After the dearth of supply from the Korean market, the 27 million transaction (US$ 243 million) for Korean Air Lines provided a renewed focus of hope for the market. KAL Japan ABS 1 involved a securitization of Japanese yen-denominated future ticket receivables originated by Korean Air Lines in Japan for flights on the Japan-Korea route. This has been the only Korean deal rated to date, and is Korean Air's first international securitization.

According to Christopher Chau, head of securitization and asset finance, Asia-Pacific at Nomura Securities International, this deal is a first in the Asia Pacific realm because it offers pan-Asian issuers the opportunity to issue yen-denominated bonds, and thereby giving potential issuers access to the Japanese investor market, one of the largest in the world.

Nomura proposed the structure to Korean Air Lines last year. An airline deal this year might have been considered a brave undertaking judging from the difficult operating conditions of the airlines, Chau said.

However, despite the difficult operating conditions, "As we looked into KAL's business," Chau explained, "we discovered that it was supported by strong Japanese passenger as well as strong cargo revenues, and that these sectors had been the least affected by the deteriorating economic conditions for airlines worldwide."

One of the key selling points of the deal was the credit enhancement provided by the Korea Development Bank (KDB), which give the notes a guaranteed credit facility. The facility can be drawn on for payments of principal and interest on the notes and expenses associated with the notes. Fitch Ratings says that the ratings are primarily based on the unconditional and irrevocable JPY-denominated credit facility provided by KDB. The transaction achieved a rating of A-' from Standard & Poor's on the back of KDB's A-' rating and a single-A rating from Fitch. KDB is 100% state-owned and it supports the government policies by funding industrial development and raising funds on behalf of the government in international markets.

KAL is the second largest cargo airline worldwide, and therefore, had additional revenues to rely on aside from passenger traffic.

"The data showed that through 9/11, the Afghanistan war, and more recently, the Iraq war and SARS, which particularly affected Asia, the traffic flows from Japan and Korea were relatively less affected," Chau added. "And the historical analysis of the DSCR for the KAL Japan ABS 1 securitization continued to be strong."

According to the Fitch pre-sale report, in the last four years, debt service coverage obligation for the transaction has fluctuated between a high of 9.0x and a low of 3.3x. Fitch adds that the outbreak of SARS, in late March forestalled the seasonal rebound in receivables volume, which usually begins in February/March.

While Japan and Korea were not affected by SARS, there was a dramatic effect on passenger numbers, with KAL's three-month average debt service coverage ratio deteriorating to a low of 3.3x for the June period, Fitch states. However, collections in June were 18% higher than those in May (the ratio deteriorated, as it is a three-month rolling average). Fitch adds that a similar increase in July traffic - preliminary indications are that it will be in excess of this figure - will cause the ratio to improve for the July reporting period.

Market sentiment in Korea will probably not be revived by this deal alone, as consumer credit companies are still going through an adjustment period. Nevertheless, Normura's Chau underlines the importance of the deal. "I think that the key point of this transaction is that it has opened up more opportunities for issuers and investors, alike," he said.

The transaction was priced in early September at one-month yen-Libor + 110 basis points. According to Nomura, the deal was predominantly placed with Asian investors: 64% in Japan; 34%, non-Japan Asia; and 2% in Europe. Bank investors were the largest single calls of investors with 68%, and funds contributed 27%, followed by insurance companies, which took 4% of the pie.

The securitization gave Korean Air Lines an effective yen funding option, which was matched against its yen revenues. "Korean Air Lines wanted to access the yen market so as to leverage on its yen-denominated revenues, which are substantial," Chau added.

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