MOODY'S ASSIGNS (P)Aaa TO KOREA FIRST BANK'S RMBS DEAL
Approximately US$ 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
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
2. the [15%] subordination to be provided by the purchaser
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
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
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.
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
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 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
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.
Michael M. Ye
Structured Finance Group
Moody's Asia Pacific Ltd.
Shirley C.Y. Chan
Structured Finance Group
Moody's Asia Pacific Ltd.