Securitization used to be a favoured restructuring method for
Korean financial institutions. This is because, through the
securitization of non-performing loans (NPLs) held by them, they
can effectively dispose of NPLs and simultaneously secure the
necessary funds required for reducing their liabilities so as to
comply with the BIS ratio. Thus, in 1999, the percentage of NPL
securitizations out of the total volume of securitizations was
approximately 42.2%. As the economy gradually recovered from the
shock caused by the so-called IMF crisis in 1998, the importance of
securitization in the Korean market as a means of disposing NPLs
has decreased significantly. According to the Financial Supervisory
Service (FSS) of Korea, last year saw a dramatic decrease in the
volume of the asset-backed securities (ABSs) securitizing NPLs as
it was reduced from W10.6 trillion in 2001 to W2 trillion in 2002,
thus constituting only 5% of the total ABS issuance in 2002.
Furthermore, the volume of Primary CBOs, which are
government-guaranteed ABSs securitizing the junk bonds issued by
small and medium-sized Korean companies suffering from temporary
financial difficulties and subscribed by a government agency, was
also reduced from W7.5 trillion in 2001 to W0.8 trillion in 2002
due to improvement in the financial conditions of the Korean
companies.
This decrease in the issuance of NPL ABS and Primary CBO
resulted in the reduction of the total volume of ABS issuance in
2002 by 21.8% compared to 2001. However, the aggregate volume of
ABS issuance excluding NPL ABS and Primary CBOs in 2002 was W37
trillion, which shows a 22.5% increase compared to 2001. Therefore,
despite the decrease in the total volume of ABS issuance in 2002,
securitization as a means of obtaining low-cost financing is
becoming more popular than ever and the aggregate volume of
cross-border ABS issuance has increased in 2002 by 74.7% compared
to 2001. Furthermore, more complicated and sophisticated financing
techniques are being involved resulting in more complex transaction
structures. For instance, the use of trust as a securitization
vehicle has considerably increased.
Most of the securitizations in Korea are transacted pursuant to
the Act Concerning Asset-Backed Securitization (ABS Act); however,
the ABS Act does not necessarily require all securitization
transactions to be subject to its jurisdiction. Nevertheless, in
order to enjoy certain special exemptions provided under the ABS
Act removing, or at least reducing, some of the strict procedural
requirements under the Korean Civil Code in connection with
transfers of debt obligations and mortgages as well as to enjoy
certain tax reduction or exemption granted under the Tax Preference
Control Law (TPCL) and Corporate Income Tax Act, securitization
should comply with the legal requirements of the Act. This article
considers a brief outline of securitization under the ABS Act and
the future developments in securitization as anticipated in view of
the new legislation that is now under discussion.
SECURITIZATION VEHICLE UNDER THE ABS ACT
Three different types of securitization vehicles are recognized
under the ABS Act: an ABS SPC, an Offshore SPC and a Trust. While
an ABS SPC is an on-shore special purpose company established in
the form of a yuhan hoesa (a limited liability company under
the Commercial Code), an Offshore SPC is a foreign entity
exclusively engaged in the business of securitization. The ABS Act
expressly prohibits an ABS SPC from establishing any branch or
hiring employees. Furthermore, an ABS SPC cannot engage in any
business other than the businesses as specifically listed in the
ABS Act. Although there is no express prevision under the ABS Act
regarding Offshore SPCs, it is understood, as a matter of practice,
that the same restriction applies to an Offshore SPC as well.
However, with regard to to the ability of an Offshore SPC to
establish a branch in Korea, the Ministry of Finance and Economy of
Korea (MOFE) has given an official interpretation that the
restriction on the establishment of a branch under the ABS Act does
not apply to an Offshore SPC. Nevertheless, it should be noted that
this interpretation was given for a case where an Offshore SPC had
intended to establish a branch to obtain a business licence from
the tax authorities so as to perform its tax liabilities in Korea.
Therefore, even if an Offshore SPC is allowed to establish a branch
in Korea, its Korean branch must remain as a passive entity and is
not allowed to engage in any business other than those specifically
listed under the ABS Act. As for using a trust as a securitization
vehicle, only a trust company licensed under the Trust Business Act
of Korea (including banks engaged in trust business) is permitted
to act as a trustee. A foreign trust company is not qualified as a
securitization vehicle, unless it holds a trust business license
under the Trust Business Act of Korea.
ELIGIBLE ORIGINATORS
Only the qualified originators listed under the ABS Act (the
originator) are eligible to act as originators in
securitizations pursuant to the ABS Act. The purpose of this
limitation on qualifications of originators is to minimize
the detrimental effects, which could be caused by the special
privileges granted under the ABS Act. At present, the eligible
originators are (i) certain government entities and
financial institutions or (ii) corporations having international
reputation (including foreign corporations or Korean subsidiaries
of foreign corporations) and having obtained FSC's recognition as
to the necessity to securitize the assets held by such corporation
pursuant to the standards prescribed by FSC.
PROCEDURES OF SECURITIZATION UNDER THE ABS ACT
Registration of the securitization plan
A securitization plan must be registered with the Financial
Supervisory Commission of Korea (FSC) by the relevant
securitization vehicle as a first step of the ABS issuance. The
Securitization Plan must include, among other things, the scope of
the assets to be securitized (the securitization assets),
the classes of the ABS, matters concerning the originator
and matters concerning the management, operation and disposal of
the securitization assets. Under the ABS Act, only one
Securitization Plan can be registered per securitization
vehicle.
FSC can deny registration of or demand changes to the
Securitization Plan if:
- the documents for registration contain untrue or misleading
information;
- the contents of the Securitization Plan are in violation of
the ABS Act or relevant presidential decrees and regulation
thereto; or
- the establishment of an ABS SPC is in violation of the
relevant laws.
In the case of a denial, FSC must provide a written notice to
the relevant securitization vehicle setting out detailed reasons
for the denial of registration or a demand to change within 15 days
from the date when the application for registration is filed. If
FSC does not issue any notice of denial or demand to change within
this 15-day period, the Securitization Plan is deemed to have been
duly registered as of the date that it was first filed.
Acquisition of the securitization asset by the securitization
vehicle
Under the ABS Act, a securitization vehicle can acquire the
securitization assets only from the originators and
the transfer of the securitization assets by an
originator to an ABS SPC or an Offshore SPC must be done by
a true sale that satisfies the requirements of Article 13 of the
ABS Act. Article 13 of the ABS Act, if interpreted literally, does
not apply to a securitization transaction that employs a trust as a
securitization vehicle. However, in practice, FSC requires the same
requirement for a transfer of asset by an originator to a
trust. Following transfer of the securitization assets to
the securitization vehicle, the originator must immediately
register the transfer with FSC.
Appointment of servicer and business trustee
An ABS SPC or an Offshore SPC (collectively, an SPC) must
appoint a qualified servicer as its servicer (servicer) and
entrust to them the servicing of the securitization assets.
In addition, all the business of the SPC other than those
specifically listed under the ABS Act should be delegated to a
third party (a business trustee). The requirement is in line
with the restriction on an SPC's ability to hire employees. While
only certain qualified entities may act as a servicer, there
is no restriction on the qualification of a business
trustee. Nevertheless, in securitizations involving public
offerings of ABS, FSC has actually required a financial institution
to be appointed as a business trustee in order to protect
the interests of the holders of the ABS. The term, business
trustee, is a literal translation of the corresponding Korean
term used under the ABS Act. However, the legal status of a
business trustee is only that of an administrative agent of
the SPC and not a trustee for the holders of the asset-backed
securities. Nevertheless, FSC requires the business trustee
to actually assume the duties of the holders' trustee and to
protect the interest of the holders. The servicer and the
business trustee need not be separate entities.
Under the ABS Act, an originator, a licensed credit
information company established pursuant to the Act Concerning Use
and Protection of Credit Information or such other persons
specializing in the asset management business meeting the
requirements prescribed by the Presidential Decree of the ABS Act
may act as a qualified servicer.
Scope of securitization assets
Securitization assets are defined under the ABS Act as
"debt claims, real estates and other property rights that are being
securitized". As such, there is no legal restriction on the type of
assets that can be securitized. Nevertheless, in practise, FSC has
been somewhat reluctant to allow stocks of a corporation (chusik
hoesa) to be securitized. Hence, the attempts to securitize
shares of a corporation so far have been futile except in one case
transacted in the initial stage of securtization in Korea.
Special provisions on the assignment of debt claims
Under Article 450 of the Civil Code of Korea, for an assignment
of a debt claim to be duly perfected, a written notice of
assignment must be given by the assignor to the obligor or a
consent of an obligor must be obtained and this notice or consent
must bear a fixed-date stamp. The term fixed date
used in this Article 450 refers to a date appearing on a document
which cannot be arbitrarily altered by the related parties. In
Korea, a Korean notary public is authorized to affix a fixed date
stamp on a document. Another way of affixing such a fixed
date stamp on a document is to send the document by
content-certified post, in which case, the stamp bearing a date
affixed by the post office constitutes the fixed date stamp.
The ABS Act provides special provisions which simplify the
assignment procedures so that, for securitizations under the ABS
Act, it is deemed that an assignment of a debt claim has been
properly perfected against third parties if the assignment of the
debt claim is duly registered with FSC. In order for an assignment
of a debt claim to be effective against the relevant obligor, a
notice to or consent from the obligor is still required; however,
not only the assignor but also the assignee can give the notice of
assignment. As a result, where the securitization assets are
debt claims, so long as an assignment of the debt claims is duly
registered with FSC, the assigned debt claims will not belong to
the bankruptcy estate of the originator. Nor will the
creditors of the originator be able to attach the assigned
debt claims even if no notice is given to or consent from the
obligor is obtained because the assignment is still effective
against third parties. Therefore, for a securitization involving
multiple obligors of underlying assets, it is quite common to
register with FSC only, and notice to or consent from the
underlying obligors is waived.
Special provisions on the assignment of mortgage
The Korean Civil Code requires that assignment of mortgage
interest must be registered with the court where the relevant real
estate is situated. In a transaction where the securitization
assets consist of mortgages involving multiple pieces of real
estates scattered all over the country, the registration of the
assignment must be made in each and every court where each piece of
real estate is located. This is not only time-consuming but also
very costly. However, the ABS Act has simplified this process by
permitting a securitization vehicle to acquire a mortgage interest
by means of registration of the assignment with FSC without any
further registration on the real estates register kept by the
relevant courts.
Protection against servicer's insolvency
To protect the interests of the ABS holders against insolvency
of the servicer, the ABS Act requires the servicer to
manage the entrusted securitization assets separately from
its own assets. Furthermore, in the case of bankruptcy of the
servicer, the securitization assets that have been
separately managed by the servicer do not constitute part of
the bankruptcy estate of the servicer, and the securitizaton
vehicle may request the servicer or the receiver of the
servicer to deliver the securitization assets to the
securitization vehicle. The same will apply as to the commencement
of the composition procedures under the Composition Act or the
reorganization procedures under the Corporate Reorganization Act.
Any creditor of the servicer cannot enforce its respective
claims against the securitization assets, and the
securitization assets will not be subject to a preservation
order or suspension order pursuant to the Bankruptcy Act, the
Composition Act or the Corporate Reorganization Act.
TAX EXEMPTIONS AND REDUCTIONS
Corporate Income Tax by an SPC
Generally, dividends are not deductible expenses under the
Korean tax law; however, the Corporate Income Tax Act provides a
special tax benefit for an ABS SPC. Under Article 51-2 of the
Corporate Tax Act, if an ABS SPC distributes as dividend at least
90% of its distributable profits as prescribed in the presidential
decree, the amount of the dividend will be deducted from its
taxable income. However, the above-mentioned tax benefit for
corporate tax is not available to an Offshore SPC.
Tax exemption or reduction under TPCL
For the real estate acquired before December 31 2003 by an ABS
SPC for the purpose of securitization, acquisition and registration
taxes are exempt pursuant to the TPCL.
FUTURE DEVELOPMENTS IN ABS TRANSACTIONS
Securitization of housing loans
Most of the housing loans in Korea are short-term loans with
maturity falling within three years. The Korean government
contemplates a change in this trend by inducing the financial
institutions to offer longer-term housing loans, with a term of at
least 20 years. To this end, the Korean government plans to raise
long-term, low-interest funds by issuing mortgage-backed securities
(MBS), which will be provided to Korean financial institutions for
the purpose of extending long-term housing loans. Because the MBS
issuer's creditworthiness determines the low financing cost in
issuing MBS, the Korea Housing Financing Corporation (KHFC), will
be established as a public corporation by consolidating the
existing KoMoCo and the Korea Housing Financing Credit Guarantee
Fund, and KHFC will act as the issuer of long-term MBS. The Korean
government is in the process of preparing a Bill for the KHFC Act
with the goal of establishing KHFC by January 2004. Listed below
are the legal reforms expected to be included in the Bill. They are
intended to:
- simplify the notice requirement by allowing the notice
fixing the amount of the indebtedness secured by kun-mortgage
and the notice of assignment to be given simultaneously (at
present these notices must be given separately);
- simplify the securitization process by allowing the
creditors to obtain an advance consent from the debtor for
assignment of the relevant indebtedness with a view to
ultimately securitizing the indebtedness at the time when the
indebtedness is first created; and
- legislate a special provision to allow KHFC to file an
amendment with FSC to change the details of mortgages
registered with FSC in case changes become necessary after
registration has been filed with FSC. (At present, if mortgage
transfer registration is filed with FSC, court registration
requirements under the Civil Code are waived. However, as there
is no provision for filing an amendment to the registration
already filed with FSC, if any change to the details of the
mortgage (for example, a change of debtor) occurs after FSC
registration, a mortgage registration with the court, which had
originally been waived, had to be made to reflect that
change).
Securitization of student loans
Student loans granted by financial institutions in Korea are
usually short-term loans (four years or less in term). In addition,
as most students are not able to provide collateral, student loans
are not readily available and even when granted, these loans have a
high interest rate. The Korean government is reviewing the
possibility of securitizing student loans through the Korea Housing
Financing Corporation so as to provide long-term, low-interest
student loans.
About the
author
Mee-Hyon Lee
Mee-Hyon Lee is a partner and head of the structured finance
team at Lee & Ko. With more than 15 years' banking and finance
experience, Ms Lee has been the principal transaction lawyer on
many of Korea's largest and most innovative structured finance
transactions, which include:
Representing Korea Asset Management Corporation in the first
cross-border securitization in Korea securitizing non-performing
loans (NPLs) whereby issued ABSs were sold to foreign investors
selected through an auction proceeding. This transaction has become
a model in all NPL sales by other financial institutions in
Korea.
Representing JP Morgan and other co-arrangers in the W314
billion ($268 million) loan financed for the acquisition of Haitai
Food Products, which was selected by IFLR as the winner of the
'Debt and Equity-Linked Deal of the Year 2001'.
Ms Lee holds Bachelor of Laws (honours) and LLM degrees from the
Seoul National University as well as an LLM degree from Havard Law
School. She writes and lectures frequently on structured finance.
Ms Lee is a member of the Korean Bar Association and New York State
Bar Association.
Email:
mhl@lawleeko.co.kr
Lee & Ko
C.P.O. Box 8735
18th Floor, Marine Center Main Building
118, 2-ka Namdaemun-ro
Chung-ku, Seoul, Korea
Tel: +822 772 4000
Fax: +822 772 4001
Web: www.lawleeko.com