Korean consumer default likely to affect Asian securitisation, says S&P

The deteriorating credit quality of South Korea’s securitised credit card portfolios has not only meant Korean asset-backed securities issuance has ground almost to a halt this year, but that it is likely to negatively affect consumer finance securitisation in other Asian countries, according to credit rating agency Standard & Poor’s.

“Securitisation can become a costly financing option”, as issuers are likely to have to add some safeguards in the structure at additional costs, said Calvin Wong, a managing director in S&P’s structured finance ratings group in Hong Kong. As a result, securitisation is likely to become a less attractive funding source compared with alternatives such as bank loans or bonds.

The growing rate of delinquencies and defaults in Korea’s credit card business has caused a number of early amortisation of securitisation deals. While S&P points out that the actual risk of losses for investors is very limited, buyers of securities backed by Korean credit card receivables face early amortisation of their investment. To avoid such risks, many Korean credit card asset-backed securities are currently being restructured.

“Investors face reinvestment risk upon an early principal payout, while issuers must find alternative funding sources and incur any costs associated with the breakage of currency and interest rate swaps. Therefore, some issuers are trying to restructure their deals to delay or avoid early amortisation,” S&P said in a new report.

But Wong said the situation in Korea is not likely to affect all asset classes and types of securitisation such as collateralised debt obligations or mortgage-backed securities. Assets such as real estate are mature and have a long-standing history. The biggest impact is likely to be on asset classes with little history in the region, such as unsecured consumer lending, including personal loans or revolving credits.