Korean cross-currency interest-rate swap spreads are expected to widen over the next month as more than USD1 billion of asset-backed bonds come to the market. Kookmin Card, LG Capital, Hyundai Card, Samsung Capital and Samsung Credit Card all plan to issue asset-backed securities, according to traders, who added the companies intend to enter swaps to hedge their foreign exchange and interest-rate exposure. "The ABS market is hot in Korea," noted one interest-rate trader. He added that ever since the success of the first off-shore ABS transaction by Samsung Capital in April corporates have been lining up to execute similar deals (DW, 4/8).
The trader continued that the companies will issue U.S. dollar-denominated bonds backed by Korean won credit card receipts. Swap players are looking to profit by entering swaps in which they pay fixed Korean won rates and receive six-month floating U.S. dollar LIBOR. They will profit from the trades if the increased demand for swaps by market players looking to hedge ABS transactions drives up bids. If this materializes they will reverse the position and profit from the difference. Korean won fixed-rates for a five-year cross-currency swaps are around 5.18%. One trader said his target rate to reverse the position would be after a 15 basis point gain.
Likely maturities for the ABS and swaps will be three to five years. Credit Suisse First Boston, ING Barings, J.P. Morgan and UBS Warburg are all involved in ABS mandates, according to traders. Traders at the banks declined comment.
