A South Korean government agency could become the issuer of the biggest securitization ever seen in non-Japan Asia if a deal being discussed between Korean bureaucrats and foreign bankers comes to fruition. The deal, which would be backed by non-performing loans owned by Korea Deposit Insurance Corp., is likely to be worth as much as be W1.9 trillion ($1.7 billion).

The discussions were confirmed by the head of the country's Financial Supervisory Committee, Nam Sang-duck.

Korean officials are keen on the deal because it would raise finance to pay for further restructuring of an economy still saddled with bad debts and troubled firms. If the deal is a success, the agency will join the Korea Asset Management Corp., the body established to clear up the country's bad debts, as an issuer of NPL-backed deals.

Nam declined to be specific on the precise form and timing of any deal but there is no doubting the need for cash. KDIC - a state body that returns customer deposits at failed or failing financial institutions - is in the process of compensating customers of bankrupt merchant bank Nara Investment Corp. and, along with Kamco, will have to find the cash - likely as much as W5.5 trillion - to bail out the country's two biggest fund managers, Daehan Investment Trust and Korea Investment Trust.

The government has made it clear that KDIC's portion of that total would be W1.9 trillion - which would eventually come from the ABS - with Kamco funding the rest.

Many banks are examining how to make a deal work, with some American banks thought to be favoring principal finance transactions, with or without securitization as the end product, and others, proposing straight agency asset-backed deals. Any deal is likely to be placed internationally.

The government had said that it would not allow the restructuring bodies to borrow money directly from banks and financial institutions to bail out struggling firms, but has back-tracked slightly, saying that it may permit the KDIC to take out short-term loans that would be repaid by the ABS.

More deals are possible, as, according to a Merrill Lynch report on banks in the Asia-Pacific, the country needs an extra W20 trillion in public funds to complete the necessary restructuring, and that figure doesn't include the W5.5 trillion needed for the bail out of Daehan and Korea investment trusts.

Some bankers expressed skepticism that the deal would ever see the light of day, particularly if the agency route was chosen in preference to a principal deal, citing the difficulties of extracting much value out of the assets and the patchy history of international ABS in Korea, but others were more positive. "These are serious discussions and serious proposals; just wait and see," said one.

In related news, Kamco announced that Morgan Stanley Dean Witter has won the latest of its non-performing loan auctions. The U.S. bank put in a combined bid for both of the portfolios on offer, with a face value of W1.03 billion in total, offering 50.1% of face value. As in the previous auction, which was won by Deutsche Bank, the winner forms a 50/50 joint venture asset management company with Kamco to realize the value on the assets.

A securitization is one way for the bank to exit its principal position, though, it is considered just as likely to restructure the assets and then either sell them directly to other banks or just wait for them to mature.

Others bidders were the usual Asian NPL suspects, including Cerberus Capital, Lone Star Fund, Deutsche and Amresco.

Cerberus, however, has good news with which to cheer itself up, after confirmation that it has struck a deal with Cho Hung Bank to set up a joint venture to purchase and manage W1.5 trillion of Cho Hung's distressed assets. The U.S. distressed asset fund will also invest $500 million to buy shares in the loss-making state-owned bank.

``We are so excited about the equity investment in Korea at this stage,'' Steven Trawick, managing director of Cerberus, told reporters in Seoul.

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