Korean Experience of
Securitization and NPL Disposition
Korea Asset Management Corporation
Table of Contents
I. Korean Securitization and KAMCO
II. KAMCO’s NPL Securitization
III. Future of NPL Securitization
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I. Korean Securitization
1. New Securitized Assets by Each Year
2. Loans and Bonds as Major Source of Securitization
3. Who securitized in Korea?
4. Lessons from Korean Experience
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1. New Securitized Assets by each year
Sep 98
Dec 00
Enacted
First Corporate Receivable
Dec 98
Aug 00
Jan 01
First Private
First P-CBO
First Venture P-CBO
First Offshore Receivable in $
First C-Card
First Korean Cross-Border
KAMCO NPL $
Mar 01
Jan 99
First Public Issue
Mar 00
First Credit Card
First KoMoCo MBS
Feb 00
Jun 99
Dec 01
First Revolving Credit Card
First S-CBO
First Auto
Dec 02
First KAMCO
1998
1999
First $ MBS
2000
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2002
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2. Loans and Bonds as Major Sources of Securitization
(In 100 MIL KRW)
Underlying
S-CBO
P-CBO
Other Securities
Security Total
Loans
Lease, Auto
MBS
Land Receivable
Credit Card
Corporate Receivable
Others
1999
-
2000
2001
2002
5,317
204,154
73,073
9,157
5,317(7.9%)
286,384(1.9%)
86,539(17%)
19,362(4.9%)
20,526(10.8%)
30,012
9,330
103,118
24,784
13,788
2,260
39,801
9,724
2,063
146,922
9,858
8,380
5,913
206,040
36,279
600
36,968
45,997
9,515
12,744
57,804
3,100
-
5,627
2,460
9,413
-
11,133
75,406
2003. 6
-
11,670
7,692
-
9,150
11,376
-
-
221,656
57,522
1,119
69,196
18,738
-
Loans Total
56,842(83.9%)
159,538(39.6%)
413,992(81.3%)
372,777(93.6%)
161,582(85.4%)
Real Estate
5,550
11,910
8,811
6,135
7,193
Total (100%)
67,709
493,832
509,342
398,274
189,301
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Who securitized ?
1999
Banks
11.49%
Securities Cos
3.39%
Insurers
5.19%
Consumer Lender
26.71%
KAMCO
29.52%
Corporates
3.68%
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Merchant Banks
1.99%
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Who securitized ?
2000
Corporates
1.91%
Others
3.30%
KAMCO
9.96%
KDIC
1.06%
Others
1.61%
Banks
12.52%
Merchant Banks
1.10%
Consumer Lender
12.50%
Inv Trust
37.61%
Insurers
1.15% Securities Cos
17.29%
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Who securitized ?
2001
Corporates
8.11%
KAMCO
2.71%
KDIC
1.91%
Others
1.49%
Others
1.16%
Banks
23.68%
Inv Trusts
0.12%
Merchant Bank
0.85%
Consumer Lender
42.17%
Korea Asset Management Corporation
Insurers
1.50%
Securities Cos
16.30%
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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 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 investor
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1. Definition of NPL
Loan Categories;
Normal (正常, 정상 )
Special Mention (關注, 요주의)
Substandard (次級, 고정)
Doubtful (可疑, 회수의문)
Estimated Loss (損失, 추정손실)
NPLs
NPLs
NPLs
Criterion Change
A loan was Substandard if 6 months delinquent;
from June 1998
3 months delinquent
Korea adopted the Forward Looking Criteria since 2000
analyzing borrower’s repaying ability
effected increase of NPL
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2. Troubled Loan by Banks
Increase : 137.6 (trillion won)
Criterion Change 44.5
New
93.1
32.5 trillion
(1997)
18.8 trillion
(2001)
Decrease : 151.3 (trillion won)
by KAMCO 43.2
by Banks 108.1
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3. Why KAMCO was involved in NPL Disposition
NPLs hinder banks’ lending activity
Credit Crunch
If nothing is done, NPLs get worse each day, Recovery
decreases continuously
Korean government restructured banks, and banks
restructured corporate clients
-> Korean government purchased NPLs from banks through
KAMCO
KAMCO, as a Korean national “Bad Bank” pioneered NPL
resolution
-> The experience will be re-deployed for current Credit Card
Problems
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4-1. Korean NPL Disposition
(In billion US$)
1997
1998
1999
2000
2001
Total
KAMCO (A)
8,345.3
22,253.9
7,761.1
1,040.7
3,816.3
43,217.3
Banks (B)
-
16,010.2
18,036.9
35,891
38,192.2
108,130.3
Total (C)
8,345.3
38,264.1
25,798
36,931.7
42,008.5
151,347.6
(A) / (C)
100%
58.15%
2.81%
9.08%
28.55%
30.08%
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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
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4-3.KAMCO NPL Resolution Methods
 KAMCO Has Acquired USD 91.77bn in NPLs and Has Resolved USD 53.86bn Since November 1997.
(USD 1 = KRW 1,200)
Resolution Methods
(As of December 31, 2002, in billion U.S. Dollars)
Accumulated Resolution
Ratio
Face Value
Purchase Value
Recovery Value
Collection
Daewoo Held
Sub Total
Recourse & Cancellation
5.07
6.68
2.15
1.54
2.16
6.92
10.54
2.73
37.80
16.06
1.09
3.52
0.55
0.30
0.53
2.19
3.56
1.86
13.60
8.47
1.34
3.48
0.77
0.56
0.76
2.69
4.94
2.22
16.75
8.47
9.41%
12.41%
3.99%
2.86%
4.01%
12.85%
19.58%
5.07%
70.18%
29.82%
Total
53.86
22.07
25.23
100.00%
International Bidding
ABS Issuance
Sale to AMC
Sale to CRC
Individual Loan Sales
Court Auction, Public Sales
* Non-Cash Resolution (Debt-equity swap) : USD 8.65 billion
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5. Why Securitization for 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
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6. Joint Venture SPC with Private investor
Seller
Investor
NPLs 100%
50%
50%Cash+
50%ABS
cash
SPC
50%
ABS
Seller 50% : Investor 50%
Asset Management Contract
Asset Manager
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
1. Sophisticated Structure: Two Tier
2. Securitization and Credit Guarantees are priority
for Asian Countries
3. Joint pooling of Multiple Countries
4. Proposed Structure
5. How to harmonize between countries
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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
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2. Securitization and Credit Guarantees are priority for
Asian Countries
Other Asian Countries need Securitization Market
But they lack credit, local bond market and FX swap
In addition to Subordination (internal credit support), sufficient
external credit support is required
In Korea, Third Party Banks (with less NPL problem) partially
guaranteed NPL securitization
Also, Korea Credit Guarantee Fund provided partial guarantee to
P-CBOs
Government supported credit guarantee program is pre-requisite for
pooling NPL
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3. Joint pooling of Multiple Countries
For NPL, the borrowers are in financial trouble, but they may be
strategic 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 structure
Goal:
Facilitate disposal of NPLs and SME industrial financing
in the region by mobilizing savings from capital-abundant
countries
Means:
Adopt securitization with proper risk sharing
Countries participate voluntarily
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4-2. Proposed structure
Country A
NPL
Loans/
Bonds
Country B
NPL
Loan/
Bonds
Senior
Junior
Senior
SPC in Country
D
(Capital
Abundant
Country)
Junior
Senior
Credit guarantee/Swap
Junior
Gov’t Agency
in Country D
Country C
NPL
Loan/
Bonds
Senior
Junior
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5. How to harmonize between countries
Different Financial and legal cultures exist between participating
countries
Korea & Japan : ABS law well-established and ABS market volume
achieved
China : Only Trust Law is available
Thailand, Malaysia, India, Philippines : ABS law and market volume
developing
Accounting, tax and bankruptcy systems are also different
Every country has unique client relationship and service(loan collection)
culture
NPL provisioning and recovery level is also different
Harmonization at FIRST TIER level is necessary, but difficult to achieve
SECOND TIER is required as ‘SAFE ZONE’.
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