South Korea recently saw its first two issues of mortgage-backed securities - both of which were domestic deals - but which deal is the first real MBS is a matter of friendly dispute. The Korean Mortgage Corp. (Komoco), the country's secondary mortgage agency, says it closed the first, but it may have been pipped at the post by a deal from NewState Capital that closed two weeks previously.

The difference of opinion arises because NewState's deal made use of Korea's recently amended ABS law, even though it was backed by mortgages, while Komoco's transaction used the country's MBS law, explained Kim Kyu-Jin of Daewoo Securities, the arranger of the NewState deal.

Whoever won the race, there is little doubt which will have the most impact as Komoco's deal is the first in a series of domestic MBS transactions which will add up to over W2 trillion ($1.8 billion) this year, said Kwun Kyung Won, head of Komoco's business preparation team.

The deal, which is split into nine senior tranches worth W367 billion and two subordinated pieces worth W28 billion, was snapped up by eager domestic investors, said an official at Hanwha Securities, which acted as joint arranger with Hyundai Securities and Daishin Securities.

The mortgages that back the deal were originated by the state mortgage lending institution, the National Housing Fund, and there is plenty of scope for further deals as the NHF has outstanding loans of around W30 trillion.

The senior tranches received AAA ratings from two domestic agencies, National Information & Credit Evaluation (a Duff & Phelps Credit Rating Co. affiliate) and KNCC, based on a guarantee from Komoco to make good any losses.

The maturities ranged from six months to six years and the notes pay interest rates of between 8.2% and 10.1%. The subordinated, first loss notes did without a guarantee and were unrated. They have been sold back to the NHF in order to make sure that there is an incentive to continue to service the loans properly.

The NewState deal, by contrast, manages without recourse back to the issuer. The mortgages boast loan-to-value ratios of between 40% and 60% and the majority have at least three to four years seasoning. The low LTVs are necessary because Korean law puts a mortgagee's deposit (often amounting to several years worth of payments) above the fist lien, said Kim.

The deal, worth W58.9 billion in total, is chopped into four fixed and floating rate tranches, rated between AAA/AA and AA/A-plus by Korea Investors Service (a Moody's Investors Service affiliate) and NICE, plus an unrated, subordinated piece. Interest rates on the rated tranches vary between 10.13% for the one-year AAA/AA tranche to 12.64% for the 10-year AA/A-plus piece. The 10-year unrated chunk pays a return of 20%.

NewState is a non-bank lender, formerly Dong Suh Financial, which was acquired by Nasdaq quoted New State Holdings and merged with Yeung Nam Housing in December 1999.

Komoco also hopes to issue "true" securitizations without an issuer guarantee, said Kwun, but initially it has to use its triple-A rating to access the best pricing from a market that still prefers recourse to highly rated issuers. Kwun also hopes to be able to increase the maturities of the bonds it offers.

"The Korean bond market and in particular the long-term market is immature, so most Korean bonds are medium-term notes, usually with maturities of three to five years," he said. "But there is still some demand for longer-term debt, for instance, from the National Pension Fund and life insurance companies that want longer maturity products for asset/liability matching."

It is part of Komoco's remit from the government to strengthen and deepen the local market, so future MBS issues from the body will feature tranches with maturities of 10-years or more.

Future deals may also have dollar-denominated tranches aimed at international investors, Kwun added, assuming that the pricing and the extra distribution can compensate for the costs of the foreign exchange swap.

Komoco will no doubt be helped in these aims by the involvement of the International Finance Corp., the World Bank's private lending arm, which bought a 15% stake in the body in November 1999 (ASRI 11/15/1999 p.1). The rest of the body is owned by the Ministry of Transportation and Construction, the state-owned Housing and Commercial Bank and other local investors.

Other deals that closed in Korea recently include a W330 billion transaction from the Industrial Bank of Korea that was collateralized by non-performing assets owed to IBK from collapsed or struggling companies. It was chopped into one-year bonds worth W180 billion, two-year bonds worth W70 billion and W80 billion worth of subordinated notes. Daishin Securities and Hyundai Securities were co-lead managers.

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