Although Moody's Investor Services says in its recent performance report that delinquencies for the Moody's-rated Korean consumer finance receivables deals have come down from the highs experienced earlier in the year, the agency warns that the numbers still look high when compared to the historical data. The picture dims further as charge-offs continued to be high in the 2Q.

A more conservative approach coupled with a focus on asset quality were some of the reasons cited for the better looking numbers, but there are still problems, and the impact of this consumer credit crisis has had its affects on the ABS market.

Gregory Park, head of Asian securitization at CSFB, admitted that the Korean market has slowed down considerably. This has especially affected the cross-border market as most finance companies have focused on domestic Korean won issuance.

"The lack of monoline involvement is also being felt as they have pulled back from writing new business, and although there is still talk of a few RMBS deals, nothing has yet materialized," Park said. "I think Korea will have a better 2004. "

Domestic data

According to data released by the Financial Supervisory Commission and the Financial Supervisory Service in Korea, ABS issues totalled KW18.9 trillion (US$16.0 billion) in the first half of 2003. This was an increase on the KW14.5 trillion (US$14.5 billion) registered last year.

The Financial Supervisory Commission said that this number was underpinned by a KW4.0 billion (US$ 3.4 billion) rise in ABS issuance backed by auto loan receivables. Meanwhile, issuance from the credit card companies had only seen a minor rise from KW7.1 trillion (US$6.0 billion) in the first half of 2002 to KW7.6 trillion (US$6.45 billion) in the first half of 2003.

The Commission says that the small rise of ABS issued by the card companies was due to increased dependence on ABS issuance resulting from difficulties in accessing other markets, such as the bond market; the rise in issuance backed by overdue credit card receivables with low likelihood of collection; and the disposals of those receivables in response to heightened prudential regulations. Lastly, there was issuance of ABS backed by auto loan receivables of credit card companies that conduct installment finance business.

Measures taken

According to the Moody's report, credit card companies have tightened collection procedures of existing customers and scrutinized new customers more closely. This has had the positive effect on principal collection rates, which have stabilized.

Moody's, however, also pointed out that the more stringent underwriting criteria implemented by the originators had resulted in an inability to generate enough eligible receivables in some transactions. "We have seen that there is a lack of eligible receivables in some of the deals, and, in some deals, triggers have been breached, so this has led to some of those deals being restructured with the consent of the noteholders, or the controlling beneficiary," explained Marie Lam, assistant vice president at Moody's. In certain cases, subordination has been increased - one suitable method of restructuring.

Having wrapped a total of seven cross-border Korean deals, Rick Holzinger, managing director, Asia-Pacific, for Financial Security Assurance, commented that: "These deals were structured with multiple layers of protection to provide a lot of cushion, and as rule, they will not require any additional collateral to support them - though some have breached their financial covenants and a couple have breached portfolio triggers. In these cases, we are working to restructure these transactions or to temporarily waive the covenant triggers."

Government steps in

The Korean government earlier this year stepped in and coordinated efforts with credit card companies in order to resolve the liquidity situation and, at the same time, implement measures that would attempt to improve the delinquency situation. But have those measures begun to work?

"Although we have noticed an improvement in the performance data in the last couple of months, it is still too early to say whether the measures put in place have worked, said Lam at Moody's. "However, delinquencies have improved and that, overall, is very encouraging."

Another measure put in place by the Financial Supervisory Service led to a hike in finance charges from May 2003, which increased the yield on the deals, and Moody's says that the yields and principal payment rates could maintain at their current levels.

Also in an effort to prevent additional large increases in credit card delinquencies, the credit card companies will work under the guidance of a Credit Card Receivables Management Committee, which will be established by the Korea Non-Bank Financing Association and the credit card companies.

FSA's Holzinger said that the firm is closely monitoring the transactions, but is not unduly concerned. "I think the biggest issue the market faced, was when the liquidity crises hit in March and April," he said. "This was not anticipated and was more to do with the accounting scandal at SK Global, rather than with any consumer credit deterioration, and the worrying issue was, that if the credit card companies could not refund then there was a possibility that they could go under. However, the government put in place some very good measures, which ensured that liquidity was maintained."

"If at the time, the liquidity situation would have worsened, then we may have pushed for the deals to go into early amortisation. However, as the market has stabilized, we do not anticipate any early terminations and prefer to see these transactions continue to perform," he added. "We are not looking to reduce our exposure to Korea, and our aim is to continue to let these deals perform," Holzinger also clarified.

Cross-border expectations

Marie Lam says that if the consumer credit situation stabilizes, and if performance continues as it has in the past few months, there may be renewed issuance activity by the end of the year.

"There is still an interest in mortgage loans, and at the same time interest in consumer receivables deals still seems to be present," Lam said. A mortgage transaction for Samsung Life is in the works, but it is still to be decided whether this deal will be issued or not.

Raj Shourie, managing director and head of Asian securitization at Deutsche Bank, says that market sentiment is improving: "We do expect some cross-border issuance in the second half of the year, although overall projections in the region are down for this year."

As Shourie explains, the consumer sector is showing better signs, as delinquencies have stabilized. But he adds: "We won't see a rush to the cross-border market, as the need for funding is not quite there, because during this period, new customers have not been generated and credit limits on some existing customers may have been curtailed."

The question, though, is whether investor sentiment is there if the cross-border market shows signs of life before the year-end? "I think that if deals come out of the consumer sector, investors will study these deals very carefully. The monolines have not yet returned to the market, and we still see them sitting on the side lines, not writing any new business, and, realistically, without their involvement it might be hard to see these consumer-type deals come to market, " said Shourie.

FSA's Holzinger said that it is more likely that we will see a return to the cross-border market for the Korean credit card companies in 2004 rather than in the fourth quarter. "Hopefully there will be a complete steadying of delinquency and defaults and there will be better quality portfolios available," he said.

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