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Unformatted text preview: ipate more inventories to come to the
market and would rather wait for bargains. Securitization
In February 2001, Huarong invited the Korea Asset Management Corporation (KAMCO) to act
as the special advisor on a proposed asset-backed securities deal. Not many details of this deal
are available for analysis at this stage. However, some securitization deals accomplished by
Huarong's counterparts in Asia can help us understand the transaction and the difficulties facing
China's NPL securitization. The RTC case proved that securitization could be a useful tool in dissolving NPLs (Appendix II:
RTC Case Study). However, it was not until late 1999 that securitization of NPLs became a
reality in Asia. In November 1999, Morgan Stanley launched and priced a JPY 21 billion issue of
floating rate structured notes for a special purpose vehicle (SPV) called International Credit Recovery - Japan One Ltd., a Cayman Islands-domiciled company. This was the first time a
capital markets solution had been applied to the NPL problem. The deal was backed by NPLs,
relating to a total of 700 real estate assets of various types located throughout Japan purchased by
Morgan Stanley over time. The real miracle that securitization did to NPLs is not to turn bad
apple into good apple but to slice the good portion of the bad apple to sell to outsiders and retain
the bad part for the originators. Most NPLs securitization has been supported by substantial overcollateralized or subordinated interests retained by the originators. In June 2001, KAMCO
launched a securitization of NPLs with a total value of US$367 million in international market.
The deal is supported by portfolios incorporating recourse provisions to each of the originating
Korean banks in the form of series of put options, that is, the options of buying back NPL when
it defaults. A successful securitization structure requires the establishment of SPCs (the Special Purpose
Corporations - the actual issuers of the securitization products), the "true-sale" of the underlying
assets from the originator to the SPC, tax exemption for the asset transfer to the SPC and most
important, the support from a well-established market infrastructure in terms of legal, tax and
accounting systems. However, China's legislation does not have securitization guidelines and it
is not clear whether the special purpose corporations would be subject to corporate and
withholding tax. The possible outcome of China's securitization deal would be quasisecuritization that is designed to circumvent these hurdles. CHAPTER SIX: UNSOLVED PROBLEMS Who Is Going To Bear All the Losses Eventually?
A crucial feature of the purchase of NPLs by the AMCs is that the NPLs were transferred at face
value. As a result, assets have been transferred at valuations not set by reference to any market.
The truth is no matter which workout approach is used and how effective it is, there is always a
big gap between the face value and the recovered value. When the AMCs were...
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This document was uploaded on 03/12/2014.
- Spring '14