While U.S. Lags, S. Korea's Kookmin Plunges Ahead -- Update #1

In a period when big U.S. banks have done nothing with covered bonds—despite a public announcement of support last year—one of South Korea's biggest lenders has launched the first issuance in the Asia-Pacific region.

Kookmin Bank logoThe launch also apparently marks another significant "first": the first time anywhere in the world that credit card receivables have been used to form part of a cover pool.

Seoul-based Kookmin Bank sold $1 billion in five-year covered bonds Wednesday (May 6), to a reception that Wall Street Journal Asia characterized as "strong demand."

The spread was reportedly 500 basis points over mid-swaps, tightening from initial guidance of 525 basis points over mid-swaps set earlier in the day.  The bond price was discounted to 98.68 for a yield of 7.572% (compared to the 7.25% coupon rate), according to Reuters.

Kookmin Bank holds more than 20% of South Korea's total bank deposits.  Previous media stories reported a plan to sell two tranches of covered bonds, totaling $1 billion—one with a three-year series with a face amount of $200 million, and the other a five-year series with a face amount of $800 million.  But the bank reportedly decided against selling the three-year bond, based on the relative degree of investor interest.

Standard & Poor's and Moody's Investor Service gave preliminary ratings that included both series.  S&P April 27 assigned the Kookmin covered bonds a provisional credit rating of AA.  Moody's (April 28) gave a provisional rating of Aa2.  Neither of those ratings is the credit agencies' highest, but both are three notches higher than the S&P and Moody's ratings for the issuing bank itself.

“Covered bonds allow us to fund on an independent basis and to a longer tenor than under the government guarantee program,” a bank spokesperson told reporters.  It has also been suggested that South Korean banks see the covered bond market as a way to access foreign capital in the face of a foreign-currency shortage.

Advance news stories on the planned launch from Bloomberg, Dow Jones Newswires, the Financial Times, and Euroweek stressed that other lenders in South Korea and across the Asia-Pacific region were watching closely to see how successful Kookmin would be in opening a covered bond market there.

Use of Credit Card Receivables

Kookmin's credit card group is South Korea's second-largest, with about 9.5 million customers.  At the beginning of this year, major U.S. credit card issuers Capital One, Citigroup, and Discover reportedly were considering deals to use credit card receivables for covered bonds, but Kookmin is apparently the first actually to do it.

According to Moody's, Kookmin's cover pool initially will include more than 1.9 million credit card accounts.  S&P's Presale report describes Kookmin's credit card portfolio for the cover pool in part as follows:

"The entrusted portfolio is a revolving pool of credit card receivables generated from designated credit card accounts that were originated by [Kookmin].  Receivables eligible for this transaction will be from [Kookmin's] credit card products, including lump-sum purchases, installment purchases, cash advances, revolving purchases, and revolving cash advances.  During the term of the transaction, all new receivables from existing designated accounts will be entrusted as well."

The report further notes that Kookmin may also "entrust" new credit card accounts with similar eligibility criteria during the life of the bonds, "if the receivables generated from the existing accounts are not enough according to the terms and conditions of the transaction."

The balance of Kookmin's cover pool (slightly more than half) is comprised of residential real estate loans in the form of "group loans by [Kookmin] to borrowers from newly completed apartment complexes," according to S&P.

Contrast with U.S.

Kookmin's move contrasts with big U.S. banks such as Bank of America, Citigroup Inc., JPMorgan Chase,  and Wells Fargo. In a joint press release last July, the four stated: "We look forward to being leading issuers as the U.S. covered bond market develops."  However, none of them has issued a covered bond since that time, and none has been announced for the future.

The U.S. banks' current absence is particularly notable because the road was already paved in this country earlier in this decade.  BofA previously issued covered bonds in 2007, and JP Morgan sponsors a covered bond program originally started by Washington Mutual in 2006.  Of course, that was before the financial meltdown shook many U.S. financial institutions to their foundations.

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