Young Hee Jo and Jong-Uk Lee of Shin & Kim in South Korea look at structured finance and securitisation practice in Korea
1. Eligibility for originators under ABS Act
Under the Asset-Backed Securitisation Act (“ABS Act”), the legal entities that can engage in ABS transactions as originators under the ABS Act are limited to (i) financial institutions such as banks, insurance companies and specialized credit finance companies and (ii) companies with good or superior credit ratings (mostly investment‐grade-rated companies and listed companies), whose need for asset securitisation is acknowledged by the Financial Services Commission (“FSC”) according to the FSC’s criteria.
Such eligibility requirements provide no exception, and accordingly, there has been strong demand for the expansion of the scope of the originator eligibility, primarily on the grounds that the likelihood of ABS securities’ redemption depends on the value of the underlying assets rather than originators’ creditworthiness.
To address such demand for expanded eligibility, a proposed amendment to the ABS Act has been presented to the National Assembly. However, it is unclear when the bill can be ratified.
2. True sale requirements for securitisation under ABS Act
The ABS Act has four requirements for a transfer of assets to be a true sale, as opposed to a secured lending transaction. These requirements are: (i) the transfer has been made in form of a sale or exchange; (ii) the transferee must have the right to take the profits from, and dispose of, the transferred assets; (iii) the transferor does not have any right to demand the return of the transferred assets and the transferee does not have any right to demand the refund of the consideration for the transferred assets; and (iv) the transferee assumes all risks relating to the transferred assets (while the transferor may provide warranties for defects).
3. SPV established under ABS Act
Under the ABS Act, a special purpose vehicle established under the ABS Act (“ABS SPC”) must be established in form of a limited liability company and is prohibited from any activities other than those permitted under the ABS Act or its articles of association. An ABS SPC is required to entrust (i) servicing activities relating to its securitisation assets to a third party servicer and (ii) any other activities to a third party administrator.
4. Commingling issue under ABS Act
Under the ABS Act, a servicer must maintain a separate account for servicing of an ABS SPC’s entrusted securitisation assets (including the funds and other property rights received as a result of the management, operation, and disposition of such assets) to prevent commingling with the servicer’s own assets.
Furthermore, the Financial Supervisory Service (“FSS”) has adopted a strict requirement for the segregation between a servicer’s accounts and an ABS SPC’s accounts, in an effort to preclude potential commingling risks. This requirement provides that any collections from underlying assets should be transferred directly from the obligor’s account to the ABS SPC’s account, without a servicer’s account being involved in any way.
5. Perfection of receivables transferred under ABS Act
Under the ABS Act, no consent is necessary for transfer of receivables for securitisation purposes in order to perfect such transfer against third parties (other than the obligors with respect to such receivables), while filing of an asset transfer registration with the FSC would be required. Additionally, in order to perfect such transfer against the obligors, perfection notices need to be provided to the obligors by a mail service accompanied with certification of contents and delivery, which is typically required to be served by the originator upon occurrence of certain trigger events (such as early amortisation events).
6. Notice required to fix secured claims for keun-mortgage purposes
For transfer of a mortgage, the approval or consent of the borrower is generally not required. In case where the mortgage takes keun-mortgage form, however, the secured claims must be fixed for such mortgage to be transferred, and the borrower’s consent would be necessary to fix the secured claims if they have not been fixed previously.
In this regard, the ABS Act provides that, if underlying assets are claims secured by a keun-mortgage, the relevant secured claims will be deemed fixed on the day immediately following the date the originator sends the borrower a notice, by a mail service accompanied with certification of contents and delivery.
7. Tax benefits for ABS SPC
Under the Corporate Tax Act (the “CTA”), if an ABS SPC distributes as dividends not less than 90% of its distributable income, which means the SPC’s net income (excluding valuation gain or loss on certain securities) plus retained earnings (or minus deficit, both of which are not inclusive of valuation gain or loss on certain securities) minus legal reserve, such distributed dividends are deductible from the taxable income of the ABS SPC.
8. Regulation on the issuance of ABCP
Asset-backed securitisation structured outside the ABS Act (“Unregistered ABS”) has been widely used primarily due to the restriction on the eligibility of originators and the true sale requirement under the ABS Act.
An asset-backed commercial paper (“ABCP”) used to be a popular tool to facilitate an Unregistered ABS as it did not require disclosure through submission of securitisation plan or securities registration statement, among others. However, with an amendment in 2013 to the FSC’s Regulations on Issuance, Public Disclosure, Etc. of Securities, any ABCP having over 365 days before maturity is now deemed issued in form of public offering of new securities and, accordingly, is subject to the securities registration statement requirement.
9. Implementation of the Electronic Short-term Bond
The Act on Issuance and Distribution of Electronic Short-Term Bond (“ESTB Act”) came into effect in January 2013 after its enactment in July 2011.
An electronic short-term bond would be exempted from the securities registration statement requirement if such ESTB has maturity of three months or less. Thanks to such exemption, asset-backed bonds issued in form of electronic short-term bonds are now widely used effectively as a replacement of ABCPs.
10. Enactment of Covered Bonds Act
With the enactment of the Covered Bonds Act on December 19 2013, Korean issuers can now use covered bonds as a low-cost, stable financing source method, which would be particularly beneficial when hit by financial crises. Covered bonds are also expected to improve the housing loan market by providing financial institutions with a stable funding source for long-term and fixed rate loans.
Although no covered bond has been issued under the Covered Bonds Act yet, several financial institutions are anticipated to issue covered bonds in the near future.
Young Hee Jo and Jong-Uk Lee
Shin & Kim