SG Asia recently closed the first internationally placed securitization backed by domestic South Korean assets, in a deal for its affiliate Korean French Banking Corp. (known as Sogeko). The deal was also the first cross-border securitization to use the Korean ABS law, which was passed in 1998, and the first Asian securitization to be issued with the backing of the World Bank's private equity arm, the International Finance Corp. (IFC).
If that were not enough, it is also the first time that lease assets - a mainstay of the securitization business elsewhere in the world - have been securitized in ex-Japan Asia. (Another Korean lease-backed deal, arranged by Credit Lynonnais for KDB Capital, was about to close as the ASRI went to press.)
"In many aspects, the transaction is a breakthrough not only for Korea, but also for the global securitization market," said Michael Leemputte, managing director of financial engineering, Asia Pacific, at SG in Hong Kong.
The privately placed transaction, which totaled $81 million, is structured with the IFC as lender of record so that its so-called preferred creditor status mitigates currency, transfer and convertibility risks. It does this because of the assumption that even in the event of a currency crisis, the government is likely to ensure that companies that have foreign-currency debts to the international agencies, such as the IFC, will not be starved of hard currency.
The deal takes the traditional A-loan/B-loan structure that the IFC has used to lend to the emerging markets for years and securitizes the repayments, with the IFC retaining the A portion and the B portion placed with investors.
The template was also used by the IFC in a deal for Garanti Leasing in Turkey, which it structured along with Rabobank and Bear Stearns, and closed in January (ASRI 1/17/2000 p. 6 and 1/31/2000 p.1).
In this case, the Series A certificate was worth $20 million and the Series B certificate $61 million. Investors from the U.S. took 40% of the deal, with the rest split between Hong Kong and Japan.
Because of the IFC's involvement the deal was rated Baa2 by Moody's Investors Service, a notch above Korea's recently upgraded sovereign rating of Baa3. Leemputte acknowledged that the IFC's preferred creditor status is no longer the advantage it would have been when Korea was still rated below investment grade, but he argued that the IFC's involvement brings other advantages, such as demonstrating to investors that the IFC's structured finance pros had examined the deal closely and were prepared to invest in it themselves. "It certainly was a factor for investors - it is viewed very positively," he said.
The terms on the 11.5-month WAL deal were the same for the IFC's chunk and the remainder. Expected maturity is January 2002 and the notes pay 250 basis points over three-month Libor.
According to Leemputte, the underlying assets - both leases and loans - are denominated in U.S. dollars, meaning that it was natural for the deal to be placed internationally in dollars, rather than in the domestic market, even if that meant putting it together would be time-consuming.
In fact, Leemputte said, waiting for sign-off from busy Korean regulators, who were dealing with something they had little experience of, took most time. In the end the deal had been well over a year in the making even before marketing started in December (ASRI 12/13/1999 p.12)
"Part of the problem was timing: the domestic market is flooded and when the regulators are inundated with a number of deals it is easier to examine and give approval to the domestic transactions, rather than study something that is more complex," he said.
Despite all the "firsts" that the deal boasts, it is perhaps as significant that it made it to market at all. It is only the third cross-border ABS from Korea and is a survivor from when - in the aftermath of the Asian financial crisis - investment bankers were swarming over Korea telling potential issuers that securitization would solve all their problems, only for deals to founder. Other market pros praised SG for their tenacity.