Currency swap illiquidity may hit Korean cross-border ABS growth

The Korean cross-border asset-backed securitisation (ABS) market could see growth stymied this year due to a lack of liquidity in the currency swaps market. While both Hyundai Capital and Samsung Capital are expected to issue separate $300 million cross-border ABSs in the next few months, a source close to the Samsung Capital deal said fears of increasing costs could deter the company from issuing further cross-border ABSs later in the year.

“Currently swaps in the foreign exchange market are volatile, so it may be too expensive to do more international ABSs,” said the source. Liquidity in the currency swap market in Korea is thin and the market has remained volatile. As any large issue will create more volatility, companies like Samsung Capital fear the cost of having to hedge swap transactions will create higher issuing costs and so render cross-border deals unattractive compared with domestic deals.

Samsung Capital’s first international ABS this year - and fourth to date - is planned for April. It is valued at $300 million and backed by auto loan receivables. Merrill Lynch is the sole lead manager, and Credit Suisse First Boston (CSFB) will provide the swaps. Samsung Capital is expected to issue one or two further ABSs in 2002, but the market environment will determine if these are to be international or not, “If swap prices stabilise and the transaction costs are lower than a domestic ABS issuance, Samsung Capital will continue to issue cross-border ABSs,” the source commented.

Korean corporates, particularly in the credit card and auto loan industry, are increasingly issuing ABSs because they can get cheaper funding in greater size, said Seoul-based Han Tae-Ho, manager of asset-backed finance at Korea's Kookmin Bank. A further incentive to issue ABS, he added, is that it can lower capital adequacy ratio (CAR) requirements – something currently being demanded by Korean regulators. Despite the volatility in the swaps market, Han predicts cross-border ABS will remain popular: “In 2002, there will be at least five to 10 cross-border securitisations from Korea.”

Hyundai Capital is expected to issue its first cross-border ABS with a $300 million deal, also backed by auto loan receivables. The deal is expected to launch in February, and JP Morgan Chase will act as sole lead manager, according to a banker at a European investment bank. Both LG Card and Samsung Card – the latter issuing the largest ABS transaction in Asia ex-Japan for $500 million – issued cross-border securitisations late last year.