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Rating Action:

Moody's assigns first-time A1 rating to KOSAF; outlook stable

19 Jul 2010

Singapore, July 19, 2010 -- Moody's Investors Service has today assigned the Korea Student Aid Foundation ("KOSAF") the following first-time ratings: A1 foreign currency long-term issuer rating and Prime-1 foreign currency short-term issuer rating. Both ratings carry a stable outlook.

In accordance with Moody's methodology for government-related issuers, the ratings of KOSAF reflect the combination of the following inputs: (1) very high level of government support; (2) very high level of dependence; (3) Korea's A1sovereign bond rating as a systemic support indicator. Moody's has not assigned a baseline credit assessment to KOSAF due to its strong ties with the government and government budget funding.

We believe that the support probability and dependence factors for its ratings are significant enough that the issuer ratings are equal to the government's. This is because KOSAF has a strong ties with the government as it essentially functions as a delivery mechanism for government policy.

The government has 99.9% stake in KOSAF. KOSAF executes the government's important policies, such as provision of loans and scholarships to students from mainly mid-to-low income families. KOSAF is run on a not-for-profit basis, and therefore it has to depend on the government budget for its operating expenses as well as the coverage of its credit costs beyond its limited capacity. Most of scholarships, granted by KOSAF, come from government funds. The government subsidizes the students' interest payments on the loans. The subsidy amounts accounts for about 70% of the annual endowments to KOSAF by the government.

The Ministry of Education, Science & Technology ("MOEST") has an absolute control on KOSAF, as it appoints its management team and approves its articles of incorporation, business plan and annual budget. It also decides the lending rate for KOSAF's student loans.

Moreover, the A1 issuer rating is further underpinned by the fact that most of its mid-to-long term financing will be obtained from government-guaranteed debt issues.

The Article 18 of the KOSAF Establishment Act, the charter for KOSAF, stipulates that the government can guarantee the repayment of principal and interest on KOSAF's debt with the approval of the National Assembly. In January 2010, the Assembly approved the guarantee up to KRW9 trillion during 2010, and KOSAF had issued about KRW1.4 trillion with the guarantee until May 2010.

While an issuer rating is Moody's opinion of an entity's senior unsecured obligations, we considered this guarantee positively in deciding KOSAF's issuer rating because we do not view the government as having decided to differentiate its support for the various classes of debt. In addition, Moody's thinks the government guarantee on some debt would significantly increase its incentive to support unguaranteed debt instruments due to the reputation risk to the government.

Moody's notes the absence of any explicit language requiring government's legal obligation to replenish KOSAF's deficit, in case KOSAF's reserves are insufficient to cover any losses in a particular fiscal year. However, given its dependence on the government budget and its non-commercial basis, an explicit support language may not be as crucial for assigning A1 rating to KOSAF .

The rating outlook on KOSAF's A1/Prime-1 issuer ratings is stable. Given KOSAF's links with the government, the outlook would be likely to move up or down with Korea's sovereign debt ratings, which also have a stable outlook. In addition, evidence of a change in KOSAF's role or relationship with the government could cause the rating to move down from the Sovereign's; specifically: a material change in its role, a significant increase in unsecured borrowings, or the National Assembly's refusal to provide a government guarantee on its new debt.

The principal methodology used in rating KOSAF is "The Application of Joint Default Analysis to Government-Related Issuers" (April 2005). This can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab.

Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

KOSAF was established in May 2009, and designated as a quasi-government institute since January 2010. The foundation is a government-related non-bank financial institution, and provides loans and scholarships to students mainly from mid-to-low income families.

KOSAF's is 99.9% owned by the government. Its outstanding student loan balance was KRW2.6 trillion as of March 31, 2010. The remaining 0.1% is contributed by its employees.

Singapore
Seung Jun Lee
Associate Analyst
Financial Institutions Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Hong Kong
YoungIl Choi
Vice President - Senior Analyst
Financial Institutions Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's assigns first-time A1 rating to KOSAF; outlook stable
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