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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
Korea Asset Management Korea Asset Management CorporationCorporation
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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
Korea Asset Management Korea Asset Management CorporationCorporation
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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%
Securiti e s C o s17.29%
Consumer Lender12.50%
Insurers1.15%
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Who securitized ?
2001
Insurers1.50%
Securiti e s C o s16.30%
Inv Trusts0.12%
Banks23.68%
Others1.16%
KDIC1.91%
KAMCO2.71%
Mer ch an t Ba n k0.85%
Corporates8.11%
Others1.49%
Consumer Lender42.17%
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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
5. How to harmonize between countries5. How to harmonize between countries
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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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5. How to harmonize between countries5. How to harmonize between countries
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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