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Announcement:

Moody's says NACF's reorganization likely to be credit positive

21 Mar 2011

Hong Kong, March 21, 2011 -- Moody's Investors Service could consider a change of the current negative outlook on the National Agricultural Cooperative Federation's ratings (NACF; A1 negative/D+/Ba1 negative) to stable if the benefits from its reorganization are assessed as sufficient to mitigate concerns over asset quality and earnings.

But, Moody's will only be able to assess the benefits when details of key implementation aspects of the reorganization become clear.

On March 11, 2011, Korea's National Assembly passed a revision of the Agricultural Cooperative Law -- which is the charter for NACF.

According to the revision, NACF will be reorganized and adopt a holding company structure on March 2, 2012.

The reorganization -- which will enhance NACF's weak capitalization as well as improve its transparency -- is likely to be credit-positive for NACF's standalone credit quality.

The capital increase (exact size and terms to be fixed in late 2011) will address NACF's capital deficiency issue. This is because the reorganization will require a relatively large capital increase of about KRW 6 trillion from various sources such as the government, member cooperatives, or employees.

The National Assembly will review the government's proposal for its capital injection into NACF in late 2011, after the government completes its due diligence on NACF's assets and after NACF finalizes the size of the capital increase from non-government sources, such as member cooperatives.

NACF's transparency will improve, as the reorganization will transform the very complex organizational structure -- because of NACF's current operation of diverse financial and corporate businesses under one legal entity -- into a relatively simple legal structure where two intermediate holding companies own well-defined operating subsidiaries.

However, it is still uncertain precisely how the reorganization will affect creditors, and the following points are awaiting confirmation:

(1) Division of existing assets and liabilities into separate legal entities after the reorganization

NACF's board of directors must decide on the exact division of assets and liabilities, and it is not entirely clear at this stage which legal entities will assume the rated debt. However, we expect that most of the asset and liabilities of the current credit and banking division will be assumed by the to-be-formed NH Bank. But the precise credit implications for bondholders cannot be determined until there is certainty about the entity that will assume these obligations and the credit profile of that entity can be assessed.

(2) Application of a cross-guarantee on existing debt among entities after the reorganization

The application of a cross-guarantee is not 100% certain. NACF's existing debt at the time of the reorganization is likely to be cross-guaranteed by all the legal entities after the reorganization, in accordance with the Commercial Code of Korea. However, the code allows NACF's Representative Assembly to reject the application of the cross-guarantee. Note that this cross-guarantee will work both ways: bonds that are assigned to the future NH Bank will benefit from cross guarantees from other NACF legal entities. But NH Bank would also have cross guarantee obligations to other legacy debt within the group.

(3) The credit quality of NH Bank that will be established as a separate legal entity after the reorganization

When we have adequate information, Moody's will analyze the intrinsic financial strength of the new NH Bank as well as make assumptions about systemic support, as the bank will take over most of the assets and liabilities of NACF's banking unit and will also issue new debt after the reorganization.

One of the key variables used to assess NH Bank's intrinsic financial strength will be its capital adequacy in terms of size and composition. Despite the internal plan to capitalize NH Bank adequately, it is still uncertain how its capital adequacy will compare with the capital adequacy of its major domestic peers.

The implicit systemic support level for NH Bank could be lower than NACF's current level. NACF carries out comprehensive public policy roles for the agricultural industry, including financing, supply chain services for agricultural products, guidance services for farmers, and a central bank role for member co-ops. NH Bank's public policy role will be limited to providing financing to the agricultural sector and it will be more active in developing its non-policy commercial operations.

(4) Implications of creditors' consent to the reorganization

The process of obtaining debtholder consents to the reorganization has not yet begun. We will wish to have more clarity regarding the costs of the consent process and the potential for early redemption of certain securities.

The list of NACF's ratings is:

- Foreign currency long-term deposit rating: A1 negative

- Foreign currency long-term senior debt rating: A1 negative

- Foreign currency long-term subordinated/junior subordinated debt of A2/A2 negative

- Foreign currency short-term deposit of Prime-1

- Bank Financial Strength Rating: D+ negative

- Baseline Credit Assessment: Ba1 negative

The last rating action on NACF was taken on 14 April 2010, when the foreign currency long-term senior debt rating and the foreign currency long-term deposit rating were raised to A1 from A2 with a negative outlook.

The principal methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007.

NACF -- established in 1961 under the Constitution of Korea and the Agricultural Co-operative Law -- acts as an umbrella organization for agricultural and livestock co-operatives, which represent almost all farmers in Korea. The structure operates on a two-tier system, with NACF in the upper tier and member co-ops in the lower tier. Member co-ops own NACF. NACF, headquartered in Seoul, had KRW 288 trillion in assets (including its non-financial operations) as of September 2010.

Hong Kong
Young Il Choi
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
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Hong Kong
Stephen Long
MD - Financial Institutions
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
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SUBSCRIBERS: (852) 3551-3077

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Moody's says NACF's reorganization likely to be credit positive
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