After six months in the making, Korea's biggest insurance company Samsung Life Insurance has brought some welcome diversity to the Asian securitization market with the launch of the first international mortgage backed deal to come out of the country. Morgan Stanley acted as lead manager on the transaction with Lehman Brothers, Nomura and Samsung Securities as co-arrangers and ING as junior co-manager.
The deal - issued out of Bichumi Global 1, a special purpose vehicle registered in the Cayman Islands - securitizes 15,525 mortgage loans originated by Samsung with a current balance of around W429.8 billion ($350.4 million). The average remaining term of the loans is 137 months with weighted average seasoning of 24.5 months and average current loan-to-value of 47.14%.
Moody's has given an underlying rating of A2 to the deal, but the monoline wrap provided by Ambac brings the deal up to triple-A status.
The most immediately noticeable feature to many observers was that despite securing triple-A ratings for a $465 million deal, the final amount issued was $299.6 million, a fact that raised eyebrows among bankers not involved in the deal.
"It is good to see this deal getting done before the end of the year," says one banker. "But I do find the size surprising for such a good asset. Maybe investors were not convinced about the merits of the deal or the banks had problems selling it at a price that Samsung Life could live with for a bigger sized offering."
Sources close to the deal, however, say that the reduction in size was merely a result of a late regulatory technicality. "It was definitely not a demand issue," says one observer. "Obviously the intention was to do a bigger transaction, but there was a situation where the Korean regulators required that the mortgages with the longest maturities be dropped from the deal. That's why the final legal maturity is now 2022 and not 2031."
Morgan Stanley employed the structure common to most international deals from Korea. First, Samsung Life sells the mortgage receivables to a Korean incorporated entity, Bichumi Korea 1 Limited (the purchaser), which then issues a $465 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 junior note to be retained by the originator equal to 10.5 % credit enhancement for the deal. A cash reserve will offer additional support.
Where this deal differs from the credit card and consumer finance transactions that have dominated the market is that it uses a straight pass through rather than revolving structure. Revolving structures allow for underlying assets to be replaced at any time, which enables issuers to dictate prepayments and therefore the average life of a deal.
MBS transactions typically feature the pass-through structure, so when principal is raised on the underlying loans it immediately goes towards paying back the bonds. Essentially the bond lives have to match the prepayments of the mortgages, which is why the Samsung Life deal has an average life of 2.2 years, shorter than the 4.5 year average lives that you see in credit card deals.
The one issue that has sparked most discussion about Samsung's deal concerns pricing, which ended up being 50bp over three month Libor. This is just outside the two 144A credit card deals from Korea that were issued this year - the $500 million offerings from KEB Card and Woori Card. KEB's transaction - arranged by CSFB - priced at 49bp while the UBS Warburg-led Woori deal priced at a discount to yield 49.8bp over Libor.
Sources close to the Samsung Life deal say the pricing reflects the rarity of the asset and the current state of the markets.
"All parties were pleased with the pricing, which ended up being smack bang in the middle of price talk," says one specialist. "It's not easy to make comparisons with the other deals from Korea as it is a completely different asset and structure. Added to that, if you look at the global securitization markets, spreads have been widening in the past few months so in some respects pricing reflects this."
However, prior to launch, bankers not involved in the transaction speculated that pricing should be in the low to mid 40bp range given the asset class, and consequently felt that 50bp was wider than it might have been.
"It's difficult to say whether the pricing will have an impact on other deals in Korea," says one ABS head at a rival bank. "This is outside the card deals for a shorter maturity and much better credit quality asset, which is a bit of a blow to be honest."
Another securitization banker was more upbeat, despite hoping for tighter pricing. "On the face of it the pricing for a 2.2 year expected life deal looks worse than the credit card deals," he argues. "But investors are exposed to more prepayment risk, so when you take into account the much longer legal final, maybe it isn't so bad. I would have liked for this to be a few basis points tighter especially because it has a monoline wrap, but it has to be said that this is a tough market at the moment."
One point that should also be noted as in defence of the Samsung Life deal is that although the launch price was just outside the card deals, concerns over the credit card sector in Korea has seen pricing in the secondary market go out by as much as 6bp in the last few months. It is therefore difficult to see a new public credit card issue pricing as competitively as KEB and Woori did earlier this year.
(NB - As FinanceAsia went to press last night, the $500 million credit card deal arranged by Banc One for Kookmin Card priced at 60bp over Libor - highlighting deteriorating sentiment in the asset class and the difficult enviroment for issuance generally. Full story in Monday's newsletter).
Sources close to the Samsung transaction would not disclose how many investors purchased bonds, but said the deal was fully subscribed with around 60% distribution in Europe, 20% in the United States and the same amount in Asia.
While securitization bankers will continue to debate the transaction, Samsung Life at least has declared itself happy with how things went. "Our primary objective for pursuing this transaction is to utilize the securitization as a means to improve our asset liability management in a more flexible and effective manner," says Samsung Life's CEO, Suk Ryul Yoo. "We also expect that through this transaction, our brand recognition will be enhanced in the global capital markets."
Although the transaction has set a benchmark for the asset class in Korea, it seems unlikely that a flood of MBS deals will come from Korea in the near future. Insurance companies have less than a 10% market share so generating big enough portfolios to make securitization worthwhile would be difficult. And Korean banks, which dominate the mortgage sector, seem unlikely to want to do MBS deals according to many securitization experts.
"Any activity will have to come from the insurance companies, so I don't think we'll see more than maybe one or two more deals in the next year," says one banker. "I am not confident about bank issuers, because the sector is too fragmented for one thing and they also don't want to take good assets off balance sheet. If banks were to segment into different product areas - each of which had responsibility for generating their own funds, maybe the situation might be different in future."