From virtually nothing two years ago and only a trickle early last year, the South Korean securitization markets - both domestic and international - have taken off at an unprecedented speed.
Figures just released by the Financial Supervisory Service, the local regulator, show that total bond issuance in the first quarter of this year rose 27.3% to W14.19 trillion ($12.8 billion), of which asset-backed securities made up W11.64 trillion, or a remarkable 82.7% of total debt issuance.
Bankers cited several reasons for the growth, not least the introduction of securitization laws that have streamlined the process of issuance, taken away many of the uncertainties and dealt with perfection issues. Also, it is clear that many fixed income investors who until recently have had to choose between three-year corporate or government bonds have welcomed the chance to invest in alternative paper, provided it is priced realistically.
"The growth has been phenomenal, particularly in the domestic markets where they can turn these deals around extremely quickly," said one banker at a Western firm. "But you have to remember that very few of the deals are international standard true' securitizations, they often have recourse back to the issuer if assets go sour or third party liquidity facilities that will cover losses. Having said that, it doesn't mean that they aren't good deals, just that the market is in its early stages."
Kim Kyu-jin of Daewoo Securities' structured products team agreed that the vast majority of local deals were quasi-securitizations and this was one of the reasons for the quick turn-around time: the quality of the assets aren't necessarily the major factor in a deal, rather the strength of the third party cover. "Originators do not keep their statistics well in Korea, and even if they do they are not reliable after the IMF bailout in 1997. So even though we do analyze asset performance statistics, the most important factor is the trustee liquidity facility," he said.
There are other problems associated with the fast-growing domestic market; not least that many of the deals really represent the shuffling of assets between different subsidiaries of Korea's major conglomerates, the chaebol.
Assets owed to a parent company or other group companies are securitized by the group's securities arm and the resulting securities are - at best - sold to the group's insurance or pension operations. Often - though it is not clear how often - the paper stays on the books of the securities firms as the tight pricing demanded by the parent mean that there are few "real" buyers, said one banker who has worked on ABS in Korea.
"They say that they have sold it, but really they have sold it to themselves," the banker said. "The money is passed from the parent to the insurance company, via the securities firm. The securities firm is under pressure from the parent, with the parent saying sell this at tight spreads'. The securities firm doesn't have a lot of choice and ends up with the bonds."
Whether this kind of practice will cause significant problems in the long term may well depend on whether Korea is again exposed to a major downturn, but bankers add that it shouldn't obscure the fact that the country's ABS market is, on the whole, developing not just at a significant speed, but also in the right direction.
