Structured finance and securitisation in South Korea: overview

A Q&A guide to structured finance and securitisation law in South Korea.

This Q&A provides an overview of, among others, the markets and legal regimes, issues relating to the SPV and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.

To compare answers across multiple jurisdictions, visit the Structured finance and securitisation Country Q&A tool.

This Q&A is part of the global guide to structured finance and securitisation. For a full list of contents visit www.practicallaw.com/securitisation-guide.

Contents

Market and legal regime

1. Please give a brief overview of the securitisation market in your jurisdiction. In particular:
  • How developed is the market and what notable transactions and new structures have emerged recently?

  • What impact have central bank programmes (if any) had on the securitisation market in your jurisdiction?

  • Is securitisation particularly concentrated in certain industry sectors?

Securitisation took off in South Korea in the aftermath of the financial crisis in 1998. The Asset-Backed Securitisation Act (ABS Act) was enacted on 16 September 1998 as Act No. 5555 to facilitate the restructuring or disposal of non-performing loans of financial institutions. The Korea Housing Finance Corporation Act (KHFC Act) enacted on 31 December 2003 as Act No. 7030 was also enacted to facilitate securitisation of mortgage loans and student loans by the Korea Housing Finance Corporation (KHFC).

Securitisations can be performed either:

  • Within the framework of the ABS Act (ABS Act securitisations) which include securitisations by the KHFC (MBS; Mortgage Backed Securities).

  • Outside the ABS Act (non-ABS Act securitisations).

The statistics for non-ABS Act securitisations are not available. However, judging from the volumes of ABS Act securitisations, the South Korean securitisation market has drastically expanded since the introduction of ABS transactions. Also, the size of the non-ABS Act securitisation market is much larger than the ABS Act securitisation market. Because ABS Act securitisation involves certain procedural requirements under the ABS Act, such as registration of a securitisation plan, most securitisations are non-ABS Act securitisations, unless the deal is looking for special benefits under the ABS Act, such as more lenient perfection requirements.

The aggregated amounts of securities issued by special purpose vehicles (SPVs) (which include special purpose companies (SPCs) and trusts established under the ABS Act (see Question 4)) in securitisations for the past seven years were:

  • In 2008, KRW20.6 trillion.

  • In 2009, KRW36 trillion.

  • In 2010, KRW28 trillion.

  • In 2011, KRW32.4 trillion.

  • In 2012, KRW47.5 trillion.

  • In 2013, KRW51.3 trillion.

  • In 2014, KRW41.5 trillion.

The reduction of aggregated amounts in 2014 is due to the decreased amounts of MBS issued by KHFC. However, the amounts of MBS issued by KHFC have been increasing in 2015 compared to the amounts in 2014.

Recently, new products (such as the securitisation of franchise trade receivables) have been introduced and there is an increased demand for allowing derivatives structures, such as synthetic collateralised debt obligations (CDOs). The KHFC Act provides a platform for KHFC to issue covered bonds and KHFC has engaged in a number of this type of issuance.

Central bank liquidity schemes and retained securitisations have not been common in South Korea. Securitisation is concentrated mostly in residential mortgage-backed loans (34.9%, 2014), credit card receivables and auto instalment loans (25.5%, 2014) and loan receivables relating to real estate project finance. (3.7%, 2014).

 
2. Is there a specific legislative regime within which securitisations in your jurisdiction are carried out? In particular:
  • What are the main laws governing securitisations?

  • What is the name of the regulatory authority charged with overseeing securitisation practices and participants in your jurisdiction?

Main law

The ABS Act is the main law governing securitisation transactions. The ABS Act provides, among other things, for the following:

  • Types of qualified originators.

  • Basic securitisation structures.

  • Roles and business of each entity in the structure.

  • True sale requirements.

  • Procedures for registration of securitisation plan and asset transfers.

  • Supervision of securitisations.

    The ABS Act governs ABS Act securitisations and the Financial Investment Services and Capital Markets Act (enacted in 3 August 2007 as Act No. 8635) governs issuance and sales of securities for both ABS Act securitisations and non-ABS Act securitisations.

Regulatory authority

The Financial Services Commission (FSC) supervises securitisations through its executive arm, the Financial Supervisory Service (FSS).

 

Reasons for doing a securitisation

3. What are the main reasons for doing a securitisation in your jurisdiction? How are the reasons for doing a securitisation in your jurisdiction affected by:
  • Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?

  • National or supra-national rules concerning capital adequacy?

  • Risk retention requirements?

  • Implementation of the Basel III framework in your jurisdiction?

Usual reasons for securitisation

The most common reasons for doing a securitisation include:

  • Cheaper borrowing.

  • Balance sheet benefits.

  • Alternative source of funding.

Accounting practices

As of 2011, K-IFRS (translated version of IFRS) has been adopted in South Korea and K-IFRS applies to SPCs. In line with the IFRS, consolidated financial statements must be prepared for companies and financial institutions. Since the adoption of the IFRS, the accounts of originators and SPCs may have to be consolidated.

Capital adequacy

Financial institutions must satisfy the minimum capital requirement against risk-weighted assets. The capital adequacy ratio varies depending on the type of financial institution.

Basel III

Since 1 December, 2013, capital requirement of Basel III Accord has been introduced and enforced against domestic banks in South Korea. The leverage ratio requirement and liquidity ratio requirement are scheduled to be implemented in 2018. Of the Basel III Accord, the capital requirement is unlikely to have a direct effect on securitisation transactions, but the leverage ratio requirement and liquidity ratio requirement may have some impact, as the case may be.

 

The special purpose vehicle (SPV)

Establishing the SPV

4. How is an SPV established in your jurisdiction? Please explain:
  • What form does the SPV usually take and how is it set up?

  • What is the legal status of the SPV?

  • How the SPV is usually owned?

  • Are there any particular regulatory requirements that apply to the SPVs?

An SPV can be established as an SPC or a trust:

  • Under the ABS Act, an SPC must be in the form of a limited liability company (yuhan-hoesa) with separate legal personality. The minimum capital of the SPC is KRW100. The SPC is usually owned by individuals (generally not less than 99.5%) and the originator (mostly less than 0.5%).

  • An SPC established for a non-ABS securitisation can be either a limited liability company or a joint stock corporation (chusik-hoesa). The minimum capital of the SPC is KRW100. The SPC is usually owned by individuals (mostly not less than 99.5%) and the originator (mostly less than 0.5%).

  • A trust established by a licensed trust company can also serve as a securitisation vehicle. A trust does not have separate legal personality and the trustee contracts on behalf of the beneficiaries of the trust in its own name.

Although a master trust structure is allowed in South Korea, an SPC for an ABS Act securitisation can only register one ABS Plan and is highly restricted in its operations (for example, it cannot have offices other than the head office and it cannot hire employees). In addition, it can conduct business only according to its ABS Plan.

 
5. Is the SPV usually established in your jurisdiction or offshore? If established offshore, in what jurisdiction(s) are SPVs usually established and why? Are there any particular circumstances when it is advantageous to establish the SPV in your jurisdiction?

Establishing the SPC

An SPC can be incorporated in South Korea or in another jurisdiction. For domestic securitisations, most SPCs are incorporated in South Korea. For most cross-border securitisations, a dual SPC structure is used, using a domestic SPC and an offshore SPC. The offshore SPC is usually established in the Cayman Islands for tax reasons.

SPC structure

It cannot be said that establishing an SPC in South Korea is more advantageous than in other jurisdictions in general. However, the comparison should be made considering the general restrictions and benefits that the SPC is subject to in South Korea.

An SPC established in South Korea is subject to South Korean corporate income tax. Corporate income tax is levied at the following rates:

  • 10% of taxable income, if taxable income is KRW200 million or below.

  • KRW20 million plus 20% of taxable income exceeding KRW200 million, if taxable income is between KRW200 million and KRW20 billion.

  • KRW3.98 billion plus 22% of taxable income exceeding KRW20 billion, if taxable income is more than KRW20 billion.

Aside from the corporate income tax, an SPC which is a domestic company will also pay to the relevant local government local corporate income tax under the Local Tax Act, which is 10% of the corporate income tax. However, under the relevant local government ordinances, local governments may adjust upward or downward the rate of local corporate income tax on incomes of each fiscal year within 50%.

However, an SPC formed under an ABS Act securitisation may receive an income tax deduction under Article 51-2 of the Corporate Tax Act. If a domestic SPC formed in an ABS Act securitisation distributes 90% or more of its distributable income by way of a dividend, these amounts are deducted from the taxable income of the domestic SPC.

 

Ensuring the SPV is insolvency remote

6. What steps can be taken to make the SPV as insolvency remote as possible in your jurisdiction? In particular:
  • Has the ability to achieve insolvency remoteness been eroded to any extent in recent years?

  • Will the courts in your jurisdiction give effect to limited recourse and non-petition clauses?

It is generally possible to make the SPC insolvency remote using the following steps:

  • Appointing a person who is independent of the originator as the director and equity holder of the SPC whose vote is required to pass the board resolution and the equity holders' resolutions relating to the SPC's insolvency.

  • Imposing restrictions on the SPC preventing it from incurring liabilities outside the ABS Plan.

  • Including limited recourse and non-petition provisions in all material transaction documents that restrict other parties from taking enforcement actions against the SPC's assets.

  • Structuring the transfer of receivables as a true sale under the ABS Act.

Although there is no South Korean court precedent directly on this point (so a court may find to the contrary), limited recourse and non-petition covenant provisions contained in the transaction documents which are governed by South Korean law would be valid against any party bound under the terms of the covenant. Also, as long as the transaction satisfies the requirements to qualify as a true sale, the transfer of assets in a securitisation is unlikely to be deemed as a secured loan transaction, in other words, it will be isolated from the bankruptcy of the originator.

 

Ensuring the SPV is treated separately from the originator

7. Is there a risk that the courts can treat the assets of the SPV as those of the originator if the originator becomes subject to insolvency proceedings (substantive consolidation)? If so, can this be avoided or minimised?

Securitisations that satisfy the requirements of Article 13 of the ABS Act are completely isolated from the bankruptcy risk of the originator (see Question 16).

However, the Debtor Rehabilitation and Bankruptcy Act (enacted on 24 March 2006 as Act No. 7894) (DRB Act), which is the main insolvency statute in South Korea, and the ABS Act contain no provision regarding cancellation of fraudulent act harming creditors under the civil law or right of denial under the DRB Act. Therefore, cancellation of a fraudulent act under the civil law and right of denial under the DRB Act may apply to the transfer.

If the requirements for cancellation of fraudulent act or right of denial are satisfied, the transfer of receivables may be deemed ineffective and be unwound. Therefore, the parties must include, in the transfer agreement, a clause on originator's representations and warranties that the originator is not insolvent and will not become insolvent in the reasonably foreseeable future, and carry out a thorough assessment of the actual risk of the originator's insolvency (since compensation for violation of representations and warranties would not be sufficient protection in case of actual insolvency) (see Question 17).

 

The securities

Issuing the securities

8. What factors will determine whether to issue the SPV's securities publicly or privately?

Securities are issued differently for the different forms of securitisation (see Question 1):

  • Non-ABS Act securitisations and cross-border ABS Act securitisations are mostly issued by private placement.

  • Domestic ABS Act securitisations are issued either publicly or privately.

In 2014, the aggregated amount of securities issued by SPVs in ABS Act securitisations was KRW41.5 trillion, of which KRW32.7 trillion was issued publicly and KRW8.7 trillion was issued privately.

 
9. If the securities are publicly issued:
  • Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?

  • If in your jurisdiction, please identify the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?

  • If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.

Publicly issued securities are usually listed on the Korea Exchange (KRX) because listing on KRX increases marketability and tradability. Securities are listed in accordance with the provisions specified in the Listing Regulation. The KRX lists the securities whose listing has been requested after examination of listing eligibility.

To list publicly issued securities, the domestic SPC must file:

  • A securities registration statement with the FSC. This statement will also have attached the:

    • underwriting agreement;

    • note trustee agreement;

    • paying agency agreement;

    • certain other documents (such as the credit rating report).

  • An application for listing with the KRX.

A minimum share capital of KRW500 million is generally requested. However, it is not required for a SPC to list its asset-backed securities issued in ABS Act securitisations on the KRX.

 

Constituting the securities

10. If the trust concept is not recognised in your jurisdiction, what document constitutes the securities issued by the SPV and how are the rights in them held?

The trust concept is recognised in South Korea (see Question 4). Under the ABS Act, a trust company licensed under the Financial Investment Services and Capital Markets Act can act as a trustee to hold the securitisation assets and issue securities in the form of beneficial certificates.

 

Transferring the receivables

Classes of receivables

11. What classes of receivables are usually securitised in your jurisdiction? Are there any new asset classes to have emerged recently or that are expected to emerge in the foreseeable future?

Mortgage loans and credit card receivables are most commonly securitised because of the funding need of the originators, the risk distribution of assets and less complicated procedures for the asset transfer.

Recently, we have seen an increasing number of automobile instalment loan receivables securitisation transactions as well as mobile handset instalment loan receivables securitisation transactions.

 

Transferring the receivables from the originator to the SPV

12. How are receivables usually transferred from the originator to the SPV? Is perfection of the transfer subject to giving notice of sale to the obligor or subject to any other steps?

Receivables are usually transferred from the originator to the SPV by assignment. To perfect the sale of receivables against any later purchasers of the same receivables from the originator and any other third parties as well as against the debtors, either:

  • Notice of assignment with a fixed-date stamp must be given by the transferor (originator) to the debtors.

  • Consent of the debtors to the assignment with a fixed-date stamp must be obtained.

For ABS Act securitisations, the assignment from the originator to the SPV is effective against third parties (other than the debtors) if the assignment is registered with the FSC. However, for the assignment to be effective against the debtors, in principle, either transferor (originator) or transferee (SPC) may give notice to or obtains consents from the debtors. However, if certain conditions are met, the notice requirement against the debtors may be satisfied with an announcement in a daily newspaper.

 
13. Are there any types of receivables that it is not possible or not practical to securitise in your jurisdiction (for example, future receivables)?

The scope of securitisation assets is broad under the ABS Act.

However, it may not always be practicable to securitise trade (sale) receivables as their transfer or assignment is often expressly prohibited or restricted in many of the underlying receivables documents.

The regulatory agency does not allow securitisation of corporate shares in ABS Act securitisations in practice.

Under Supreme Court precedents, future receivables can be transferred if:

  • The receivables are "specifiable".

  • It is "reasonably expected" that the receivables will arise "in the near future".

If these requirements are met, future receivables can be securitised. Securitisations of future receivables are fairly common in Korea. The interpretation by the court is done on a case-by-case basis, subject to a reasonableness test.

 
14. How is any security attached to the receivables transferred to the SPV? What are the perfection requirements?

Security attached to the receivables can be transferred to the SPV by a transfer agreement for the security with the receivables and by taking the necessary actions for perfection. These vary according to the type of security held:

  • Mortgage loans. The assignment of a mortgage from an originator to an SPV is perfected by registering the assignment in the real estate registry maintained at the local court. However, the assignment of a mortgage loan from the originator to the SPV in an ABS Act securitisation is effective against third parties (other than the debtor) when the assignment is registered with the FSC (even if the transfer has not been registered in the relevant real estate registries).

  • A Kun-mortgage. This is a type of mortgage where the principal amount of the mortgage debt fluctuates within a registered maximum mortgage amount. A Kun-mortgage can only be assigned with the consent of the debtor, unless the principal amount of the mortgage debt has been crystallised. The ABS Act provides a mechanism by which Kun-mortgages attached to the securitised receivables can be crystallised.

  • Pledge. The assignment of receivables secured by a pledge over bank accounts from the originator to the SPV is perfected when the pledgor/assignor notifies the debtor and the third party obligor (that is, the account bank) in writing with a fixed-date stamp on it (for example, by contents certified mail). However, in ABS Act securitisations, the assignment of pledged receivables and the pledge from the originator to the SPV is effective against third parties (other than the debtor) when the assignment is registered with the FSC.

  • Promissory notes. According to the Private International Law of Korea (KPIL), the law of the jurisdiction where the promissory note was endorsed governs the method of assignment. If South Korean law applies, a promissory note assignment can be perfected by endorsement and delivery of the promissory note under the Bills Act (enacted on 20 January 1962 as Act No.1001).

 

Prohibitions or restrictions on transfer

15. Are there any prohibitions or restrictions on transferring the receivables, for example, in relation to consumer data?

Contractual restrictions

If the transfer or assignment of receivables is expressly prohibited or restricted in the underlying receivables documents, the contractual restriction is binding on the originator and the debtor (see Question 13). However, if the originator transfers or assigns the receivables in breach of the contract but the transferee or assignee has, in good faith, no knowledge of the breach, then the transfer or assignment is valid against the debtor.

A negative pledge agreement is also binding on the parties to the agreement, but not binding on third parties acting in good faith.

Legislative restrictions

Restrictions on the supply of customer information apply to non-ABS Act securitisations. However, the ABS Act provides for exemptions from these restrictions to the extent necessary for the implementation of ABS Act securitisations.

 

Avoiding the transfer being re-characterised

16. Is there a risk that a transfer of title to the receivables will be re-characterised as a secured loan? If so:
  • Can this risk be avoided or minimised?

  • Are true sale legal opinions typically delivered in your jurisdiction or does it depend on the asset type and/or provenance of the securitised asset?

If a qualified originator transfers its assets to an SPC as a true sale (as described in Article 13 of the ABS Act) the transfer is not deemed a secured loan transaction. In addition, securitisations that satisfy these requirements are completely isolated from the bankruptcy risk of the originator (see Question 7). The Article 13 requirements are that:

  • The transfer must be made by means of a sale and purchase agreement.

  • The transferee must have the right to receive profits from, and the right to dispose of, the securitised assets. However, the transferor may have the right of first refusal when the transferee disposes of the securitised assets.

  • The transferor must not have the right to claim back the securitised assets, and the transferee must not have the right to claim back the price paid for the transferred securitised assets.

  • The transferee must assume risks associated with the securitised assets except, however, that the transferor might bear warranty liabilities (including the transferor's warranty for the obligors' financial capability).

The Supreme Court has ruled that assets in an SPV established as a trust are not part of the bankruptcy estate or assets of the settlor (that is, the originator) if the settlor is in insolvency proceedings under the DRB Act. A true sale legal opinion must be delivered for ABS Act securitisations, and is frequently delivered for non-ABS Act securitisations.

 

Ensuring the transfer cannot be unwound if the originator becomes insolvent

17. Can the originator (or a liquidator or other insolvency officer of the originator) unwind the transaction at a later date? If yes, on what grounds can this be done and what is the timescale for doing so? Can this risk be avoided or minimised?

A creditor can petition a court to rescind or cancel an act made by the debtor to its property knowing that the act will harm its creditors (fraudulent act harming creditors, see Question 7). This does not apply where the party benefiting from that act (including the party that received the property from the original beneficiary of the act) did not know that it would harm other creditors, either (Article 406(1), Civil Code):

  • At the time of the act.

  • At the time when the party received the property from the original beneficiary of the act.

An act made by an insolvent company with the knowledge that the act would harm its secured or unsecured creditors can be avoided for the benefit of the company's estate (right of denial, see Question 7), unless the party benefiting from that act did not know at the time of the act that it would harm the company's creditors (Article 100(1), Item 1, DRB Act).

Therefore, a transaction can be unwound if, when a transfer or trust agreement is entered into or when receivables are transferred or entrusted by the originator to the SPV under such an agreement, both:

  • The originator is insolvent or may become insolvent in the reasonably foreseeable future.

  • The originator knows this.

The originator is generally regarded as insolvent if any of the following apply:

  • Its total assets amount to less than its total liabilities.

  • It suspends payments of its debts or is unable to pay its debts generally.

  • A petition for insolvency is filed by, or with respect to, the originator under the DRB Act.

  • It is designated as:

    • a company showing signs of insolvency under the Corporate Restructuring Promotion Act (enacted on 19 May 2011 as Act No.10684); or

    • an insolvent financial institution under the Act on the Structural Improvement of the Financial Industry (enacted on 8 March 1991 as Act No.4341).

Such risk can be reduced if the SPV receives solvency certificates, from either the originator itself or an accounting firm, confirming that the originator is not insolvent at the time of the securitisation.

 

Establishing the applicable law

18. Are choice of law clauses in contracts usually recognised and enforced in your jurisdiction? If yes, is a particular law usually chosen to govern the transaction documents? Are there any circumstances when local law will override a choice of law?

The courts will recognise and give effect to a choice of another jurisdiction's laws to govern the transaction documents if the application of that law is not manifestly contrary to the public policy or compulsory provisions of South Korea. For example, in cross-border securitisations, most transaction documents relating to the issuance of notes and security located outside South Korea are governed by English law, while primary filing documents attached to the ABS Plan and documents relating to security located in South Korea are mostly governed by South Korean law.

However, in any proceedings in South Korea, a court will apply:

  • The laws of the jurisdiction where a party to the transaction has been incorporated (or, in the case of a natural person, the law of his home country) in relation to the capacity of that party to enter into the transaction documents.

  • The laws of the jurisdiction where the property is located in relation to real rights or other rights subject to registration, concerning movables and immovables.

  • The laws of the jurisdiction expressly or implicitly agreed by the parties in a contract, assignment of claim and acceptance of obligation. If there is no governing choice of law agreed by the parties, the laws of the jurisdiction with the greatest connection with the contract.

  • South Korean law, decrees and regulations requiring governmental approvals, authorisations or consents for actions taken or contracts executed by the parties.

 

Security and risk

Creating security

19. Please briefly list the main types of security that can be taken over the various assets of the SPV in your jurisdiction, and the requirements to perfect such security.

In cross-border securitisations, all assets held by the SPC are provided as security. These assets include its bank accounts and securitised assets (that is, the receivables) and security is created over these assets by a pledge in most cases.

Under South Korean law, to create a perfected pledge over the receivables (including bank accounts) the parties must first enter into a pledge agreement to create a pledge over the assets and the pledgor (that is, the SPV) must deliver a notice of pledge with a fixed-date stamp on it (for example, by contents-certified mail) to each of the obligors.

 
20. How is the security granted by the SPV held for the investors? If the trust concept is recognised, are there any particular requirements for setting up a trust (for example, the security trustee providing some form of consideration)? Are foreign trusts recognised in your jurisdiction?

Under the Civil Code (enacted on 22 February 1958 as Act No.471), the creditor and the secured party must be identical. Accordingly, security cannot be granted to a third party. However, due to the amendment to the Trust Act (enacted on 30 December 1961 as Act No. 900) which took effect from 26 July 2012, a security trust is permitted in South Korea. A security trust is arranged by the SPV granting the security as a trust property to be held by the trustee, and naming the investors as the beneficiary of the trust. This trust must be set up in accordance with the Trust Act.

The other exception to this principle is under the Secured Bond Trust Act enacted on 20 January 1962 as Act No. 991 (SBTA). Under the SBTA, foreign trusts are recognised in South Korea subject to the approval of the FSC.

 

Credit enhancement

21. What methods of credit enhancement are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the credit enhancement techniques set out in the Guide to a standard securitisation ( www.practicallaw.com/2-501-2997) (Guide)?

The methods of credit enhancement commonly used in South Korea include:

  • Creating senior/subordinated tranches.

  • A credit line from the originator or a third party financial institution.

  • Warranty liability for put-back of securitised assets.

Letters of credit are not commonly used for credit enhancement in South Korea.

The aggregated amount of credit enhancement provided by the originator cannot exceed 50% of the aggregated amount of the securities issued by the SPC under the current FSS guideline.

For further information on methods of credit enhancement, see Guide, Credit enhancement.

 

Risk management and liquidity support

22. What methods of liquidity support or cash reservation are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the provision of liquidity support as set out in the Guide?

The most commonly used method in South Korea to ensure the SPV's liquidity is the liquidity provider's commitment to purchase the commercial papers to be issued on a revolving basis by the SPC.

Cash reserve funds or loan facilities are used in very limited circumstances.

For further information on methods of liquidity support, see Guide, Risk management and liquidity support.

 

Cash flow in the structure

Distribution of funds

23. Please explain any variations to the cash flow index accompanying Diagram 9 of the Guide that apply in your jurisdiction. In particular, will the courts in your jurisdiction give effect to "flip clauses" (that is, clauses that allow for termination payments to swap counterparties who are in default under the swap agreement, to be paid further down the cash flow waterfall than would otherwise have been the case)?

There are no substantial variations to the cash flow index in Diagram 9 of the Guide (see Diagram 9, Guide).

 

Profit extraction

24. What methods of profit extraction are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the profit extraction techniques set out in the Guide?

The most commonly used methods of profit extraction in South Korea include:

  • The SPC issuing subordinated notes to the originator.

  • The originator taking fees for servicing the portfolio of receivables.

  • The originator holding equity interests in the SPC.

 

The role of the rating agencies

25. What is the sovereign rating of your jurisdiction? What factors impact on this and are there any specific factors in your jurisdiction that affect the rating of the securities issued by the SPV (for example, legal certainty or political issues)? How are such risks usually managed?

South Korea is rated Aa3 by Moody's, AA- by Standard & Poor's, and AA- by Fitch. In general, the rating agencies provide a rating after conducting statistical analysis on the following:

  • The credit characteristics of the isolated receivables, such as default levels, history of defaults, and so on.

  • The security.

  • The legal integrity of the structure.

  • The credit ratings of the parties involved.

Rating agency determines the credit rating of the securities based on the information regarding the asset and the originator and the conditions of the securitisation rather than other factors such as political issues.

There are no specific factors likely to affect South Korean securitisation.

 

Tax issues

26. What tax issues arise in securitisations in your jurisdiction? In particular:
  • What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.

  • Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.

  • Are there any other tax issues that apply to securitisations in your jurisdiction?

  • Does your jurisdiction's government have an inter-governmental agreement in place with the US in relation to FATCA compliance, and will this benefit locally-domiciled SPVs?

Transfer taxes

No transfer tax applies to the transfer of the receivables.

For mortgage loans, the mortgages should be transferred with the loan receivables.

For ABS Act securitisations, no mortgage registration tax is payable on the initial mortgage transfers from the originator to the SPC as the SPC acquires the mortgage interests when the asset transfer registration with the FSC is completed, without registration of the mortgage transfers in the relevant real estate registries (see Question 14).

However, a subsequent mortgage transfer by the SPC requires registration and, further, the initial mortgage transfer by the originator (which at the time of its transfer was exempt from registration under the ABS Act) must be registered before the registration of the subsequent mortgage transfer under the Civil Code. Therefore, mortgage registration tax is payable for the subsequent mortgage transfer by the SPC as well as the initial mortgage transfer from the originator to the SPC at the time of the subsequent mortgage transfer.

The amount of tax payable for each mortgage transfer (including education surtax) is 0.24% of the mortgage amount. However, registration tax (and the surtax on it) payable on the registration of an initial mortgage transfer at the time of its subsequent transfer by the SPC is currently reduced by 50% (100% in the case of securitisations by the KHFC) under the Tax Exemption and Limitation Law for ABS Act securitisations (this reduction is scheduled to expire on 31 December 2012).

In addition, the transferee must purchase National Housing Bonds with a principal amount of 1% of a mortgage amount of KRW20 million or more (up to a maximum of KRW1 billion for each mortgage) and a registration fee of KRW14,000 for each mortgage.

Registration of initial mortgage transfers for ABS Act securitisations is exempt from the obligation to buy National Housing Bonds.

Withholding tax

For an overseas issuance of foreign currency denominated bonds to a non-South Korean resident which is not a South Korean corporation, the payment of interest on bonds and the fees (if limited to the gross underwriting spread, for example, underwriting fee, selling commission, and so on), which are directly related to the issuance of the bonds are not subject to any withholding or deduction (Article 21(1), Tax Exemption and Limitation Law).

South Korean withholding tax may be levied up to the rate of 22% on any indemnity amounts paid by an SPC to a bondholder.

Other tax issues

For ABS Act securitisations, if the domestic SPC distributes 90% or more of its distributable income by way of a dividend, these amounts are deducted from the taxable income of the South Korean SPC.

 

Recent developments affecting securitisations

27. Please give brief details of any legal developments in your jurisdiction (arising from case law, statute or otherwise) that have had, or are likely to have, a significant impact on securitisation practices, structures or participants.

Asset-backed commercial paper (ABCP) is a representative form of non-ABS securitisation. Unlike the asset-backed securities issued following the specific procedures under the ABS Act, ABCP has been suggested to be problematic due to insufficient public notice and lack of transparency in distribution and sales process. Therefore, FSS has strengthened the public offering procedure and requires disclosure of the credit rating of the ABCP.

 

Other securitisation structures

28. What other structures, including synthetic securitisations, are sometimes used in your jurisdiction?

Although it is not clear from the wording of the ABS Act whether synthetic securitisations are permissible, as a matter of practice the FSS does not allow synthetic securitisations under the ABS Act.

However, there are a few precedents of synthetic securitisations in the non-ABS Act securitisations sector, where the SPC issued commercial paper or bonds.

The single issue structure, using one South Korean SPC, is the most common structure for domestic securitisations.

The master trust and conduit structures are also used in South Korea, while structured investment vehicles (SIVs) are not used yet.

 

Reform

29. Please summarise any reform proposals and state whether they are likely to come into force and, if so, when. For example, what structuring trends do you foresee and will they be driven mainly by regulatory changes, risk management, new credit rating methodology, economic necessity, tax or other factors?

The ABS Act was introduced in September 1998 and a reform proposal is currently being discussed. The reform proposes to expand the scope of originator (by deleting the high credit rating requirement to qualify as an originator) under the ABS Act, to allow entities with a low credit rating to be able to participate in securitisation if the assets used are high quality liquid assets (HQLA). There is no other reform proposal being considered.

 
30. Has the nature and extent of global, regional and domestic reforms had a positive or negative affect on revitalising securitisation in your jurisdiction?

Even if the reform proposal (deleting the high credit rating requirement to qualify as an originator) is passed, it is unlikely for securitisation by entities with a low credit rating to be actively used in practice. If it is decided that the securitisation of HQLA by entities with a low credit rating poses risks to investors in any way, the regulatory authority is likely to impose heightened regulation.

 

Online resources

Official text of Korean law (in Korean)

W www.law.go.kr

Description. Website with the official text of Korean law (in Korean).

Korea Legislation Research Institute

W http://elaw.klri.re.kr/eng_service/main.do

Description.Unofficial translations into English of the text of Korean law, which is maintained by KIRI (Korea Legislation Research Institute). Up-to-date (almost) and for guidance only.



Contributor profiles

Soonghee Lee, Partner

Yoon & Yang LLC

T +82 2 6003 7507
F +82 2 6003 7025
E shlee@yoonyang.com
W www.yoonyang.com

Professional qualifications. Korea, 1990; New York, US, 2001

Areas of practice. Corporate law; corporate disputes; liabilities of directors and statutory auditors; finance and securities litigation; corporate finance; securitisation/structured finance, project finance/real estate finance, ship/aircraft finance; derivatives; IPOs/capital markets; acquisition finance; collective investments/private investments; financial institution M&A; financial regulation/disclosure; regulatory investigation; insurance; cross-border agreements; M&A.

Non-professional qualifications. Seoul National University School of Law, Doctorate Course (Financial Law); Cornell University Law School, LLM, 2000; Seoul National University College of Law, LLB, 1987.

Recent transactions. Advised on various ABCP programmes and project financing deals in real estate industries.

Languages.Korean, English, Japanese

Publications

  • Supreme Court decides on KIKO cases, International Briefings, International Finance Law Review, February 2014.
  • Study on the treatment of the unclaimed shares and the prohibition of the issuance of bonds with detachable warrants (co-Authored), 61 Business Finance & Law, Seoul National U. Finance Law Centre, September 2013.
  • Securities Finance 2012, 2013 and 2014 Korea (Co-Authored), Getting the Deal Through - Securities Finance, Law Business Research.

Young Kyun Yun, Partner

Yoon & Yang LLC

T +82 2 6003 7556
F +82 2 6003 7025
E ykyun@yoonyang.com
W www.yoonyang.com

Professional qualifications. Korea, 2006

Areas of practice. Corporate finance; securitisation/structured finance, project finance/real estate finance, acquisition finance; collective investments/private investments; financial institution M&A; financial regulation/disclosure; corporate law; corporate disputes; M&A; cross-border agreements; international trade/commerce/customs duties; international litigation/arbitration; customs and trade.

Non-professional qualifications. University of Washington School of Law, LLM, 2012; Yonsei University, BA in Political Science and Diplomacy.

Recent transactions. Advised on various transactions including structured financing and capital market transactions.

Languages. Korean, English

Publications

  • Practical Issues and Problems regarding Private Equity Fund, the Korean Journal of Securities Law, 2013.
  • Inquiry into the ISD under KORUS FTA, Master Graduation Thesis, 2012.

Dong Seon Kim, Associate

Yoon & Yang LLC

T +82 2 6003 7057
F +82 2 6003 7025
E kds@yoonyang.com
W www.yoonyang.com

Professional qualifications. Korea, 2007

Areas of practice. Project finance/real estate finance; corporate finance; securitisation/structured finance; real estate development; SOC; acquisition finance; financial regulation/disclosure; corporate law; corporate disputes; M&A.

Non-professional qualifications. LL.B. Yonsei University College of Law.

Languages. Korean; English

Recent transactions Advised on various transactions including structured financing and capital market transactions.

Publications. Interpretation of the Act on Private Participation In Infrastructure in Korea, Korea Development Institute Public and Private Infrastructure Investment Management Center, 2010.


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