Nomura gets the nod for KEB card deal

Korean credit card company seeks to raise $167 million with second cross-border deal.

KEB Credit Services, one of Korea's largest credit card companies and part of the Korea Exchange Bank Group, has selected Nomura to arrange its next asset-backed securitization. Nomura beat off a bid from Deutsche Bank to win the mandate.

According to a source familiar with the original RFP that KEB sent out in mid-April, the company is looking to do a three year deal backed by a portfolio of around W200 billion ($167.1 million) in card receivables. The source adds KEB is open to doing the transaction in US dollars or domestically and has not decided whether to do a term offering or conduit transaction.

The year is turning out to be a good one for Nomura's Korean securitization franchise. Aside from the KEB mandate, it was discovered in April that the bank is now in charge of the first securitization for Korea Air Lines (KAL), the country's biggest air carrier and part of the Hanjin Group.

SG was originally chosen to do the deal in November 2002 - which will be backed by future flow ticket sales denominated in Japanese Yen - but it has been suggested that there were problems related to getting true sale treatment for future flow securitizations under Japanese law.

Nomura believes it has created a workable structure to get around those issues and it is thought the deal may see the light of day within the next three months. If it does get completed it would be the first ever securitization from ex-Japan Asia to be denominated in Yen. Given the bank's strong history in Japan, Nomura could carve out a niche for itself in arranging similar deals for other Korean issuers, especially at times when investors are looking to get more Yen exposure.

Returning to the KEB deal, if the issuer chooses to go the international route, it would be its second cross-border transaction following a $500 million public 144A registered offering in August 2002 via CSFB.

That transaction, rated triple-A by Moody's and S&P because of a monoline wrap provided by Financial Security Assurance, was launched through the KEB Card International ABS 2002-1 special purpose vehicle and priced at 49bp over Libor.

However, the current market environment is a very different one from the one into which KEB made its first foray into the international ABS market. From the second half of last year, news emerged about a liquidity crisis in the credit card business with delinquencies and losses rising at an alarming rate. In January 2003, overdue card payments stood at W8 trillion ($6.4 billion, a 23% increase on the previous month.

This inevitably impacted the credit card deals that were issued late last year, notably Kookmin Card's second deal of 2002 via Banc One in December. When Kookmin issued the $250 million issue, spreads had moved out to 60bp, more than 10bp outside KEB's deal and the UBS Warburg led $500 million issue for Woori Card. The current indications are that secondary trading levels for US dollar denominated card bonds remain around 60bp over Libor, or perhaps a couple of points outside that.

Moreover, details came out in March of an accounting scandal at SK Group, which led to a wave of panic selling of corporate and asset backed bonds by Korean investors. An estimated $19 billion was withdrawn from the domestic bond market. With Korean credit card companies financing themselves almost solely through bond issues, and with investors already expressing concerns about the level of delinquencies, this exodus of funds was not what the industry needed.

Although the effects of the SK fallout were primarily felt on the domestic market, there were concerns that it could spill out into heightening negative sentiment about Korean card companies from foreign investors.

Fortunately however, the Korean government was swift in implementing measures to bolster the flagging card sector. Banks, brokerages, and insurance companies will set aside W5 trillion in loans to buy bonds issued by credit card firms, while credit card companies (or their parent companies) will be required to improve their balance sheets by increasing capital by approximately W4.6 trillion, instead of by W2 trillion as previously planned. Korea Asset Management Corp. will also buy more than W4 trillion in bad loans from the card companies. The card companies also have more control over the rates they charge customers.

LG Card, Kookmin Card and Woori Card have all recently confirmed plans to issue domestic securitization deals. More importantly, Samsung Card mandated Merrill Lynch in April to arrange its next cross-border deal, likely to be around $300 million. That, and the latest news about KEB, suggests that the outlook is improving for the card companies. Nevertheless, it is likely that the deals in 2003 will be significantly smaller than the $500 million transactions that characterized the market in 2001 and 2002.

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