Korea Asset Management Corporation (KAMCO) recently completed its first international securitization of non-performing loans (NPLs). This transaction is one of the few international securitizations to have emerged from Korea. It is the first securitization of non-performing assets by a Korean Government agency. We outline some of the key features of this important transaction, which was arranged by Deutsche Bank and UBS Warburg (as joint lead managers). Simmons & Simmons advised KAMCO.
Summary
The transaction involved the establishment of two special purpose vehicles (SPVs), one in Korea and the other in the Cayman Islands. KAMCO sold a static portfolio of NPLs (denominated in US dollars and Japanese Yen) to the Korean SPV. The Korean SPV issued notes which were purchased by the Cayman SPV. The Cayman SPV in turn issued notes secured on, amongst other things, the Korean SPV's notes and the NPLs.
The transaction required the approval of the Financial Supervisory Commission of Korea (FSC).
The Korean SPV
The Korean SPV, Korea 1st International ABS Speciality Co., Ltd., was incorporated as an off-balance sheet limited liability company in accordance with the Korean Act on Asset Backed Securitization of 1998 (the Act). Under the Act, the Korean SPV may not engage in any business other than the securitization transaction itself and certain activities ancillary to such securitization. The shares of the Korean SPV are owned by its sole director and KAMCO. KAMCO, in its capacity as master servicer, is responsible for the management of the NPLs on behalf of the Korean SPV in accordance with the Act.
True sale of NPLs
Each NPL is the subject of a settlement agreement made between KAMCO and the Korean commercial bank from which it originally purchased the relevant NPL. Each settlement agreement contains an option which allows KAMCO to put an NPL back to the selling bank on the occurrence of certain events such as a payment default in respect of the NPL continuing for six months or longer.
The NPLs and the settlement agreements were transferred to the Korean SPV under a loan portfolio transfer agreement governed by Korean law. KAMCO, as master servicer, is responsible for exercising the put options with the Korean banks on behalf of the Korean SPV.
Under the Act, the transfer of the NPLs would constitute a true sale - rather than the creation of a security interest over the assets in question - only if:
- the transfer was by way of sale and purchase,
- the transferee has the right to profits in respect of the assets and the right to dispose of such assets,
- the transferor has no right to demand the return of the assets and the transferee has no right to repayment of the purchase price for the assets, and
- the transferee assumes all of the risks associated with the assets, except that the transferor may provide certain warranties in respect of the assets.
In general, for a transfer of the NPLs to be perfected and enforceable against a borrower, it is necessary for the borrower's consent to be obtained for such transfer. However, the Act provides that it is sufficient for a transfer to be perfected against a borrower if the transferor or transferee sends a notice of transfer to such borrower.
The transfer of the NPLs had to be registered with the FSC.
Korean SPV notes
The Korean SPV issued senior and subordinated notes, the proceeds of which comprised the purchase price for the NPLs. The security for the senior note included, amongst other things, a Korean law pledge over the NPLs. In addition to the subordinated note, further credit enhancement for the senior notes was provided by way of an irrevocable credit facility from The Korean Development Bank to the Korean SPV in respect of amounts payable under the Korean SPV senior note.
For reasons of Korean regulation, the terms of the senior note prohibit redemption of principal (either in whole or in part) until after the first anniversary of the issue date of the senior note.
Cayman SPV
The Korean SPV senior note was sold to the Cayman SPV, Korea Asset Funding 2000-1 Limited, which in turn issued floating rate notes. Those notes are secured on, amongst other things, the Cayman SPV's interest in the Korean SPV senior note. The Cayman SPV senior notes are rated BBB+ by Fitch and Baa2 by Moody's. They are listed on the Luxembourg Stock Exchange. These notes were offered to qualified institutional buyers in the United States pursuant to Rule 144A.
Sean Bulmer is a Partner, International Finance Group, with Simmons & Simmons, Hong Kong.
