LIFE AFTER DEATH
The South Korean financial sector has lessons to teach its north-east Asian neighbors.
By Abe De Ramos

South Korea may be parked next to a nuclear arsenal, but few can doubt that its economy is sitting pretty now. Its government has nearly wiped out the problem that led to the financial sector's near-collapse during the Asian crisis: non-performing loans (NPLs). So successful were its financial reforms that other Asian governments, in multilateral meetings, have sought its advice on how to solve their lingering NPL problems.

And don't they need it. Analysts have estimated that Japan has about US$1.2 trillion of NPLs, China US$500 billion, and Taiwan US$100 billion. Failure to resolve them could harm the liquidity of domestic banks, and dry up the most critical funding source for local CFOs. The revival of Korea's financial sector has kept its banks lending, but that's not the only benefit CFOs are getting. The resolution of NPLs introduced a new capital market that will broadly improve liquidity and provide a new avenue to take pressure off their balance sheets.

Securitization, essentially a bond issue with payments backed by receivables, is not new in Asia. Between the crisis in 1997 and the first half of 2002, there were 32 US dollar-denominated securitization deals in Asia, totalling US$7.5 billion, according to Lehman Brothers in Korea. Local currency securitizations are few as Asian regulators are only just introducing new rules creating that market. The action is happening in Korea, where securitization rules came into being as part of the post-Asian crisis reforms required by the International Monetary Fund. In 2000 and 2001, Koreans, mostly financial institutions, issued 61 trillion won (US$50 billion) of collateralized debt obligations (CDOs), a form of securitization, including NPLs.

With the NPL problem nearly solved in Korea, private corporations, led by credit card and auto companies, are taking over the securitization market. "Korea is very much in stage three" of financial rehabilitation while Taiwan and China are still in stage one, says Goetz Eggelhoefer, managing director at Bank of America in Singapore. In stage one, insolvent banks are closed, and in stage two, NPLs are resolved. "It's the recapitalization process that spawns all kinds of securitization methods, whether it's for a motor company or for a bank," he says.

Liquid Assets

Kevin Lam, director of securitization at ING Barings in Hong Kong, says that CFOs of companies with a diverse pool of receivables, such as shipping and transportation companies, may soon follow, given Korea's very liquid domestic market.

And just how liquid is it? Consider this: Korean car companies are getting better pricing at home relative to the likes of General Motors. "If a Korean motor company wants to issue in the US, it's very hard to tell it that it has to issue at 200 over Treasuries because it can go to the Korean market at 180, or even less," says Eggelhoefer.

But that doesn't mean the Korean market can absorb every issue. Indeed, the trend this year has been for large issuers to cross borders. Last September, Bank of America brought to the US Korea's largest-ever auto receivables issue, a US$726 million securitization deal with Hyundai Motor Finance. In August, KEB Card, with Credit Suisse First Boston as underwriter, sold US$500 million of receivables to 35 investors globally, becoming the first to securitize credit card loans cross-border. ING Barings soon followed with a US$500 million issue for Kookmin Credit Card, without the usual guarantee from an insurer, signalling investors' confidence in Korean credit.

A word of caution, however, is beginning to resurface in Korea. In a November 2002 report, Goldman Sachs says the rapid build-up of household debt, through credit cards and mortgages, has been alarming (see chart) and could create a new class of non-performing assets. If left unchecked, this might result in a vicious cycle for the Korean financial sector - a prospect no CFO would like to see.

Abe De Ramos is Executive Editor - Hong Kong for CFO Asia.