The Korea Land Corp. (Koland), a government land bank, has recently launched the first of three structured deals backed by the proceeds of real estate. Though touted as Koland's first securitization, the transaction is more noteworthy for showing how Korean bankers have been creatively applying securitization principles to obtain funding in the domestic market.

The W405 billion ($336 million) transaction was arranged by Daewoo Securities, Samsung Securities, Korea Development Bank and Korea Housing and Commercial Bank. Koland transferred industrial real estate purchased from companies to a domestically incorporated SPC called Landpia II 1999-1, which then issued two tranches of securities: a three-year tranche with a principal amount of W205 billion was priced at 9.4%, while a five-year tranche with a principal amount of W200 billion was priced at 10.15%. The transaction was rated triple-A by two domestic agencies, KMCC and Korea Investors Service, and placed with domestic banks and insurance companies.

Underlying cashflow will initially come from a W5 billion reserve fund set up by Koland, and later from the eventual sale of the real estate to the public. Should there be any shortfall in the payments due to investors, Korea Development Bank and Kookmin Bank have agreed to guarantee the payment of interest and principal up to a total of W700 billion over a five-year period, explained Kunsok Pang, an analyst in the structured finance department at KMCC.

The unique structure of the deal is due to Korea's illiquid property market, explained Hoon Kyo Jeong, general manager of structured products at Daewoo Securities in Seoul. "The underlying asset is land acquired by Koland from corporations, but the land does not produce any cashflow. That is why the cashflow is produced by the reserve fund and the guarantees by KDB and Kookmin Bank," he said.

Two more securitizations are in Koland's pipeline. Both are roughly W250 billion and backed by regular installment payments paid to Koland by land-buyers. Salomon Smith Barney, KEB Securities and Daewoo Securities are preparing to launch one deal in late October, while Nomura Securities and Hyundai Securities will bring another later, said Jeong.

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