Korea Housing Finance Corporation (KHFC), the state mortgage company established in March by the Korean government and Bank of Korea, last week launched the first deal out of what will be a monthly mortage-backed securitization program.

Hana Securities, Korea Development Bank (KDB) and Samsung Securities acted as co-lead managers on the (KR)W552 billion (US$470 million) debut offering, which was split into nine tranches with maturities between one and 20 years.

Under its remit, KHFC sells long-term mortgages through registered financial institutions, credit guarantees to mortgage borrowers and can purchase mortgage portfolios from nine private originators. That was the case with its first MBS, backed by mortgages bought from Hana Bank, KFB, Korea Exchange Bank and Samsung Life Insurance.

KHFC also has arrangements to buy mortgages from Kookmin Bank, Industrial Bank of Korea, Woori Bank, the National Agriculture Cooperative Federation and Daehan Life Insurance.

Since its inception, KHFC has extended W1.2 trillion (US$1 billion) of mortgage loans to domestic borrowers. It has targeted sales of W4.5 trillion in 2004 and hopes to raise W4 trillion through its MBS program this calendar year and W6 trillion over the next 12 months.

Ultimately, KHFC says it plans to raise W70 trillion from securitization issuance by the end of 2008: in the process, boosting the market for long-dated bonds in Korea, lowering housing costs and encouraging the development of the domestic MBS market. In the future, KHFC also intends to introduce new products such as MBS swaps and variable rate-adjusted MBS into the market.

With the government guaranteeing investors against losses, the deal - launched out of the KHFC MBS 2004-1 special purpose company - was rated triple-A by Korea Ratings, Korea Investors Service and National Information and Credit Evaluation.

The W10 billion one-year notes priced at par on a 4.14% coupon, five basis points over treasuries. The W32 billion two-year tranche pays 4.28%, a pick-up of seven basis points, while the W50 billion three-year tranche pays 4.33%, a spread of 10 basis points.

The remaining six rated tranches are callable and priced against five-year treasuries. They include a W110 billion five-year tranche, callable after three years, which offers 4.67%, or 20 basis points over treasuries; a W130 billion 7.5 year tranche, callable at 3.5 years, paying 4.82%, a 35 point pick-up; and a W80 billion 10-year tranche, callable at four years, offering 5.04%, 57 basis points over.

In addition, the W50 billion of 12-year notes, callable at five years, pay 5.16%, or 69 basis points over, while the W50 billion 15-year notes, callable at six years, pay 5.22%, or 75 basis points over. The partially callable W40 million 20-year tranche offers 5.26%, a pick-up of 79 basis points, while the W10 million subordinated tranche, which has a legal final of 21 years, pays a 5.36% coupon.

The weighted average coupon is around 5%, which is not only well inside treasuries, but significantly lower than KHFC's 6.7% fixed rate for 10-year to 20-year mortgage loans.

According to KHFC, 19 investors participated in the deal. KHFC placed about W220 billion with commercial banks, W200 billion with insurance companies, W100 billion with pension funds and the remainder with other asset managers.

May I have another, sir?

On the face of it then, the deal could be regarded as an unqualified success. Not everyone will be happy, however. For one thing, to say the pricing is on the tight side would be a major understatement.

Prior to the deal's launch, the Korea Securities Dealers Association estimated coupons of 4.439% for the one-year bonds, 4.868% for the three-year notes and as much as 6.028% for the 20-year tranche.

For those unacquainted with Korean capital markets, the difference between anticipated pricing and the actual levels might seem extreme. Further, it is rather unlikely that the differential resulted from unprecedented investor demand. It might, however, be speculated that - for some domestic deals involving state-owned institutions - investors do not have much choice. That is, investors may have little influence over pricing, and deal participation may be mandatory.

Meanwhile, there is some concern that KHFC will crowd out private originators from both the mortgage and MBS markets.

"That thought is not way off beam," an experienced Asian ABS banker told ASR. "After all, that is exactly what has happened in Hong Kong [with the Hong Kong Mortgage Corp.] The main difference is that the mortgages involved in these deals are, from day one, originated for the purpose of on-selling to the KHFC, rather than selling to a mortgage portfolio when needed. However, my suspicion is that, over time, KHFC's role will expand. Right now, my feeling is the banks really regard KHFC as competition and do not want to originate product for them, but are not permitted to say so."

According to the Financial Supervisory Service, by the end of July 2003 there were approximately US$5.6 billion of real estate loans in the financial system, US$4.4 billion of which were held by banks. Home ownership exceeds 50% in Korea and demand continues to grow, spurred by low interest rates, favorable capital gains treatment for borrowers and a banking sector looking to build up mortgage portfolios.

Aside from a need for funds, banks are increasingly looking toward securitization as a means to manage maturity mismatches.

In April, KFB completed a US$499.6 million MBS deal via UBS, the country's first cross-border offering since Samsung Life's US$299.6 million MBS - a late 2002 deal arranged by Morgan Stanley.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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