KEB sets new Korean card ABS benchmark

CSFB-led $500 million issue prices 6bp inside last year''s offering from LG Card.

Korea Exchange Bank (KEB), which has the fifth largest credit card business in Korea, priced its first cross-border securitization with a deal backed by credit card receivables in New York on Monday.

Credit Suisse First Boston acted as sole lead manager and bookrunner for the $500 million transaction and also acted as the main swap provider, with BNP Paribas in support.

The company's deal was launched through KEB Card International ABS 2002-1, a Cayman Islands-registered special purpose vehicle, and securitizes a pool of 387,410 credit card accounts worth around W845.8 billion ($698.5 million).

CSFB employed the structure common to most international Korean deals. KEB sells the card receivables to a Korean incorporated entity, KEBCS Securitization 2002-5 (the purchaser), which in turn issues a $500 million bond to the Cayman Islands SPV, and swaps the proceeds into Won to buy an equivalent amount of receivables. In addition, the purchaser issues a subordinated bond to be retained by the originator, which - along with the reserve account - is equal to 21% credit support.

The transaction features a four-year revolving period followed by a one-year controlled amortization period. During this time, interest collected on the cards will be used to pay interest on the senior bonds. Any surplus interest will be added to the underlying pool to cover any defaults.

The bonds have a legal maturity of six-and-a-half years, expected maturity of five-years and average lives of 4.5 years. The deal - which has an underlying rating of A2 from Moody's - benefits from a monoline wrap from Financial Security Assurance (FSA) to bring it up to triple-A status with Moody's and S&P. Again, the involvement of the monoline insurers is standard practice on international ABS deals from Korea.

Final pricing of 49bp over one month Libor was one point inside initial price talk, which all parties are believed to be satisfied with given present volatility in global capital markets. The pricing was also 6bp inside the last publicly offered Korean cross-border card transaction; a $500 million five-year offering from LG Card issued last December. CSFB was also involved on that deal in the role of joint lead manager with UBS Warburg.

The KEB deal was oversubscribed with 51% of the bonds placing with US investors, 26% selling into Asian accounts, and the final 23% taken up by European buyers. The distribution pattern was similar to the LG Card deal, which had a 90% take-up by non-Asian investors.

Rival bankers were fairly complimentary about KEB's issue. "I would say that 49bp over is a pretty good result for KEB and sets a precedent for the market," says one head of Asian securitization in Hong Kong. "Some 6bp inside LG is not insignificant, although that deal priced in December, which is normally the hardest month to sell to investors. But this pricing and the geography of the distribution suggests that international ABS buyers are really warming to Korean card deals."

Another market participant agreed that the pricing was an improvement, but still questioned the timing of the transaction. "The pricing looks like a good result on paper, but may have been even better if it had been launched in June and September when the markets are busier," comments the banker. "There are a few more Korean card deals in the pipeline and these would have benefited from a more aggressively priced deal offered in more conducive market conditions."

CSFB and KEB could argue, however, that it is still better to get the transaction out early ahead of other offerings, especially in view of negative publicity about the Korean credit card market. Although the Korean government has played an active role in promoting the use of credit cards among consumers - the number of credit card transactions rose more than 90% in 2001 - it has voiced, and acted on, serious concerns about the prospect of large-scale defaults.

At the start of April the Financial Supervisory Service put a block on LG Card and Samsung Card - the country's two biggest card companies - from taking on new customers for two months, KEB was handed a 45-day embargo, while Kookmin Credit Card was fined W500 million ($380,000) for being overly aggressive in approving applications from unsuitable candidates.

There was much speculation earlier in the year that the situation was causing monolines - an important factor in the success of Korean ABS - to rethink the extent of their participation in card-backed transactions.

FSA's involvement in the KEB deal would seem to imply that those fears have been allayed to some extent, although that is no guarantee that investors will not limit their exposure to this asset class, which might impact the success of the other card deals scheduled for this year.

Woori Financial is believed to be close to launching its own deal via CSFB. HSBC is lead manager for Samsung Card's transaction, while Kookmin Card recently offered a split mandate to Bank One and ING as it looks to raise $1 billion from international ABS investors.

KEB is a market leader in the revolving card segment, the newest product area in the Korean card sector. As of December 2001, the company had 6.2 million card members. In 2001, the company recorded operating revenues of W1.12 trillion and net income of W212 billion, up from W631 billion in operating revenues and W112 billion in net income the previous year. Total card assets under management nearly doubled in 2001 to more than W5.6 trillion, up from W3.41 trillion in 2000.

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