Asia-based securitization bankers outside of Japan breathed a sigh of relief in April. When Korea First Bank completed a US$499.6 million MBS deal via UBS, it was the country's first cross-border offering since Samsung Life's US$299.6 million MBS - a late 2002 deal arranged by Morgan Stanley.
Considering that sizeable, international transactions from Korea completely dominated the Asia scene from 2000 through 2002, it is understandable bankers hope the KFB deal heralds a return to those days. However, Korea has changed markedly since 2002, and it might be wise to reserve judgment on whether issuance can match earlier levels.
For one thing, activity in 2001 and 2002 was dominated by credit card and consumer finance transactions. Monolines - such as LG Card, KEB Card, Woori Card and Samsung Card - launched their deals as the card industry was expanding rapidly. Apparently, this expansion was too rapid, as by mid-2002, defaults levels spiked.
The fallout had multiple effects: Government agencies implemented tough measures to curb further business growth, while existing card deals were put under severe pressure. This frightened off the monoline insurers - whose involvement was key to the success of cross-border deals - and, subsequently, investors.
At the end of 2003 and early 2004, a period of restructuring took place. Unable to stay afloat as independent entities, most of the card companies have been reintegrated with original parent or sister institutions. Several transactions were called early. The only two monoline card companies left are LG Card and Samsung Card, both of which have needed significant balance sheet restructuring in recent months. For example, Korea Development Bank, the biggest shareholder in LG Card, had to bail out LG with a US$2 billion equity injection. Bankers say further funds are needed before the company becomes stable.
So the message to anyone hoping for a revival in credit card issuance seems to be: "Don't hold your breath."
"There may be private label card portfolios, but, overall, the prospects of seeing any card deals this year are pretty low," admits Diane Lam, structured finance analyst at Standard & Poor's in Hong Kong. "Aside from the preoccupation with reintegration, there is less need for funds due to shrinking portfolios and limited origination. Moreover, consumers realize they need to repay so credit expansion is not going to be strong. It is belt-tightening time, and we see this type of cycle in many countries."
In the absence of credit card transactions, market practitioners are pinning their hopes on the real estate sector, specifically residential mortgages, boosting cross-border issuance. To date, international deals from Korea have generally been placed with European and U.S. investors. Given what happened with credit cards and the perception of the geopolitical situation in Korea, foreign investors want the added comfort of a monoline wrap. And, according to Nancy Fox, managing director at Ambac with responsibility for Australia, New Zealand and ex-Japan Asia, the MBS sector is viewed in a highly positive light.
"Ambac sees opportunities for additional deals, primarily in the mortgage sector," she says. "After completing MBS transactions for Samsung Life and KFB, we have developed an in-depth understanding of the market and its risks. The credit card sector appears to be recovering but we are still very cautious. The enormous growth in the sector disguised many weaknesses that are now apparent as the dust settles. Ambac was the only major financial guarantor not to wrap Korean card transactions. We have capacity and are enthusiastic about the market, but our appetite remains primarily in mortgages."
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. "Pre-1997, commercial banks were restricted from providing mortgage loans in excess of 10 years," explains Lam. "But since that regulation was eliminated, banks have targeted residential mortgage-lending business, resulting in more relaxed lending and lower rates. Some banks seek more flexible hedging tools to manage rate risk and the maturity gap between deposits and mortgage loans, and therefore are looking at securitization. The impetus for RMBS will come from a stabilized housing market and banks seeking to offer refinancing or new mortgage loan products to existing or new customers."
The one cloud on the horizon could be that house prices are rising too rapidly. Prices in Seoul's Gangnam district have, for example, risen 93% since 2001. So it has to be asked whether loans are being extended too quickly and if the current boom is sustainable. According to Anthony Cutcliffe, head of Asian structured debt capital markets at UBS, there remains room for growth in the housing loan market.
"RMBS should grow if issuers are smart enough to do deals," asserts Cutcliffe. "As for the market overheating, the government has imposed restrictions on buying in high-growth areas. For example, you can only get 50% LTV on re-mortgaging in these areas. Also, if you took a trend line from 1985 to now, and look at house prices against disposable income, you would see that house prices have not risen that substantially. If they were to go up by another 50%, it might be a different story, but the levels are not silly yet."
Perhaps the one positive to emerge from the card fallout is that a hard lesson was learned in extending credit too readily. "The government is aware of the situation and will keep things in check," agrees Cutcliffe. "The mortgage sector is obviously a good one for banks and there should be no problems as long as they have good credit processes. The credit card boom scared a lot of people, so hopefully, lessons will have been learned."
According to S&P, defaults on the Samsung Life issue are currently less than 0.55% of the closing balance, suggesting both a robust deal structure and continued strong performance of the asset class.
As for an MBS pipeline, the market has been rife with talk that KFB is looking to do two more deals in 2004, with Merrill Lynch tipped to arrange the first of those issues. The latest gossip suggests HSBC may also be working on an MBS transaction, although this has not yet been confirmed.
With regard to other asset classes, it seems likely we will see a series of one-off transactions. Hyundai Capital will soon close a US$300 million auto loan deal via Standard Chartered; Credit Suisse First Boston and JPMorgan are working on a US$1 billion CBO for the Ministry of Commerce, Industry and Energy; and Nomura is believed to be working on a similar issue for SMEs with Hannuri Securities, which may be guaranteed by the Japan Bank for International Cooperation.
Copyright 2004 Thomson Media Inc. All Rights Reserved.