Korea Asset Management Corporation

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Korean Experience of Securitization and NPL
Disposition

• Korea Asset Management Corporation

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Table of Contents
I. Korean Securitization and KAMCO
II. KAMCOs 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
Mar 00 First Credit Card
First Public Issue First KoMoCo MBS
Dec 01 Feb 00 First Revolving Credit
Card Jun 99 First S-CBO
First Auto
Dec 02 First KAMCO
First MBS
1998 1999 2000 2001 200
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2. Loans and Bonds as Major Sources of
Securitization
(In 100 MIL KRW)

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Who securitized ?

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Who securitized ?

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Who securitized ?

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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. KAMCOs NPL Securitization
1. Definition of NPL 2. Troubled Loan by
banks 3. Why KAMCO was involved in NPL
Disposition 4. KAMCOs NPL Securitization 5.
Why Securitization for NPL? 6. JV-SPC with
private investor
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1. Definition of NPL
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 borrowers
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
Credit Crunch
NPLs hinder banks lending activity If
nothing is done, NPLs get worse each day,
Recovery decreases continuously Korean
government restructured banks, and banks
restructured corporate clients -gt Korean
government purchased NPLs from banks through
KAMCO KAMCO, as a Korean national Bad
Bank pioneered NPL resolution -gt The experience
will be re-deployed for current Credit Card
Problems


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4-1. Korean NPL Disposition
(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
• 19992000KAMCO created market for bulk sale
  targetting foreign investors
• KAMCO established JV NPL investment
  vehicle with private investors
• KAMCO issued public and
  private ABSs
• 20002001 Banks followed KAMCOs 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)

(As of December 31, 2002, in billion U.S.
Dollars)

Ratio
Resolution Methods
Accumulated Resolution
Face Value
Purchase Value
Recovery Value
5.07
1.09
1.34
International Bidding
9.41
6.68
3.52
3.48
ABS Issuance
12.41
2.15
0.55
0.77
Sale to AMC
3.99
1.54
0.30
0.56
Sale to CRC
2.86
2.16
0.53
0.76
Individual Loan Sales
4.01
6.92
2.19
2.69
Court Auction, Public Sales
12.85
10.54
3.56
4.94
Collection
19.58
2.73
1.86
2.22
Daewoo Held
5.07
37.80
13.60
16.75
Sub Total
70.18
16.06
8.47
8.47
Recourse Cancellation
29.82
53.86
22.07
25.23
Total
100.00
Non-Cash Resolution
(Debt-equity swap) USD 8.65 billion
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5. Why Securitization for NPL?

• Sellers 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
• Investors 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 cash
50 ABS
50Cash 50ABS
SPC 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 Industriesof 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 particip
ation KAMCO proposed joint pooling of Asian NPL
and SME Loans to APEC/ASEAN3 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
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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.