Korean financial institutions, active issuers of collateralized loan obligations in their own market, are starting to jump into the U.S. with balance sheet deals to take advantage of cheaper financing.Jerome Cheng, asst. v.p. and structured finance analyst for Moody's Investors Service, said the rating agency is reviewing six dollar- and euro-denominated transactions that are expected to close before year-end, compared to the handful of cross-boarder transactions that have closed in the last four years. Cheng said cheaper interest rates abroad relative to Korea, increased availability of cross currency swaps and interest by U.S.-based financial guarantors to wrap tranches have led to a pick up in the pipeline.
Korean financials have removed roughly KRW600 million in underperforming loans off their balance sheets in the past two months through domestic deals. Alexander Batchvarov, Asian CDO analyst at Merrill Lynch, says Korean companies are looking for new ways to raise money following the region's financial crisis and have been actively using the balance sheet CLO structure domestically to provide alternative funding for the last two years. Batchvarov said Korea was responsible for 80% of Asian CLO issuance last year. But now they're looking to tap U.S. and European investors with cross-border transactions.
One cross-border deal expected to hit the market in the next month is a $300 million balance sheet deal by asset seller Korean Deposit Insurance Corporation. The deal includes the sale of a combination of U.S. and KRW denominated underperforming assets to a special purpose vehicle and the sale of notes, including U.S. denominated, to investors. The deal provides KDIC with needed funding unavailable through banks now skeptical to lend to the Korean market. Setting up a special purpose vehicle enables liquidation of underperforming assets on the seller's portfolio and the opportunity to raise immediate cash flow through the sale of bonds.
Cheng said decreasing LIBOR rates have made coupons on bonds more attractive for issuers and that banks abroad feel more comfortable with KRW risk and are more willing to swap the currency. In addition, financial guarantors enable issuance of triple A notes backed by double B assets for a rate cheaper than a double B coupon.
To issue in the U.S., however, Korean institutions will have to adhere to global securitization and transparency standards, said Calvin Wong, Asian CDO analyst for Standard & Poor's. Wong said Korean domestic deals often allow note holders to put back bonds to the asset seller if the supporting collateral tanks. "Risk is not completely transferred as it is traditionally. It's more of a funding vehicle than a risk-transferring vehicle. They just delay the problem rather than fix it by taking risk out of one pocket and putting it another," said Wong. Addressing that point, the KDIC deal and future cross-boarder deals are expected to launch without recourse options as the rest of the market expects a true transfer of risk for off balance sheet treatment.