Kookmin Bank, the second biggest commercial lender in South Korea, has said it plans to sell W512 billion ($436 million) of securities backed by non-performing loans (NPL) in the domestic market before year-end. If the transaction goes as planned, Kookmin will become the first bank in Korea to issue an NPL-backed deal and could pave the way for similar issues from other banks burdened with bad debt.
The transaction is being arranged by domestic houses Daishin Securities and Samsung Securities. A line of credit, a typical feature in Korean domestic securitizations, will likely be provided by Housing & Commercial Bank to the tune of W150 billion. Launch date is set for the end of November, said a Samsung banker. Domestic asset backeds in Korea have a relatively short execution, since they typically have recourse back to the originator and are subject to less rigorous historical analysis than true securitization deals.
Kookmin is only one of many banks now considering NPL quasi-securitizations.
Industrial Bank of Korea, which issued the country's second cross-border securitization earlier this year, has recently invited domestic securities firms to bid on an NPL-backed securitization to launch early next year, added the Samsung banker.
"We have a plan to issue non-performing loan backed securities, maybe next year in the second quarter, but that may change according to financial circumstances. We have to get approval from our board first," confirmed an official in the Industrial Bank of Korea's international banking department.
Korean banks have been quick to seize upon other assets for securitization. In addition to the NPL issue, Kookmin said it plans to issue up to W300 billion of securities backed by loans and securities held in its trust accounts, though no arranger has yet been mandated.
Housing & Commercial Bank will also launch a securitization backed by the proceeds of residential and commercial real estate set to be auctioned off next year, said a banker at Hyundai Securities, which is co-arranging the deal with Daishin Securities.
The rush to securitize assets by Korean banks is driven partly by the slow pace of asset resolution by the Korea Asset Management Corp. (Kamco), the quasi-sovereign agency in charge of cleaning up the banking sector.
Though Kamco has issued three NPL-backed issues in the domestic market so far, all were fully guaranteed and came with a put option requiring obligors to buy back the NPLs in the event of default, making them more attractive to investors, pointed out a structured finance banker in Hong Kong. "Given the limited success of Kamco so far, I'm not surprised that Korean banks are trying to do this themselves," he said.
Another reason that banks are forging ahead with their own funding plans is that they are worried that Kamco's resources may be stretched once it starts buying bonds issued by the Daewoo Group, the country's largest industrial conglomerate, which is unable to pay $73 billion of debt. "Once Kamco starts buying Daewoo bonds from investment trusts, they may have no more capacity to buy from banks," added another banker.