Warburg. "It is Korean banking sector risk, not pure KDB risk, and it is quite a complicated story."

He added that the final pricing moved in from initial price talk of around 225 to 250 basis points over Libor.

The fact that the deal can be viewed as both an ordinary ABS and as a KDB-related deal has allowed the investment banks to garner an unusually wide placement. The paper was sold to around 40 different investors, including banks, asset managers and insurance firms in Europe, the U.S. and Asia.

"Interest in the paper has come not only from ABS specialists ... but also from investors new to the asset-backed sector but familiar with Korean bank credit," said David Knell, head of Asian securitization at Deutsche.

This distribution will certainly stand Kamco in good stead when it comes to selling the future deals that it is planning, as many investors will already be familiar with the body itself and with Korean NPL deals. "Kamco will be pleased with the distribution and the pricing and will have a head start for future deals," said one Asian investor.

The floating rate notes are issued by a Cayman Islands SPV called Korea Asset Funding 2000-1 and are backed by senior and subordinated notes issued by a Korean SPV, which in turn are collateralized by the loans and the put options. In addition to the KDB credit facility, credit enhancement equal to 12% of the underlying portfolio comes from the retained subordinated notes.

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