South Korea's Woori Bank confirmed last week that it is working with Merrill Lynch on a securitization of distressed loans. The two parties have established a joint venture SPV to dispose of around W45 billion ($44.2 million) of "precautionary" loans, defined as loans where interest payments have been delinquent for one to three months.

The venture will issue bonds ABS by collections on those loans. Officials at Merrill declined to offer details on potential timing of the issue, whether it will be a local currency offering or if it would be sold publicly or privately. Many rival bankers suggest Merrill will also act as sole investor for the bonds, a role it has fulfilled on other Korean securitizations in the past year.

Woori formed a similar venture with Lehman Brothers in 2002, and may explore alliances with other foreign houses, sources report. The bank has the second highest delinquent loan ratio in the country at 2.27%. Additionally, with a capital adequacy ratio of 12.2%, Woori has plenty of work to do if it is to reach the 8% required before 2007, under the Basel 2 accord.

With several other Korean banks in a similar situation, securitization should see plenty of capital management related ABS in the next 18 months.

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