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June 2009 | ifr special report | 13 ASIA

Having been introduced as long ago as 1890 in Germany and actively issued in 22 European countries, it seems extraordinary that Asia’s first covered bond was issued only in May. Educating investors about a new product was always going to prove a challenge but Kookmin’s deal took the continent by storm, heralding what is likely to be a boom in covered bond issuance from Asia. Jonathan Rogers reports.

All eyes on Asia T

he delay in introducing covered bonds to Asia has been blamed on the lack of a legal framework and regulations backing covered bond issuance in the region. But that theory has to a certain extent been undermined by Kookmin Bank’s ability to bring its deal, despite a lack of a covered bond law in South Korea, by utilising its ABS legislation.

Given the success of Kookmin’s deal and the obvious attractiveness of the asset class, it seems likely that covered bond issuance in Asia will take off. European investors have long extolled the virtues of the covered bond, citing the instrument’s high credit quality (issuance generally comes with a higher credit rating than the sovereign rating of the issuer’s domicile country), standardised format and large issue sizes. All this contributes to strong liquidity.

Regulators are also keen on the instrument because there has never been a covered bond default, while any problems can usually be detected early in the asset pool. Given Asia’s vast infrastructure needs over the next decade, and its desire to develop residential property ownership, the instrument could prove invaluable. It can also reduce the financing burden at the sovereign level.

Cheaper and longer

Kookmin’s deal came via Citigroup and HSBC. “By issuing a covered bond we’re able to retain our independence rather than relying on the government guarantee,” said Kookmin Bank CEO Kang Chung-won – a guarantee that would have cost 70bp for offshore issuance. “We could price at a longer tenor than the three years imposed by the use of the government guarantee.” The deal came with a five-year tranche supplementing the three-year. The senior paper, issued by KB Covered Bond First Securitization, is guaranteed by KB Covered Bond First International. The SPV is incorporated in Ireland and is secured by a pool of residential mortgage loans and credit card receivables that will always exceed the bond’s value. As with all covered bonds, investors have recourse to the bank's balance sheet. But there is a further enhancement: a requirement that Kookmin top up non- performing loans in the pool with performing ones.

“The bonds are supported by a relatively typical asset-backed securitisation structure. This asset-backed structure seeks to match the cash inflow from the asset side with the cash outflow needed on the liability side,” wrote S&P analyst Frank Lu in a ratings note ahead of issuance. “The structure does not rely on the market value and the refinancing capability of the trust assets.”

Kookmin has a US$1.5bn-equivalent mortgage portfolio, more than sufficient to support the deal’s 75% subordination requirement. Demand and the ultimate deal size will determine the exact balance between mortgage and credit card receivables.

By issuing a covered bond

we’re able to retain our independence rather than relying on the government guarantee. We could price at a longer tenor than the three years imposed by the use of the government guarantee.

S&P rated the paper AA, compared to the issuer’s A rating from S&P (or A+ by Fitch) and the sovereign’s A2 rating, clearly demonstrating the covered bond’s superior ratings dynamic. While the risk on the securities remains with Kookmin, the deal comes with an ultra-conservative LTV of 48%, and includes hedging of won exposure via a currency swap.

Well received

The US$1bn five-year deal was indicated in Asia hours at mid-swaps plus 525bp but bankers involved signalled this guidance would be tightened as New York came in. It opened at 515bp/510bp and by 9am had tightened to 495bp/492bp. By 10am it was in at 494bp/492bp and by the late afternoon settled at 475bp/472bp, for a quick 2.5 points gain for investors, or a handy

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