The Korea Asset Management Corporation (KAMCO) is set to issue 50 billion won in asset-backed securities (ABS) based on troubled housing loans held by financial institutions. This marks the first time KAMCO has sought to securitize only troubled mortgages. While the specific structure for bond acquisition and risk sharing has yet to be determined, this move is seen as an attempt to expand beyond its traditional reliance on internal funds for acquiring non-performing loans.
According to financial industry sources, KAMCO has recently initiated the process of selecting a lead manager for the ABS issuance backed by troubled housing loans. Proposals will be accepted until August 31, with a preferred negotiation partner to be selected on September 3, followed by discussions on terms before finalizing the lead manager later that month. The issuance will be conducted privately.
Historically, KAMCO has primarily used its own resources to directly acquire non-performing loans from financial institutions or to establish separate funds. This time, however, it aims to attract institutional investors by issuing ABS based on troubled mortgages as underlying assets.
However, it remains unclear whether KAMCO or a specialized purpose company (SPC) will acquire the troubled mortgages, and whether KAMCO will directly purchase senior or junior ABS or provide separate credit enhancements. The proportion of private investor participation and the final burden of losses will also be determined after the lead manager is selected.
KAMCO's choice to focus on troubled mortgages as its first target for diversifying acquisition structures is likely influenced by the relative predictability of recovery amounts due to the collateral involved. Unlike unsecured delinquent loans, mortgages allow for cash flow estimates based on the collateral value of the property and anticipated disposal proceeds. This structure also makes it relatively easier to attract institutional investors by segmenting ABS into senior and junior tranches based on risk.
There is also a growing demand in the financial sector for the sale of non-performing loans. In the second quarter of this year, the four major financial groups sold 12.492 trillion won in non-performing loans, a 17% increase compared to the same period last year. While this figure is not limited to mortgages, it indicates a broader trend of increasing asset sales for soundness management across the financial sector.
KAMCO's financial burden is also increasing. As of the end of last year, KAMCO's total debt reached 12.735 trillion won, a 27% increase from the previous year. During the same period, its debt ratio rose from 213.73% to 234.28%, an increase of 20.55 percentage points. If the demand for non-performing loan sales in the financial sector continues to grow, KAMCO may need to utilize private funds rather than relying solely on its own resources and corporate bond issuance.
Typically, the securitization of non-performing loans involves an SPC acquiring the loans from financial institutions and then issuing ABS based on those loans. Investors purchase the ABS and recover their investments through debtor repayments or collateral disposal proceeds. KAMCO is also considering taking on asset management tasks such as debt recovery and post-management.
The extent to which this securitization will reduce KAMCO's actual financial burden will depend on the final structure. If KAMCO takes on junior ABS or bears loss risks, the effect of risk transfer may be limited even with private fund participation. Conversely, if the proportion of private investor acquisition increases, KAMCO could enhance its capacity to manage non-performing loans compared to direct purchases using its own resources.
Given that troubled mortgages are the underlying assets, debtor protection measures are also a concern. There may be conflicts between collateral disposal for investment recovery and the stability of the debtor's housing. Specific asset management methods, including debt restructuring and collateral execution criteria, will be finalized alongside the securitization structure after the lead manager is selected.
* This article has been translated by AI.
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