SCFB launches Asia's largest international securitisation

Standard Chartered, as sole lead manager and bookrunner, has completed Asia’s largest cross-border securitisation with a $1.26 billion floating rate seven-tranche residential mortgage-backed securitisation (RMBS) transaction for Korea First Mortgage No. 6 Ltd. The notes are backed by a pool of residential mortgage loans originated by Standard Chartered First Bank Korea Limited (SCFB), formerly known as Korea First Bank (KFB).

This issue marks First Bank’s sixth RMBS offering to date and it is the first unwrapped RMBS ever completed in the international capital markets. Since First Bank's first deal in 2004, it has issued a total of $4 billion.

The issuer is a newly established bankruptcy-remote, special-purpose company incorporated in the Cayman Islands.

The AAA notes were structured into a short Class A1 tranche that were targeted at more conservative investors, and a longer Class A2 tranche. Both Class A1 and Class A2 were offered in both dollar and euro.

The notes will legally mature in May 2038, with no mortgage loans in the pool maturing after November 2036. In essence, an 18-month period exists to meet the time required to liquidate the mortgaged properties under the defaulted mortgage loans, in case the notes are not yet fully repaid by November 2036.

The $265 million Class A1a notes are rated AAA/Aaa priced at three month Libor + 16bp. The €125 million Class A1b notes are rated AAA/Aaa priced at three month Euribor + 16bp. The $350 million Class A2a notes are rated AAA/Aaa priced at three month Libor + 20bp. The €285 million Class A2b notes are rated AAA/Aaa priced at three month Euribor + 20bp. The $63 million Class B notes are rated AA/Aa2 and priced at three month Libor + 28.5bp. The $33 million Class C notes are rated A/A2 and priced at three month Libor + 45bp. The $24 million Class D notes are rated BBB/Baa2 and priced at three month Libor + 80bp.

The transaction was closed with 30 investors subscribing to the issue. Final allocations between European and Asian investors were split approximately 53% and 47%, respectively, with banks and asset managers accounting for 94% of the deal. The majority of the investors were also participants of First Bank’s previous transactions while approximately 20% were new to SCFB and the Korean securitisation market.

The collateral underlying the transaction is a pool of eligible residential mortgages that includes fully amortising (FA), interest-only (IO) and hybrid loans.

The notes are collateralised by senior and junior notes issued by First Home Loan No. 6, acting as the purchaser. The notes will then, in turn, be backed by a portfolio of residential mortgage loans originated by SCFB.

First Home Loan No. 6, a newly established limited liability company organised under the laws of South Korea, will use the proceeds from the issuance of both the purchaser senior notes and the purchaser junior notes to acquire a portfolio of residential mortgage loans from SCFB. SCFB will then subscribe to the purchaser junior notes.

The issuer will use the payments it receives under the purchaser senior notes to honour its payment obligations under the issuer notes on a quarterly basis after certain issuer fees and expenses are paid. In addition, the purchaser will use interest and principal collected on the underlying mortgage loans to honour its payment obligations under the purchaser senior notes and purchaser junior notes.

SCB will provide a swap to mitigate the mismatches between the mortgage loans and purchaser senior notes. SCB will also provide a swap to mitigate the mismatches between the purchaser senior note and euro-denominated notes.

The value of Korea’s residential properties has appreciated markedly over the previous few years. According to a recent report from Moody’s: “during the Asian financial crisis, apartment prices in Korea declined. They fell over 20% from 1997 to 1998. By 1999, the housing market had started to show signs of recovery, partly driven by a shortage of supply in urban areas and the increased participation of commercial banks in mortgage financing.

“Sale prices for apartments have since soared. By January 2006, Seoul’s apartment purchase price index had doubled from 1998. To stabilise the market, the government announced various measures to curb price hikes. These measures included the imposition of LTV limits in regions deemed as exhibiting excessive speculative activities, the introduction of higher capital gains tax rates on property sales, and the implementation of stricter qualifications for subscription rights to apartments still under development.

“In terms of mortgage products, floating-rate loans are popular. In the first half of 2006, floating-rate mortgage loans accounted for more than 98% of total mortgage loans. The government has also recently promoted long-term amortising mortgage loans.”

Korea First Bank was acquired by Standard Chartered Bank in April last year and subsequently renamed in September 2005. Currently, it is the sixth largest bank in Korea, with a 5% share of system assets through its 403 branches.

As at the end of June, SCFB reported total assets of W60 trillion ($64 billion).