korea asset management corporation korean experience of securitization and npl disposition korean...

Korea Asset Management Corporation

Korean Experience of Securitization and NPL Disposition

Korean Experience of Securitization and NPL Disposition

Korea Asset Management Korea Asset Management CorporationCorporation

2

Table of ContentsTable of Contents

I. Korean Securitization and KAMCO I. Korean Securitization and KAMCO I. Korean Securitization and KAMCO I. Korean Securitization and KAMCO

II. KAMCO’s NPL Securitization II. KAMCO’s NPL Securitization II. KAMCO’s NPL Securitization II. KAMCO’s NPL Securitization

III. Future of NPL SecuritizationIII. Future of NPL SecuritizationIII. Future of NPL SecuritizationIII. Future of NPL Securitization


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I. Korean Securitization I. Korean Securitization

1. New Securitized Assets by Each Year

2. Loans and Bonds as Major Source of Securitization

3. Who securitized in Korea?3. Who securitized in Korea?

4. Lessons from Korean Experience4. Lessons from Korean Experience

1. New Securitized Assets by Each Year

2. Loans and Bonds as Major Source of Securitization

3. Who securitized in Korea?3. Who securitized in Korea?

4. Lessons from Korean Experience4. Lessons from Korean Experience


4

1. New Securitized Assets by each year 1. New Securitized Assets by each year 1. New Securitized Assets by each year 1. New Securitized Assets by each year

Sep 98Sep 98 Dec 00Dec 00

EnactedEnacted First Corporate ReceivableFirst Corporate Receivable

Dec 98Dec 98 Aug 00Aug 00 Jan 01Jan 01

First Private First Private First P-CBOFirst P-CBO First Venture P-CBOFirst Venture P-CBO

First Offshore Receivable in $ First Offshore Receivable in $ First C-Card First C-Card

First Korean Cross-Border First Korean Cross-Border KAMCO NPL $KAMCO NPL $

Mar 01Mar 01

Jan 99Jan 99 Mar 00Mar 00 First Credit Card First Credit Card

First Public Issue First Public Issue First KoMoCo MBS First KoMoCo MBS Dec 01Dec 01

Feb 00Feb 00 First Revolving Credit CardFirst Revolving Credit Card

Jun 99Jun 99 First S-CBO First S-CBO

First AutoFirst Auto Dec 02Dec 02

First KAMCOFirst KAMCO First $ MBS First $ MBS

19981998 19991999 20002000 20012001 20022002

Sep 98Sep 98 Dec 00Dec 00

EnactedEnacted First Corporate ReceivableFirst Corporate Receivable

Dec 98Dec 98 Aug 00Aug 00 Jan 01Jan 01

First Private First Private First P-CBOFirst P-CBO First Venture P-CBOFirst Venture P-CBO

First Offshore Receivable in $ First Offshore Receivable in $ First C-Card First C-Card

First Korean Cross-Border First Korean Cross-Border KAMCO NPL $KAMCO NPL $

Mar 01Mar 01

Jan 99Jan 99 Mar 00Mar 00 First Credit Card First Credit Card

First Public Issue First Public Issue First KoMoCo MBS First KoMoCo MBS Dec 01Dec 01

Feb 00Feb 00 First Revolving Credit CardFirst Revolving Credit Card

Jun 99Jun 99 First S-CBO First S-CBO

First AutoFirst Auto Dec 02Dec 02

First KAMCOFirst KAMCO First $ MBS First $ MBS

19981998 19991999 20002000 20012001 20022002


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2. Loans and Bonds as Major Sources of Securitization2. Loans and Bonds as Major Sources of Securitization2. Loans and Bonds as Major Sources of Securitization2. Loans and Bonds as Major Sources of Securitization

7,1937,1936,1356,1358,8118,81111,91011,9105,5505,550Real EstateReal Estate

161,582(85.4%)161,582(85.4%)372,777(93.6%)372,777(93.6%)413,992(81.3%)413,992(81.3%)159,538(39.6%)159,538(39.6%)56,842(83.9%)56,842(83.9%)Loans TotalLoans Total

12,74412,744

57,80457,804

3,1003,100

--

69,19669,196

18,73818,738

--

36,96836,968

45,99745,997

9,5159,515

--

221,656221,656

57,52257,522

1,1191,119

146,922146,922

9,8589,858

8,3808,380

5,9135,913

206,040206,040

36,27936,279

600600

103,118103,118

24,78424,784

13,78813,788

2,2602,260

39,80139,801

9,7249,724

2,0632,063

30,01230,012

9,3309,330

--

5,6275,627

2,4602,460

9,4139,413

--

LoansLoans

Lease, AutoLease, Auto

MBSMBS

Land ReceivableLand Receivable

Credit CardCredit Card

Corporate ReceivableCorporate Receivable

OthersOthers

398,274398,274

19,362(4.9%)19,362(4.9%)

11,67011,670

7,6927,692

--

20022002

189,301189,301509,342509,342493,832493,83267,70967,709Total (100%)Total (100%)

20,526(10.8%)20,526(10.8%)86,539(17%)86,539(17%)286,384(1.9%)286,384(1.9%)5,317(7.9%)5,317(7.9%)Security TotalSecurity Total

9,1509,150

11,37611,376

--

11,13311,133

75,40675,406

--

204,154204,154

73,07373,073

9,1579,157

--

--

5,3175,317

S-CBOS-CBO

P-CBOP-CBO

Other SecuritiesOther Securities

2003. 62003. 6200120012000200019991999UnderlyingUnderlying(In 100 MIL KRW)

(In 100 MIL KRW)


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Who securitized ?

1999

Corporates3.68%

Merchant B an k s1.99%

Securiti e s C o s3.39%

Insurers5.19%

Banks11.49%

Consumer Lender26.71%

KAMCO29.52%


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Who securitized ?

2000

Inv Trust37.61%

Banks12.52%

Others1.61%

KDIC1.06%

KAMCO9.96%Corporates

1.91%Others3.30%

Merchant B an k s1.10%



Insurers1.15%


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Who securitized ?

2001

Insurers1.50%


Inv Trusts0.12%

Banks23.68%

Others1.16%

KDIC1.91%

KAMCO2.71%

Mer ch an t Ba n k0.85%

Corporates8.11%

Others1.49%



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Lessons from Korean Experiences

Lesson 1 : Securitization evolves as market need arises

USA : Mortgage Lease/Cards Junk Bonds/CBOs

Future Cash Flows

Korea : NPLs CBOs Cards Future Cash Flows

Lesson 2 : Securitization can be an effective policy tool for

overcoming credit crunch problems (or credit quality

gap)

Lesson 3 : Public sectors can facilitate securitization

Beware: Basel II will make NPL ABS much difficult


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II. KAMCO’s NPL SecuritizationII. KAMCO’s NPL Securitization

1. Definition of NPL

2. Troubled Loan by banks

3. Why KAMCO was involved in NPL Disposition

4. KAMCO’s NPL Securitization

5. Why Securitization for NPL?

6. JV-SPC with private investor6. JV-SPC with private investor

1. Definition of NPL

2. Troubled Loan by banks

3. Why KAMCO was involved in NPL Disposition

4. KAMCO’s NPL Securitization

5. Why Securitization for NPL?

6. JV-SPC with private investor6. JV-SPC with private investor


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1. Definition of NPL1. Definition of NPL

Loan Categories;Loan Categories;

Normal (Normal ( 正常正常 , , 정상 정상 ))Special Mention (Special Mention ( 關注關注 , , 요주의요주의 ))Substandard (Substandard ( 次級次級 , , 고정고정 )) NPLs NPLsDoubtful (Doubtful ( 可疑可疑 , , 회수의문회수의문 ) ) NPLs NPLs Estimated Loss (Estimated Loss ( 損失損失 , , 추정손실추정손실 ) ) NPLs NPLs

Loan Categories;Loan Categories;

Normal (Normal ( 正常正常 , , 정상 정상 ))Special Mention (Special Mention ( 關注關注 , , 요주의요주의 ))Substandard (Substandard ( 次級次級 , , 고정고정 )) NPLs NPLsDoubtful (Doubtful ( 可疑可疑 , , 회수의문회수의문 ) ) NPLs NPLs Estimated Loss (Estimated Loss ( 損失損失 , , 추정손실추정손실 ) ) NPLs NPLs

Criterion ChangeCriterion Change

A loan was Substandard if 6 months delinquent;A loan was Substandard if 6 months delinquent;from June 1998 3 months delinquentfrom June 1998 3 months delinquentKorea adopted the Forward Looking Criteria since 2000 Korea adopted the Forward Looking Criteria since 2000 analyzing borrower’s repaying abilityanalyzing borrower’s repaying ability

effected increase of NPLeffected increase of NPL

Criterion ChangeCriterion Change

A loan was Substandard if 6 months delinquent;A loan was Substandard if 6 months delinquent;from June 1998 3 months delinquentfrom June 1998 3 months delinquentKorea adopted the Forward Looking Criteria since 2000 Korea adopted the Forward Looking Criteria since 2000 analyzing borrower’s repaying abilityanalyzing borrower’s repaying ability

effected increase of NPLeffected increase of NPL


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2. Troubled Loan by Banks2. Troubled Loan by Banks

32.5 trillion(1997)

Increase : 137.6 (trillion won)

Criterion Change 44.5 New 93.1

Increase : 137.6 (trillion won)

Criterion Change 44.5 New 93.1

Decrease : 151.3 (trillion won)

by KAMCO 43.2 by Banks 108.1

Decrease : 151.3 (trillion won)

by KAMCO 43.2 by Banks 108.1

18.8 trillion(2001)


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3. Why KAMCO was involved in NPL Disposition3. Why KAMCO was involved in NPL Disposition

NPLs hinder banks’ lending activityNPLs hinder banks’ lending activity

If nothing is done, NPLs get worse each day, Recovery If nothing is done, NPLs get worse each day, Recovery decreases continuouslydecreases continuously Korean government restructured banks, and banks Korean government restructured banks, and banks restructured corporate clientsrestructured corporate clients -> Korean government purchased NPLs from banks through -> Korean government purchased NPLs from banks through KAMCO KAMCO

KAMCO, as a Korean national “Bad Bank” pioneered NPL KAMCO, as a Korean national “Bad Bank” pioneered NPL resolutionresolution -> The experience will be re-deployed for current Credit Card -> The experience will be re-deployed for current Credit Card ProblemsProblems

NPLs hinder banks’ lending activityNPLs hinder banks’ lending activity

If nothing is done, NPLs get worse each day, Recovery If nothing is done, NPLs get worse each day, Recovery decreases continuouslydecreases continuously Korean government restructured banks, and banks Korean government restructured banks, and banks restructured corporate clientsrestructured corporate clients -> Korean government purchased NPLs from banks through -> Korean government purchased NPLs from banks through KAMCO KAMCO

KAMCO, as a Korean national “Bad Bank” pioneered NPL KAMCO, as a Korean national “Bad Bank” pioneered NPL resolutionresolution -> The experience will be re-deployed for current Credit Card -> The experience will be re-deployed for current Credit Card ProblemsProblems

Credit CrunchCredit Crunch


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4-1. Korean NPL Disposition

28.55%9.08%2.81%30.08%58.15%100%(A) / (C)

151,347.6

42,008.536,931.725,79838,264.18,345.3Total (C)

108,130.3

38,192.235,89118,036.916,010.2-Banks (B)

43,217.33,816.31,040.77,761.122,253.98,345.3KAMCO

(A)

Total20012000199919981997

(In billion US$)(In billion US$)(In billion US$)(In billion US$)


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4-2. KAMCO Pioneered NPL Securitization

KAMCO pioneered and banks followed

KAMCO tried to sell NPL from late 1998 but no domestic demand existed

Only demand was from American Distressed Debt Investors

• 1999~2000:KAMCO created market for bulk sale targetting foreign investors

KAMCO established JV NPL investment vehicle with private investors

KAMCO issued public and private ABSs

• 2000~2001: Banks followed KAMCO’s sale method

• 2002 : Domestic investors started to follow foreign investors

NPL securitization market can not develop on its own - needed government level support at early stage

KAMCO pioneered and banks followed

KAMCO tried to sell NPL from late 1998 but no domestic demand existed

Only demand was from American Distressed Debt Investors

• 1999~2000:KAMCO created market for bulk sale targetting foreign investors

KAMCO established JV NPL investment vehicle with private investors

KAMCO issued public and private ABSs

• 2000~2001: Banks followed KAMCO’s sale method

• 2002 : Domestic investors started to follow foreign investors

NPL securitization market can not develop on its own - needed government level support at early stage


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4-3.KAMCO NPL Resolution Methods4-3.KAMCO NPL Resolution Methods KAMCO Has Acquired USD 91.77bn in NPLs and Has Resolved USD 53.86bn Since November 1997.

(As of December 31, 2002, in billion U.S. Dollars) (USD 1 = KRW 1,200)

Resolution MethodsResolution MethodsAccumulated ResolutionAccumulated Resolution

RatioFace Value Purchase Value Recovery Value

5.07 1.09 1.34International Bidding 9.41%

53.8653.86 22.07 22.07 25.2325.23TotalTotal 100.00%100.00%

6.68 3.52 3.48ABS Issuance 12.41%2.15 0.55 0.77Sale to AMC 3.99%1.54 0.30 0.56Sale to CRC 2.86%2.16 0.53 0.76Individual Loan Sales 4.01%6.92 2.19 2.69Court Auction, Public Sales 12.85%

10.54 3.56 4.94Collection 19.58%2.73 1.86 2.22Daewoo Held 5.07%

37.80 13.60 16.75Sub Total 70.18% 16.06 8.47 8.47Recourse & Cancellation 29.82%

* Non-Cash Resolution (Debt-equity swap) : USD 8.65 billion


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5. Why Securitization for 5. Why Securitization for NPL? NPL?

• Seller’s Side

1. Off Balance Sheet Effect and BIS Capital Release

2. Diversified Loan Pool is easier to sell than Individual Loan

3. Credit Guarantors prefer to guarantee partially for a

securitized pool than Individual Loan

4. Easier Legal Structure for foreign investors

• Investor’s Side

Possible leverage if senior tranche is sale-able

• Seller’s Side

1. Off Balance Sheet Effect and BIS Capital Release

2. Diversified Loan Pool is easier to sell than Individual Loan

3. Credit Guarantors prefer to guarantee partially for a

securitized pool than Individual Loan

4. Easier Legal Structure for foreign investors

• Investor’s Side

Possible leverage if senior tranche is sale-able


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6. Joint Venture SPC with Private investor6. Joint Venture SPC with Private investor

Seller Investor

SPCSeller 50% : Investor 50%

Asset Manager

NPLs 100%

50%Cash+

50%ABS

50%

cash

Asset Management Contract

50%

ABS

50%

ABS

Seller and Investor form a JV to warehouse NPL for future resolution through disposal, restructuring and securitization

Seller and Investor form a JV to warehouse NPL for future resolution through disposal, restructuring and securitization


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III. Future of NPL Securitization III. Future of NPL Securitization

1. Sophisticated Structure: Two Tier

2. Securitization and Credit Guarantees are priority Securitization and Credit Guarantees are priority

for Asian Countries for Asian Countries

3. Joint pooling of Multiple CountriesJoint pooling of Multiple Countries

4. Proposed Structure

5. How to harmonize between countries5. How to harmonize between countries

1. Sophisticated Structure: Two Tier

2. Securitization and Credit Guarantees are priority Securitization and Credit Guarantees are priority

for Asian Countries for Asian Countries

3. Joint pooling of Multiple CountriesJoint pooling of Multiple Countries

4. Proposed Structure



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1. Sophisticated Structure: Two Tier 1. Sophisticated Structure: Two Tier

First Level Entity :

Local Entity in capital importing country

Company or Trust as applicable

Must achieve ‘local rating’ acceptable to international rating

agency

Second Level Entity:

Domiciled in Offshore Financial Center (Cayman Island etc) for

international issuance

First Level Entity :

Local Entity in capital importing country

Company or Trust as applicable

Must achieve ‘local rating’ acceptable to international rating

agency

Second Level Entity:

Domiciled in Offshore Financial Center (Cayman Island etc) for

international issuance


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2. Securitization and Credit Guarantees are priority for2. Securitization and Credit Guarantees are priority for Asian Countries Asian Countries

Other Asian Countries need Securitization Market But they lack credit, local bond market and FX swap Other Asian Countries need Securitization Market But they lack credit, local bond market and FX swap

Government supported credit guarantee program is pre-requisite for Government supported credit guarantee program is pre-requisite for pooling NPLpooling NPL

Government supported credit guarantee program is pre-requisite for Government supported credit guarantee program is pre-requisite for pooling NPLpooling NPL

In addition to Subordination (internal credit support), sufficient external credit support is requiredIn Korea, Third Party Banks (with less NPL problem) partially guaranteed NPL securitizationAlso, Korea Credit Guarantee Fund provided partial guarantee to P-CBOs

In addition to Subordination (internal credit support), sufficient external credit support is requiredIn Korea, Third Party Banks (with less NPL problem) partially guaranteed NPL securitizationAlso, Korea Credit Guarantee Fund provided partial guarantee to P-CBOs


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3. Joint pooling of Multiple Countries3. Joint pooling of Multiple Countries

.

For NPL, the borrowers are in financial trouble, but they may bestrategic corporations in the “Core Industries”of the country

Government supports in those industries are inevitable Pooling and supporting Asia-Pacific industries together might be better than individual country level support

May be easier to invite private investment bankers and vulture investors’participation

KAMCO proposed joint pooling of Asian NPL and SME Loans to APEC/ASEAN+3 countries

For NPL, the borrowers are in financial trouble, but they may bestrategic corporations in the “Core Industries”of the country

Government supports in those industries are inevitable Pooling and supporting Asia-Pacific industries together might be better than individual country level support

May be easier to invite private investment bankers and vulture investors’participation

KAMCO proposed joint pooling of Asian NPL and SME Loans to APEC/ASEAN+3 countries


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4-1. Proposed structure4-1. Proposed structure

Goal:Goal:

Facilitate disposal of NPLs and SME industrial financing Facilitate disposal of NPLs and SME industrial financing

in the region by mobilizing savings from capital-abundant in the region by mobilizing savings from capital-abundant

countriescountries

Means:Means:

Adopt securitization with proper risk sharingAdopt securitization with proper risk sharing

Countries participate voluntarilyCountries participate voluntarily

Goal:Goal:

Facilitate disposal of NPLs and SME industrial financing Facilitate disposal of NPLs and SME industrial financing

in the region by mobilizing savings from capital-abundant in the region by mobilizing savings from capital-abundant

countriescountries

Means:Means:

Adopt securitization with proper risk sharingAdopt securitization with proper risk sharing

Countries participate voluntarilyCountries participate voluntarily


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4-2. Proposed structure4-2. Proposed structure

Country A NPL

Loans/Bonds

SPC in Country D

(Capital AbundantCountry)

Senior

Junior

Senior

Junior

Senior

Junior

Country B NPL Loan/Bonds

Country CNPL Loan/Bonds

Senior

Junior

Gov’t Agency in Country D

Credit guarantee/Swap


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Harmonization at FIRST TIER level is necessary, but difficult to achieveSECOND TIER is required as ‘SAFE ZONE’.

Different Financial and legal cultures exist between participating countries

Different Financial and legal cultures exist between participating countries

Korea & Japan : ABS law well-established and ABS market volume

achievedChina : Only Trust Law is available Thailand, Malaysia, India, Philippines : ABS law and market volume

developingAccounting, tax and bankruptcy systems are also differentEvery country has unique client relationship and service(loan collection)

culture

Korea & Japan : ABS law well-established and ABS market volume

achievedChina : Only Trust Law is available Thailand, Malaysia, India, Philippines : ABS law and market volume

developingAccounting, tax and bankruptcy systems are also differentEvery country has unique client relationship and service(loan collection)

culture

NPL provisioning and recovery level is also different NPL provisioning and recovery level is also different

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