Covered Bonds From Korea Return After 2 1/2 Years as Funds Cheer

  • KHFC issued $500 million of covered notes in November
  • The securities will help lenders get secure funds, FSC says

South Korean issuers sold their first covered bonds in 2 ½ years, as regulators and investors applauded lenders for choosing to issue safer debt.

State-backed Korea Housing Finance Corp. raised $500 million last month issuing securities backed by assets including home loans, while Kookmin Bank, the nation’s biggest mortgage lender, raised $500 million in October. Investors welcomed the offerings as only two nations have such bonds in Asia. Singapore’s Oversea-Chinese Banking Corp. is considering a program, United Overseas Bank Ltd. has one already and DBS Group Holdings Ltd. sold the nation’s first covered securities in July.

"We would encourage banks from Singapore and South Korea to come to the market with benchmark deals," said Richard Schmidt, a senior portfolio manager at MEAG Munich Ergo Asset Management GmbH in Munich. "We appreciate the solidity of their financial systems, their successful efforts to implement an investor friendly legislation and the opportunity to diversify into Asia."

Greater issuance of covered bonds and mortgage-backed securities will help Korean lenders convert home loans to long-term, fixed-rate plans, reducing default risks in a country with a record $1 trillion in household debt. Covered bonds have historically been attractive to investors because they are guaranteed by the issuer and backed by a pool of assets, such as mortgages and public-sector loans.

Asian Issuance

Covered bonds differ from securitization such as mortgage-backed notes in that the assets remain on bank balance sheets. Australian and New Zealand issuers have shown that issuance of the securities can quickly become an efficient funding source, according to MEAG Munich Ergo’s Schmidt. There still aren’t enough offerings from Asia, he said.

Korean covered notes will perform strongly in 2016, due to the high and stable credit quality of issuers and the country’s sovereign strength, Moody’s Investors Service analysts led by Jerome Cheng wrote in a report dated Dec. 1. Korean banks with large mortgage portfolios may establish new programs for the securities in 2016, following Korea Housing Finance Corp. and Kookmin Bank, they said.

Household Debt

“Covered bonds will help Korean lenders get long-term financing stably, which can match the maturity of their increased long-term mortgages,’’ said Kwon Dae Young, director of Financial Policy Division at Financial Services Commission in Seoul. “Issuers will need to move towards offshore covered bond issues on a regular basis.’’

Household debt in Korea rose 34.5 trillion won ($29.5 billion) in the third quarter to a record 1,166.04 trillion won at the end of September, the central bank said last week. The government introduced a refinancing program earlier this year to increase the proportion of fixed-rate and amortizing mortgages as it seeks to lower dependence on floating rate loans whose servicing costs rise when rates increase.

KHFC plans to sell covered notes regularly to diversify funding sources as such steps "will be helpful in times of crisis," said Cho Jeom Hoh, general manager of the securitization business at the state-backed company, said in a phone interview Tuesday.

Kookmin’s covered bond was Korea’s first since legislation that simplified issuance rules and clarified investor protections took effect last year. It hired BNP Paribas SA to arrange investor meetings from next week in connection with a proposed offering in dollars, a person familiar said on Tuesday.

While costs with unsecured notes are now low, covered notes offer cheaper financing that could fall further as the market expands, according to Moody’s.

“Cost savings could increase in the future when more banks issue covered bonds, a situation which will improve liquidity in the market,” Moody’s analysts led by Cheng wrote.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE