Market participants say that there are several cross-border Korean deals in the works, which include credit cards and residential mortgage-backed transactions.

"Market activity is picking up," comments Stephen Roith, partner in the securitization group at Clifford Chance. "It also coincides with the ebbing away of the SARS virus in the region - not that this was a problem in Korea."

Roith adds that although the Korean cross-border market is unlikely to be as busy as last year, there may still be between six to twelve transactions that could emerge this year. "We are looking at quite a few of these already," he adds.

"We went through a pretty tough liquidity period between March and April. However, this now seems to be stabilizing," said Raj Shourie, managing director and head of Asian securitization at Deutsche Bank.

The market has experienced a lot of volatility and uncertainty stemming from the North Korean situation and the effects of the war in Iraq - all of which have had repercussions on the swap markets. Spreads had widened due to the North Korean situation and the SK Global scandal. However, there has also been some good news after the recent successful Republic of Korea issue, the Korean bond spread levels have significantly lowered. There is also awareness that the Korean government is committed to working out and stabilizing the consumer credit situation.

"On the consumer credit situation, we expect the situation to further deteriorate," said Marie Lam, assistant vice president at Moody's Investors Service. "However, we are expecting things to get better in the second part of the year. We have an ongoing dialogue with the originators, and since the beginning of this year, we notice that some of them have taken measures to tighten up their underwriting standards. We expect to see some of the results of their efforts to come through in August and September."

Cross-border issuance & monoline appetite

"We have seen a tail-off in potential cross-border Korean issuance, as investors have shied away from the bond market, and the monolines have not entered into any new business, as they take time to assess the deals on their books, and the general situation," explained Shourie.

Some say that one possible issue is the extent of monoline involvement going forward. This is because they could be reaching their fill on Korean names, especially at a time when asset quality in some consumer sectors is deteriorating.

Rick Holzinger, managing director at FSA, however, explained that they were not currently writing any new business in Korea. "This was a conscious decision on our part, not because we have hit our capacity on Korea, but because we are closely monitoring the deals in our portfolio and the overall credit situation," he said. FSA has wrapped a total of seven Korean deals.

Holzinger adds that they had had initial intentions of coming back into the market. "However, with the liquidity crises in late March and April, we decided to continue in our initial intent of staying out of the market for a while," he said. But despite the hiatus right now, we continue to hold a long-term positive view on the Korean ABS market."

Commenting on the deals on their books, Holzinger said that these were very strong transactions, and that therefore they were not expecting to suffer ultimate losses. "We were very cautious from a credit perspective when we entered into these transactions, and we were expecting them to be affected by tremendous volatility; therefore we built in a lot more coverage in these deals, and we remain comfortable," he added.

Holzinger, however, adds that some of their transactions are in danger of hitting triggers, but even then, he says, the policy would be not to terminate the deals, but rather to work through any problems with the issuers, while keeping the deals outstanding.

Unwrapped deals

"The real future for Korean securitization lies in accustoming the cross-border market to unwrapped transactions," said Roith at Clifford Chance. "I would expect that this year we will see one or two unwrapped transactions come to market. I would also expect deals going the conduit route to become more common this year, while there could also be more use of the structured private placement market."

However, the unknown quantity is how much investor appetite there will be for unwrapped deals at a time when the credit situation in Korea is under stress. Market participants point to the fact that it will probably be residential mortgages, perceived as a stronger asset class, that will most likely take the unwrapped route. Others say it is more likely that cross-border deals will go the private route via conduits and private placements.

"We see that there is still appetite for unwrapped transactions in the market, and these could either be launched via conduits or publicly," Lam said. Moody's reported in its 2002 review and 2003 outlook on Asian structured finance, that it had rated three unwrapped Korean deals backed by consumer finance receivables.

"Although overall we are expecting much less volume from the cross-border market than what we saw in 2002, the situation could also turn around pretty quickly and we could see cross-border issuance pick-up in the second half of the year," said Shourie. One unwrapped cross-border deal may come to market before year-end.

Both Samsung Card and KEB Credit Services recently announced plans for cross-border credit card deals. Samsung Card has mandated Merrill Lynch in April to arrange its deal, likely to be around US$300 million, and KEB Credit Services has mandated Nomura. LG Card, Kookmin Card and Woori Card have also said they have plans to issue domestic securitization deals.

In the RMBS sector, Samsung Life is planning a follow-up deal from its inaugural RMBS last year. In December 2002, it launched the $299.6 million Bichumi Global with Morgan Stanley as arranger, marking the first Korean cross-border RMBS.

There are also signs of a new asset class on the horizon for Korea, with a deal reported for the Korea Airlines, to be denominated in yen.

Shourie at Deutsche Bank also points to the domestic market, where issuance now seems to have picked up, even though the deals that have come to market have been at wider spreads then those seen last year. But even the Korean domestic ABS market has been hit. "We saw around US$40 billion of total issuance in 2001, followed by US$25 billion in 2002, and for this year we are expecting that number to drop significantly," he said.

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