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Rating Action:

MOODY'S ASSIGNS (P)Aaa TO KOREA FIRST BANK'S RMBS DEAL

15 Mar 2004
MOODY'S ASSIGNS (P)Aaa TO KOREA FIRST BANK'S RMBS DEAL

Approximately US$[500] Million of Mortgage-Backed Securities Rated

Hong Kong, March 15, 2004 -- Moody's Investors Service has assigned provisional ratings of (P)Aaa to both the Class A1 and Class A2 guaranteed secured floating rate notes (the notes) to be issued by Korea First Mortgage No.1 Limited (the issuer) and which are ultimately backed by residential mortgage loan assets originated by Korea First Bank (KFB) of Korea. The ratings are based on an unconditional and irrevocable note guarantee to be provided by Aaa-rated Ambac Assurance Corporation (Ambac) on the timely interest payments and the ultimate repayment of the notes by their respective maturity dates. The transaction will be KFB's first cross-border residential mortgage-backed securitisation transaction (RMBS) and the second RMBS arranged out of Korea. UBS Limited, the lead manager, and Lehman Brothers Inc., the co-lead manager, brought the transaction to the market.

The complete rating action is as follows:

Issuer: Korea First Mortgage No.1 Limited

US$[330,000,000] Class A1 Guaranteed Secured Floating Rate Notes due [February 2014], rated (P)Aaa

US$[170,000,000] Class A2 Guaranteed Secured Floating Rate Notes due [February 2024], rated (P)Aaa

The (P)Aaa ratings address the expected loss posed to the investors by the respective note maturity dates of the Class A1 and Class A2 notes. The expected loss only takes into account the scheduled yield and the principal repayment on the notes but does not consider the step-up margin payments, which will be paid on a when-available basis to the noteholders, if the Class A1 and Class A2 notes were not fully repaid in 2009 and 2014, respectively. The step-up margin payments are not guaranteed by Ambac. Hence, the ratings do not address the likelihood and timeliness of the step-up margin payments.

In addition, Moody's has assigned a provisional rating of (P)Aa3 to each of the two classes of notes - without regard to the note guarantee to be provided by Ambac - based on the following factors:

1. the credit quality of the underlying residential mortgage loan assets;

2. the [15%] subordination to be provided by the purchaser subordinate notes;

3. the potential risks due to the set-off right of the underlying obligors, and the possibility of the collections generated from the underling mortgage loans becoming commingled with the servicer's own funds;

4. a reserve fund, which will be fully funded on the closing date to cover (a) certain senior fees and expenses plus three months of interest payable on the purchaser senior note, (b) the upfront transfer cost that will be incurred by the back-up servicer in the event of a servicer transition, and (c) the expenses associated with sending perfection notices to borrowers when any of the notification trigger events, such as a servicer termination event, is breached;

5. the KRW/USD cross-currency swap to be provided by ING Bank N.V. - acting through its Seoul branch - as the swap counterparty (ING Seoul branch) and the swap guarantee to be provided by Ambac;

6. the transaction's principal paying mechanism - (a) sequential with all available principal collections passing through to first pay down the Class A1 notes before paying down the Class A2 notes, prior to an event of default, and (b) pari passu between the Class A1 and Class A2 notes subsequent to an event of default;

7. the transaction's structural features, including the various triggers that will cause the servicer termination events and notification trigger events;

8. the legal protections provided in the transaction, including registration under the Act on Asset-Backed Securitisation, enacted in September 1998;

9. the experience of Korea First Bank (KFB) as the originator and the servicer; and

10. the experience of Kookmin Bank as the back-up servicer.

TRANSACTION SUMMARY

The notes to be issued by the issuer are collateralized by a purchaser senior note to be issued by First Home Loan No.1 Limited (the purchaser), which is, in turn, backed by a portfolio of residential mortgage loans originated by KFB.

The issuer will purchase the purchaser senior note from the purchaser with the notes issuance proceeds. The purchaser will then use the purchaser senior note proceeds - together with proceeds from the issuance of the purchaser subordinate notes - to acquire a portfolio of residential mortgage loans from KFB. Meanwhile, KFB will, in turn, subscribe to the purchaser subordinate notes.

The noteholders will benefit from the unconditional and irrevocable note guarantee to be provided by Aaa-rated Ambac. This guarantee will insure full and timely payments of interest (other than step-up margin payments) for the notes and the ultimate repayment of principal by their respective maturity dates.

The issuer will use the payments it receives under the purchaser senior note to fulfill its obligations on the notes on a quarterly basis. In addition, the purchaser will use the interest and principal collected on the underlying mortgage loans to honor its payment obligations under the purchaser senior note and the purchaser subordinate notes.

The principal collected on the mortgage loans will be applied on a pass-through basis - in a sequential order - to first repay the principal of the purchaser senior note until it is fully redeemed, and then the principal repayment of the purchaser subordinate notes. For the Class A1 notes, the pay down will occur faster than that for the Class A2 notes because the principal will only flow to the Class A2 notes after the Class A1 notes are fully repaid. However, upon the occurrence of an event of default, the principal of the Class A1 and Class A2 notes will be repaid on a pari-passu basis.

The interest of the Class A1 and Class A2 notes will rank pari-passu and pro rata between themselves and bearing interest rates that are linked to 3-month LIBOR, and non-payment of step-up margin payments will not constitute an event of default.

A swap with ING Seoul branch will be established to mitigate the currency and interest rate mismatches faced by the transaction, and to protect against non-transferability and inconvertibility risks. Ambac will provide a swap guarantee to insure the timely interest payments and ultimate principal repayments by the purchaser under the swap agreement. However, the swap guarantee will not insure the step-up margin payments, which will be covered by the swap after the step-up date.

In rating the transaction, Moody's also considered, among other factors, the default frequencies and the loss severity of the mortgage loans, certain characteristics from the mortgage loan-by-loan information, the environment for the Korean residential property market and the concerns caused by the deterioration in consumer credit. Moody's also took into account the impact of set-off risk and commingling risk on the transaction.

Moody's believes that the [15%] subordination, the presence of the reserve fund, coupled with the structural features built into the transaction, sufficiently protect Ambac against potential defaults in the mortgage loans and are consistent with the (P)Aa3 ratings.

A more detailed analysis of the transaction will be available at Moody's website in the Pre-Sale Reports section: http://www.moodys.com

THE COMPANIES

The issuer is a newly established bankruptcy-remote, special purpose company incorporated in the Cayman Islands. The purchaser is a newly set up limited liability company organized under the laws of Korea.

KFB (Baa3/P-3/D) is both the originator and servicer. Although the bank has a short history in the residential mortgage lending business, which it started only in June 2000, Moody's believes that it has adequate capacity as a servicer.

Kookmin Bank (A3/P-2/D+) - Korea's largest retail bank with the biggest mortgage portfolio - is the back-up servicer. It will assume the role of the servicer in the event that KFB ceases to be the servicer.

The securities will not be registered under the Securities Act of 1933 (the Act) under circumstances reasonably designed to preclude a distribution thereof in violation of the Act. The issuance will be designed to permit resale under Rule 144A.

The provisional ratings are issued in advance of the final issue of the notes and reflect Moody's preliminary credit opinions regarding the transaction only. Moody's makes no representations that the provisional ratings will be the same as the definitive ratings. The definitive ratings of the transaction are subject to the satisfactory review of the final structure, documents and legal opinions, which have to be provided to Moody's within 30 days.

Moody's Investors Service is a publisher of rating opinions and research. It is not involved in the offering or sale of any securities, nor is it acting on behalf of the offering party. This release is not a solicitation or a recommendation to buy, hold or sell securities.

Hong Kong
Michael M. Ye
Managing Director
Structured Finance Group
Moody's Asia Pacific Ltd.
Telephone: 852-2509-0200
Facsimile: 852-2509-0165

Hong Kong
Shirley C.Y. Chan
Analyst
Structured Finance Group
Moody's Asia Pacific Ltd.
Telephone: 852-2509-0200
Facsimile: 852-2509-0165

No Related Data.
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