Korea Asset Management Corporation

1. Korean Experience of Securitization and NPL Disposition Korea Asset Management Corporation

2. Table of Contents I. Korean Securitization and KAMCO II. KAMCO’s NPL Securitization III. Future of NPL Securitization

3. I. Korean Securitization 1. New Securitized Assets by Each Year 2. Loans and Bonds as Major Source of Securitization 3. Who securitized in Korea? 4. Lessons from Korean Experience

4. 1. New Securitized Assets by each year Sep 98Dec 00 Enacted First Corporate Receivable Dec 98Aug 00Jan 01 First Private First P-CBOFirst Venture P-CBO First Offshore Receivable in $ First C-Card First Korean Cross-Border KAMCO NPL $ Mar 01 Jan 99Mar 00 First Credit Card First Public Issue First KoMoCo MBS Dec 01 Feb 00 First Revolving Credit Card Jun 99 First S-CBO First Auto Dec 02 First KAMCOFirst $ MBS 1998 1999 2000 2001 2002

5. Underlying 1999 2000 2001 2002 2003. 6 S-CBO P-CBO Other Securities - - 5,317 204,154 73,073 9,157 11,133 75,406 - 11,670 7,692 - 9,150 11,376 - Security Total 5,317(7.9%) 286,384(1.9%) 86,539(17%) 19,362(4.9%) 20,526(10.8%) Loans Lease, Auto MBS Land Receivable Credit Card Corporate Receivable Others 30,012 9,330 - 5,627 2,460 9,413 - 103,118 24,784 13,788 2,260 39,801 9,724 2,063 146,922 9,858 8,380 5,913 206,040 36,279 600 36,968 45,997 9,515 - 221,656 57,522 1,119 12,744 57,804 3,100 - 69,196 18,738 - Loans Total 56,842(83.9%) 159,538(39.6%) 413,992(81.3%) 372,777(93.6%) 161,582(85.4%) Real Estate 5,550 11,910 8,811 6,135 7,193 Total (100%) 67,709 493,832 509,342 398,274 189,301 2. Loans and Bonds as Major Sources of Securitization (In 100 MIL KRW)

6. Who securitized ?

7. Who securitized ?

8. Who securitized ?

9. Lessons from Korean Experiences • Lesson 1 : Securitization evolves as market need arises USA : Mortgage  Lease/Cards  Junk Bonds/CBOs  Future Cash Flows Korea : NPLs  CBOs  Cards  Future Cash Flows • Lesson 2 : Securitization can be an effective policy tool for overcoming credit crunch problems (or credit quality gap) • Lesson 3: Public sectors can facilitate securitization • Beware: Basel II will make NPL ABS much difficult

10. II. KAMCO’s NPL Securitization 1. Definition of NPL 2. Troubled Loan by banks 3. Why KAMCO was involved in NPL Disposition 4. KAMCO’s NPL Securitization 5. Why Securitization for NPL? 6. JV-SPC with private investor

11. Loan Categories; Normal (正常, 정상 ) Special Mention (關注, 요주의) Substandard (次級, 고정) NPLs Doubtful (可疑, 회수의문) NPLs Estimated Loss (損失, 추정손실) NPLs 1. Definition of NPL Criterion Change A loan was Substandard if 6 months delinquent; from June 1998 3 months delinquent Korea adopted the Forward Looking Criteria since 2000 analyzing borrower’s repaying ability effected increase of NPL

12. 2. Troubled Loan by Banks Increase : 137.6 (trillion won) Criterion Change 44.5 New 93.1 32.5 trillion (1997) 18.8 trillion (2001) Decrease : 151.3 (trillion won) by KAMCO 43.2 by Banks 108.1

13. 3. Why KAMCO was involved in NPL Disposition Credit Crunch NPLs hinder banks’ lending activity If nothing is done, NPLs get worse each day, Recovery decreases continuously Korean government restructured banks, and banks restructured corporate clients -> Korean government purchased NPLs from banks through KAMCO KAMCO, as a Korean national “Bad Bank” pioneered NPL resolution -> The experience will be re-deployed for current Credit Card Problems

14. 1997 1998 1999 2000 2001 Total KAMCO (A) 8,345.3 22,253.9 7,761.1 1,040.7 3,816.3 43,217.3 Banks (B) - 16,010.2 18,036.9 35,891 38,192.2 108,130.3 Total (C) 8,345.3 38,264.1 25,798 36,931.7 42,008.5 151,347.6 (A) / (C) 100% 58.15% 30.08% 2.81% 9.08% 28.55% 4-1. Korean NPL Disposition (In billion US$)

15. 4-2. KAMCO Pioneered NPL Securitization • KAMCO pioneered and banks followed • KAMCO tried to sell NPL from late 1998 but no domestic demand existed • Only demand was from American Distressed Debt Investors • 1999~2000:KAMCO created market for bulk sale targetting foreign investors • KAMCO established JV NPL investment vehicle with private investors • KAMCO issued public and private ABSs • 2000~2001: Banks followed KAMCO’s sale method • 2002 : Domestic investors started to follow foreign investors • NPL securitization market can not develop on its own - needed government level support at early stage

16. 4-3.KAMCO NPL Resolution Methods • KAMCO Has Acquired USD 91.77bn in NPLs and Has Resolved USD 53.86bn Since November 1997. (USD 1 = KRW 1,200) (As of December 31, 2002, in billion U.S. Dollars) Ratio Resolution Methods Accumulated Resolution Face Value Purchase Value Recovery Value International Bidding 5.07 1.09 1.34 9.41% ABS Issuance 6.68 3.52 3.48 12.41% Sale to AMC 2.15 0.55 0.77 3.99% Sale to CRC 1.54 0.30 0.56 2.86% Individual Loan Sales 2.16 0.53 0.76 4.01% Court Auction, Public Sales 6.92 2.19 2.69 12.85% Collection 10.54 3.56 4.94 19.58% Daewoo Held 2.73 1.86 2.22 5.07% Sub Total 37.80 13.60 16.75 70.18% Recourse & Cancellation 16.06 8.47 8.47 29.82% Total 53.86 22.07 25.23 100.00% * Non-Cash Resolution (Debt-equity swap) : USD 8.65 billion

17. 5. Why Securitization for NPL? • Seller’s Side • 1. Off Balance Sheet Effect and BIS Capital Release • 2. Diversified Loan Pool is easier to sell than Individual Loan • 3. Credit Guarantors prefer to guarantee partially for a • securitized pool than Individual Loan • 4. Easier Legal Structure for foreign investors • Investor’s Side • Possible leverage if senior tranche is sale-able

18. 6. Joint Venture SPC with Private investor Seller Investor NPLs 100% 50% cash 50% ABS 50%Cash+ 50%ABS SPC Seller 50% : Investor 50% Asset Management Contract Asset Manager Seller and Investor form a JV to warehouse NPL for future resolution through disposal, restructuring and securitization

19. III. Future of NPL Securitization 1. Sophisticated Structure: Two Tier 2. Securitization and Credit Guarantees are priority for Asian Countries 3. Joint pooling of Multiple Countries 4. Proposed Structure 5. How to harmonize between countries

20. 1. Sophisticated Structure: Two Tier • First Level Entity : Local Entity in capital importing country Company or Trust as applicable Must achieve ‘local rating’ acceptable to international rating agency • Second Level Entity: Domiciled in Offshore Financial Center (Cayman Island etc) for international issuance

21. 2. Securitization and Credit Guarantees are priority for Asian Countries Other Asian Countries need Securitization Market But they lack credit, local bond market and FX swap In addition to Subordination (internal credit support), sufficient external credit support is required In Korea, Third Party Banks (with less NPL problem) partially guaranteed NPL securitization Also, Korea Credit Guarantee Fund provided partial guarantee to P-CBOs Government supported credit guarantee program is pre-requisite for pooling NPL

22. 3. Joint pooling of Multiple Countries For NPL, the borrowers are in financial trouble, but they may be strategic corporations in the “Core Industries”of the country Government supports in those industries are inevitable Pooling and supporting Asia-Pacific industries together might be better than individual country level support May be easier to invite private investment bankers and vulture investors’ participation KAMCO proposed joint pooling of Asian NPL and SME Loans to APEC/ASEAN+3 countries .

23. 4-1. Proposed structure Goal: Facilitate disposal of NPLs and SME industrial financing in the region by mobilizing savings from capital-abundant countries Means: Adopt securitization with proper risk sharing Countries participate voluntarily

24. Country A NPL Loans/ Bonds Senior SPC in Country D (Capital Abundant Country) Senior Junior Junior Country B NPL Loan/ Bonds Senior Credit guarantee/Swap Junior Gov’t Agency in Country D Country C NPL Loan/ Bonds Senior Junior 4-2. Proposed structure

25. 5. How to harmonize between countries Different Financial and legal cultures exist between participating countries • Korea & Japan : ABS law well-established and ABS market volume achieved • China : Only Trust Law is available • Thailand, Malaysia, India, Philippines : ABS law and market volume developing • Accounting, tax and bankruptcy systems are also different • Every country has unique client relationship and service(loan collection) culture NPL provisioning and recovery level is also different • Harmonization at FIRST TIER level is necessary, but difficult to achieve • SECOND TIER is required as ‘SAFE ZONE’.