The Korean Asset Management Corp., the country's bad loan agency, is in the market with its first international securitization, a $367 million transaction backed by non-performing loans.

Well ... kind of.

While the deal is indeed backed by a portfolio of NPLs purchased by Kamco from Korean banks with a face value totaling $419.6 million, in reality it is backed as much by put options that allows Kamco to sell back any loans which default to the original originating bank.

"This is not a true international non-performing loan transaction where the detailed analysis is performed on the underlying loans and the associated collateral," said Amit Agarwala, associate director at Fitch. "The focus of analysis was on the credit quality of the put option banks, rather than the underlying loan obligors themselves. The analysis was somewhat similar to a collateralized loan obligation from the put option bank perspective."

Such transactions are not unknown in the domestic Korean market, but are unusual for deals that are placed internationally.

The transaction, which is jointly lead managed by UBS Warburg and Deutsche Bank, is structured using a Cayman Islands SPV called Korea Asset Funding 2000-1, which will issue floating rate notes rated BBB-plus by Fitch and Baa2 by Moody's Investors Service. Those notes are backed by equivalent notes issued by an SPV in Korea, plus a retained subordinated tranche worth $53 million issued by the same Korean SPV. The Korean SPV has bought all the loans and then pledged them along with the rights under the put options to the Cayman SPV.

The notes will be repaid by collections on the loans, plus any exercise on the put backs.

The loans themselves are composed of NPLs that have been restructured under corporate reorganizations, composition acts, or commercial agreements. A loan will be held to be in default if the obligor fails to follow the restructured payment schedule, in which case Kamco exercises the put option. Most of the loans, of which 91% are denominated in dollars and the rest in yen, were restructured in 1997 or 1998 after the onset of the Asian financial crisis.

Because the loans have been restructured - with repayments on many of them not yet commencing - Fitch assumed when stressing the cashflows that 75% of the loans would default with no recovery. Indeed, most of the underlying obligors would probably be in the triple-C category if they were rated, Agarwala said, which is why the procedure for exercising the put options and the credit quality of the put option banks became critical.

The put option banks are Korean Development Bank (59.6%), Korean Exchange Bank (19%), Hanvit (6.2%), Cho Hung Bank (12%), Shinhan Bank (2.3%), and Kookmin Bank (0.6%).

As well as representing the bank exposed to the majority of the put backs, KDB also extends a credit facility initially equal to 30% of the notes sold to investors. This means that the rating is closely reliant on the foreign currency rating of the BBB-plus rated state-owned bank, Agarwala added. Consequently, any change in Korea's foreign currency rating is likely to have a direct impact on the rating of the deal.

Fitch's ratings are based on stress tests that assume that KDB is the last bank standing, when the others go bankrupt, while Moody's - who rate KDB at Baa2 - arrive at much the same conclusion via a Monte Carlo simulation, using corporate default studies to assess the probability of the put option banks defaulting.

Price talk suggests a coupon of around Libor plus 225 basis points for the notes, which have an average life of just under five years and a final maturity of 2009. Market pros suggested that this would make them attractive not just to traditional buyers of Asian ABS, but also to any investor keen to increase exposure to KDB at a spread double that on offer from KDB's own debt.

The transaction is Kamco's first foray into the international markets and has been in the works since Warburg and Deutsche were mandated in December last year (ASRI 12/13/1999 p.1). Market experts think that if this deal is a success, Kamco may revisit the international markets and other potential Korean issuers, such as the Korean Deposit Insurance Corp., will also be encouraged.

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