Finance 2008/09 Volume 2: Securitisation South Korea South Korea Yong-Ho Kim and Yong-Seung Sun, Kim & Chang www.practicallaw.com/ 6-381-1640 MARKET AND LEGAL REGIME In 2006, KRW23.2 trillion (about US$25.3 billion). 1. Please give a brief overview of the securitisation market in your jurisdiction. In particular: How active and/or developed is the market and what notable transactions have taken place recently? Is securitisation particularly concentrated in certain industry sectors? Securitisation took off in South Korea in the aftermath of the financial crisis in 1998. The Act on Asset-Backed Securitisation (ABS Act) was enacted in September 1998 to facilitate the restructuring or disposal of non-performing loans of financial institutions. A separate act was also enacted to facilitate securitisation of mortgage loans and student loans by the Korea Housing Finance Corporation (KHFC). Securitisations can be achieved either within the framework of the ABS Act (ABS Act securitisations (which include securitisations by the KHFC)) or outside the ABS Act (non-abs Act securitisations). In 2007, KRW19.8 trillion (about US$21.4 billion). Recently, new products (such as the securitisation of franchise trade receivables) have been introduced in South Korea and there is an increased demand for allowing derivatives structures, such as synthetic CDOs. In the South Korean market, securitisation is concentrated mostly in residential mortgage-backed loans, receivables held by credit specialty finance companies and loan receivables relating to real estate project finance. For further information on the classes of receivables referred to above and throughout this chapter, see Model Guide, table, Classes of receivables. 2. Is there a specific legislative regime within which securitisations in your jurisdiction are carried out? In particular: What are the main laws governing securitisations? Is there a regulatory authority? The statistics for non-abs Act securitisations are not available. However, judging from the volumes of ABS Act securitisations, the South Korean securitisation market has drastically expanded over the past decade, although the volume has somewhat decreased since 2006 as a result of the downturn in the South Korean debt capital market. The aggregated amounts of securities issued by SPVs (which include special purpose companies (SPC) and trusts established under the ABS Act ( see Question 4 )) in securitisations are set out below (conversion rates are as at 1 December in the relevant year): In 1999, KRW6.8 trillion (about US$5.9 billion). In 2000, KRW49.4 trillion (about US$40.1 billion). In 2001, KRW50.9 trillion (about US$40.2 billion). In 2002, KRW39.8 trillion (about US$33.3 billion). In 2003, KRW39.9 trillion (about US$33.2 billion). In 2004, KRW27.0 trillion (about US$25.8 billion). In 2005, KRW28.6 trillion (about US$28.0 billion). Main law The ABS Act is the main law governing securitisation transactions in South Korea. The ABS Act provides, among other things, for the following: Types of qualified originators. Basic securitisation structures. Roles and business of each entity in the structure. True sale requirements. Procedures for registration of securitisation plans (ABS Plan) and asset transfers. Supervision of securitisations. Regulatory authority The Financial Services Commission (FSC) (formerly the Financial Supervisory Commission) supervises securitisations through its executive arm, the Financial Supervisory Service (FSS). CROSS-BORDER HANDBOOKS www.practicallaw.com/securitisationhandbook 121 This chapter was first published in the Cross-border Finance Handbook 2008/09 Volume 2: Securitisation and is reproduced with the permission of the publisher,
South Korea Finance 2008/09 Volume 2: Securitisation REASONS FOR DOING A SECURITISATION 3. Which of the reasons for doing a securitisation, as set out in the Model Guide, usually apply in your jurisdiction? In particular, how are the reasons for doing a securitisation in your jurisdiction affected by: Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)? National or supra-national rules concerning capital adequacy (such as the Basel International Convergence of Capital Measurement and Capital Standards: a Revised Framework (Basel II Accord) or the Capital Requirements Directive)? What authority in your jurisdiction regulates capital adequacy requirements? Usual reasons for securitisation The Basel II Accord is applicable in South Korea for banks. Under the Basel II Accord, it is generally understood that securitisations may have an adverse impact on the capital adequacy ratio for the originator. Capital adequacy requirements are supervised by the FSC through the FSS. THE SPECIAL PURPOSE VEHICLE (SPV) Establishing the SPV 4. How is an SPV established in your jurisdiction? Please explain: What form does the SPV usually take and how is it set up? What is the legal status of the SPV? There are a number of reasons for doing a securitisation. These usually include: Cheaper borrowing. Balance sheet benefits. Alternative source of funding. For further information on these, see Model Guide, Reasons for doing a securitisation. Accounting practices The accounting principles for SPCs in ABS Act securitisations, as well as the GAAP, (for a definition of terms in this chapter set out in bold and italics, see Glossary, in this Handbook), apply to securitisations and most transactions are structured as off-balance transactions in South Korea. However, according to the roadmap issued in 2007, the IFRS is expected to be gradually introduced in South Korea in the next three years. The IFRS will be adopted by: Listed corporations (excluding financial institutions) that choose to use it, in 2009. All listed corporations, in 2011. In line with the IFRS, the consolidated financial statements must be principal financial statements in South Korea as follows: Listed corporations with assets not less than KRW2 trillion (about US$2.2 billion), in 2011. How is the SPV usually owned? Are there any particular regulatory requirements that apply to the SPVs? An SPV can be established as an SPC or a trust: Under the ABS Act, an SPC must be in the form of a limited liability company ( yuhan-hoesa ) with separate legal personality. The minimum capital of the SPC is KRW10 million (about US$10,800) and the SPC is usually owned by individuals (mostly not less than 99%) and the originator (mostly less than 1%). An SPC established for a non-abs securitisation can be either a limited liability company or a joint stock corporation ( chusik-hoesa ). The minimum capital of the SPC is KRW50 million (about US$54,000) and the SPC is usually owned by individuals (mostly not less than 99%) and the originator (mostly less than 1%). A trust established by a licensed trust company can also serve as a securitisation vehicle. Such a trust does not have separate legal personality and the trustee contracts on behalf of the beneficiaries of the trust in its own name. Although a master trust structure ( see Model Guide, Master trusts ) is allowed in South Korea, an SPC for an ABS Act securitisation is permitted to register only one ABS Plan and is highly restricted in its operations (for example, it cannot have offices other than the head office and it cannot hire employees. In addition, it can conduct business only according to its ABS Plan. Listed corporations with assets less than KRW2 trillion, in 2013. Once the IFRS is adopted, the accounts of originators and SPCs may have to be consolidated. Capital adequacy Financial institutions must satisfy the minimum capital requirement against risk-weighted assets. The capital adequacy ratio varies depending on the types of financial institutions. 5. Is the SPV usually established in your jurisdiction or offshore? If established offshore, in what jurisdiction are SPVs usually established and why? Are there any particular circumstances when it is advantageous to establish the SPV in your jurisdiction? An SPC can be incorporated in South Korea or in another jurisdiction. For domestic securitisations, most SPCs are incorporated in 122 CROSS-BORDER HANDBOOKS www.practicallaw.com/securitisationhandbook This chapter was first published in the Cross-border Finance Handbook 2008/09 Volume 2: Securitisation and is reproduced with the permission of the publisher,
Finance 2008/09 Volume 2: Securitisation South Korea South Korea. For most cross-border securitisations, a dual SPC structure is used, using a domestic SPC and an offshore SPC. The offshore SPC in such cases is usually established in the Cayman Islands for tax reasons. A South Korean SPC does not, in practice, issue notes directly to offshore investors. Instead, the dual SPC structure is adopted so that the offshore SPC issues notes to the offshore investors. The reason for this structure is to avoid the application of the Secured Bond Trust Act (SBTA). It is generally understood that notes issued by South Korean companies that are secured by collateral located in South Korea are subject to the procedural and other onerous requirements of the SBTA (for example, appointment of a licensed trustee, supervision and approval of the FSC, and so on). Including limited recourse and non-petition provisions in all material transaction documents that restrict other parties from taking enforcement actions against the SPC s assets. Although there is no South Korean court precedent directly on this point (so a court may find to the contrary), provisions concerning the limited recourse and the non-petition covenant contained in the transaction documents expressed to be governed by South Korean law would be valid and effective against each party who makes such covenant according to its terms. However, it is not entirely clear whether the court would necessarily reject an insolvency petition filed in breach of such a covenant solely because of the covenant. Ensuring the SPV is treated separately from the originator It is understood that, commercially, offshore investors require the notes issued under a South Korean cross-border securitisation to be issued in the form of notes that are secured by certain underlying collateral located in South Korea. Accordingly, the domestic SPC issues unsecured bonds to the offshore SPC, which in turn issues secured notes to offshore investors. The assets/rights of the domestic SPC are typically pledged to the offshore SPC through separate documents to secure the domestic SPC s obligations under the bonds issued by it to the offshore SPC, as well as its obligations to other parties to the transaction documents. An offshore SPC does not, in practice, directly own the securitised assets (that is, without an intervening South Korean SPC) for tax related reasons. Under South Korean tax law, a foreign company (the offshore SPC in this case) that maintains an agent in South Korea can create a so-called agency permanent establishment (agency PE) and so become subject to South Korean corporate income tax. Even if no agency PE is found, interest payments on the underlying assets (such as loan receivables paid to the offshore SPC) would be subject to South Korean withholding tax. On the other hand, a South Korean SPC under the ABS Act is considered to be engaged in financial business in South Korea and, therefore, no withholding is required for such interest payments to it. Also, under South Korean tax law, if the South Korean SPC distributes 90% or more of its distributable income by way of a dividend, such amounts are deducted from the taxable income of the South Korean SPC. 7. Is there a risk that the courts can treat the assets of the SPV as those of the originator if the originator becomes subject to insolvency proceedings? If so, can this be avoided/minimised? The Act on Debtor Rehabilitation and Bankruptcy contains no provision under which the court can consolidate the assets and liabilities of the SPC with those of the originator in the originator s insolvency proceedings. Outside insolvency proceedings, in a few cases the Supreme Court has applied the doctrine of piercing the corporate veil by denying the corporate existence of a subsidiary where the parent company had incorporated such subsidiary (usually a paper company) for the purpose of harming its creditors or circumventing any application of laws or regulations against the parent company. Therefore, unless the corporate existence of the SPC is denied based on the doctrine established by the above Supreme Court precedents, the assets and the liabilities of the originator and the SPC would not be consolidated involuntarily in the originator s insolvency proceedings. THE SECURITIES Issuing the securities Ensuring the SPV is insolvency remote 6. Is it possible to make the SPV insolvency remote in your jurisdiction? If so, how is this usually achieved? It is generally possible to make the SPC insolvency remote in South Korea. To achieve this, usually the following steps can be taken: Appointing a person who is independent of the originator as the director and equity holder of the SPC whose vote is required to pass the board resolution and the equity holders resolutions relating to the SPC s insolvency. Imposing restrictions on the SPC preventing it from incurring liabilities outside the ABS Plan. 8. Are the securities issued by the SPV usually publicly or privately issued? Securities in the non-abs Act securitisations and in cross-border ABS Act securitisations are mostly issued by private placement. However, domestic ABS Act securitisations are issued either publicly or privately. In 2007, the aggregated amount of securities issued by SPVs in ABS Act securitisations was KRW19.8 trillion (about US$21.4 billion), of which KRW13.8 trillion (about US$14.9 billion) was issued publicly and KRW6 trillion (about US$6.5 billion) was issued privately. CROSS-BORDER HANDBOOKS www.practicallaw.com/securitisationhandbook 123 This chapter was first published in the Cross-border Finance Handbook 2008/09 Volume 2: Securitisation and is reproduced with the permission of the publisher,
South Korea Finance 2008/09 Volume 2: Securitisation 9. If the securities are publicly issued: Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction? If in your jurisdiction, please briefly summarise the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements? If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this. Among the classes of receivables set out in the table of the Model Guide ( see Model Guide, table, Classes of receivables ), the following have never been securitised in South Korea: Whole business. Leveraged loan CLOs. Second lien CLOs. Emerging market CLOs. Emerging market CBOs. CDOs of CDOs. The securities that are publicly issued in South Korea are listed on the Korea Exchange (KRX). The securities can be traded in the KOSPI market or the KOSDAQ market of the KRX. However, most securities listed on the KRX are traded in the KOSPI market. For the listing of publicly issued securities, the South Korean SPC is required to file a registration statement with the FSC and the application with the KRX. The underwriting agreement, note trustee agreement, paying agency agreement and certain other documents (such as the credit rating report) are attached to the registration statement. Generally a minimum share capital of KRW500 million (about US$541,000) is required for a company to list its bonds on the KRX. However, this requirement is not applied to securities issued in ABS Act securitisations. Constituting the securities CDOs of ABS and CDOs. The transfer of the receivables from the originator to the SPV 12. How are the receivables usually transferred from the originator to the SPV (for example, assignment, novation, sub-participation, declaration of trust)? How is the transfer perfected? Are there any rules, requirements or exemptions that apply specifically to transferring receivables in a securitisation transaction? Receivables are usually transferred from the originator to the SPV by assignment. To perfect the sale of receivables against any later purchasers of the same receivables from the originator and any other third parties as well as against the debtors, the originator must either: Give notice of the assignment to the debtor with a fixeddate stamp on it. 10. If the trust concept is not recognised in your jurisdiction, what document are the securities issued by the SPV constituted by and how are the rights in them held? The trust concept is recognised in South Korea. Under the ABS Act, a trust company licensed under the Trust Business Act can act as a trustee to hold the securitisation assets and issue securities in the form of beneficial certificates. TRANSFERRING THE RECEIVABLES Classes of receivables 11. What classes of receivables are usually securitised in your jurisdiction? Please explain any particular reasons (for example, the strength of the origination market) why such receivables are usually securitised and the progress of the market in securitising new classes of receivables. Consumer loans and credit card receivables are most commonly securitised because of the funding need of the originators, the risk distribution of assets and less complicated procedures for the asset transfer. Obtain the consent of the debtor to such assignment with a fixed-date stamp on it. For ABS Act securitisations, the assignment from the originator to the SPV is effective against third parties (other than the debtors) if the assignment is registered with the FSC. However, for the assignment to be effective against the debtors, in principle, notice of the assignment must be given to the debtors or their consent to it must be obtained. 13. Are there any types of receivables that it is not possible or not practical to securitise in your jurisdiction (for example, future receivables)? The scope of securitisation assets is broad under the ABS Act. However, it may not always be practicable to securitise trade receivables as their transfer or assignment is often expressly prohibited or restricted in many of the underlying receivables documents. Securitisation of rental receivables may also not be practicable because there is a concentration of risks in respect to the originator s credit risk in addition to the asset risk. Under Supreme Court precedents, future receivables may be transferred if: The receivables are specifiable. 124 CROSS-BORDER HANDBOOKS www.practicallaw.com/securitisationhandbook This chapter was first published in the Cross-border Finance Handbook 2008/09 Volume 2: Securitisation and is reproduced with the permission of the publisher,
Finance 2008/09 Volume 2: Securitisation South Korea It is reasonably expected that the receivables will arise in the near future. If these requirements are met, future receivables can be securitised. 14. How is any security attached to the receivables transferred to the SPV? What are the perfection requirements? Security attached to receivables can be transferred to the SPV by an agreement to transfer such security with the receivables and by taking the necessary actions for perfection. These vary according to the type of security held: contractual restriction is binding on the originator and the debtor. However, if the originator transfers or assigns the receivables in breach of such contract but the transferee or assignee has, in good faith, no knowledge of such breach, then the transfer or assignment is valid against the debtor. A negative pledge agreement is also binding on the parties to the agreement, but not binding on the third parties in good faith. Legislative restrictions Restrictions on the supply of customer information apply to non- ABS Act securitisations. However, the ABS Act provides for exceptions from these restrictions for ABS Act securitisations. Mortgage loans. The assignment of a mortgage from an originator to an SPV is perfected by registering the assignment in the real estate registry maintained at the relevant court. However, the assignment of a mortgage loan from the originator to the SPV in an ABS Act securitisation is effective against third parties (other than the debtor) when such assignment is registered with the FSC, even without registering the mortgage transfer in the relevant real estate registries. A Kun- mortgage is a type of mortgage where the principal amount of the mortgage debt fluctuates within the registered maximum mortgage amount. A Kun- mortgage can only be assigned without the consent of the debtor if the principal amount of the mortgage debt has been crystallised. Otherwise, a Kunmortgage cannot be assigned without the consent of the debtor. The ABS Act provides for a mechanism by which Kun- mortgages attached to the securitised receivables can be crystallised. Pledge. The assignment of receivables secured by a pledge over bank accounts from the originator to the SPV is perfected when the pledgor/assignor notifies the debtor and the third party obligor (that is, the account bank) in writing with a fixed-date stamp on it (for example, by contents certified mail). However, the assignment of pledged receivables and the pledge from the originator to the SPV in ABS Act securitisations is effective against third parties (other than the debtor) when such assignment is registered with the FSC. Promissory notes. According to the Private International Law of Korea (KPIL), the law of the jurisdiction where the promissory note was endorsed governs the method of assignment. If South Korean law applies, a promissory note assignment can be perfected by endorsement and delivery of the promissory note under the Bills Act. Prohibitions on transfer Avoiding the transfer being re-characterised 16. Is there a risk that a transfer of title to the receivables will be re-characterised as a loan with security? If so, can this risk be avoided and/or minimised? If a qualified originator transfers its assets to an SPC in a manner of true sale (as described in Article 13 of the ABS Act), such transfer will not be deemed a secured loan transaction and securitisations that satisfy such requirements are completely isolated from the bankruptcy risk of the originator. Under Article 13 of the ABS Act, for the sale/ transfer of assets not to be deemed the provision of a security interest, the transfer must satisfy each of the following four requirements: The transfer must be made by means of a sale/purchase agreement. The transferee should have the right to receive profits from and the right to dispose of the securitised assets except, however, that the transferor may have the right of first refusal when the transferee disposes of the securitised assets. The transferor should not have the right to claim back the securitised assets, and the transferee should not have the right to claim back the price paid for the transferred securitised assets. The transferee should assume risks associated with the securitised assets except, however, that the transferor might bear warranty liabilities (including the transferor s warranty for the obligors financial capability). The Supreme Court has ruled that assets in a trust established as the SPV will not become a part of the bankruptcy estate or assets of the originator if the originator is in insolvency proceedings under the Act on Debtor Rehabilitation and Bankruptcy. 15. Are there any prohibitions on transferring the receivables or other issues restricting the transfer? For example, is a negative pledge enforceable, or are there any legislative provisions that affect the transfer of receivables (such as consumer or data protection rules)? Contractual restrictions If the transfer or assignment of receivables is expressly prohibited or restricted in the underlying receivables documents, the Ensuring the transfer cannot be unwound if the originator becomes insolvent 17. Can the originator (or a liquidator or other insolvency officer of the originator) unwind the transaction at a later date? If yes, on what grounds can this be done and what is the timescale for doing so? Can this risk be avoided or minimised? A creditor can petition a court to rescind or cancel an act made by the debtor with respect to its property with the knowledge that CROSS-BORDER HANDBOOKS www.practicallaw.com/securitisationhandbook 125 This chapter was first published in the Cross-border Finance Handbook 2008/09 Volume 2: Securitisation and is reproduced with the permission of the publisher,
South Korea Finance 2008/09 Volume 2: Securitisation such an act will harm its creditors, unless the party benefiting from that act (including the party that received the property from the original beneficiary of the act) did not know at the time of the act that it would harm other creditors (or at the time when the party received the property from the original beneficiary of the act) ( Article 406(1), Civil Code ). South Korean law, decrees and regulations requiring governmental approvals, authorisations or consents for actions taken or contracts executed by the parties. The governing laws of claims, rights and equity interests concerning: Further, under the relevant part of Article 100(1), Item 1 of the Act on Debtor Rehabilitation and Bankruptcy, an act made by an insolvent company with the knowledge that the act would harm its secured or unsecured creditors can be avoided for the benefit of the company s estate, unless the party benefiting from that act did not know at the time of the act that it would harm the company s creditors. the assignability of them; the effect of their assignment against the underlying debtors and third parties; the creation of security interests over them. Therefore, a transaction can be unwound if, when a transfer or trust agreement is entered into, and each time the receivables are transferred or entrusted by the originator to the SPV under such an agreement, both: The originator is insolvent or may become insolvent in the reasonably foreseeable future. The originator knows this. The originator is generally regarded as insolvent if any of the following apply: Its total assets are less than its total liabilities. It suspends payments of its debts or is unable to pay its debts generally. A petition is filed by, or with respect to, the originator under the Act on Debtor Rehabilitation and Bankruptcy. It is designated as: a failing company or equivalent under the Corporate Restructuring Promotion Act; or a failing financial institution under the Act on the Improvement of the Financial Industry of Korea. Avoidance risk may be reduced if the SPV receives solvency certificates, from either the originator itself or an accounting firm, confirming that the originator is not insolvent at the time of the securitisation. Establishing the applicable law The laws governing the claim and cross-claim respectively as to set-off and any similar arrangement. For example, in cross-border securitisations, most transaction documents relating to the issuance of notes and security located outside South Korea are governed by English law, while primary filing documents attached to the ABS Plan and documents relating to security located in South Korea are mostly governed by South Korean law. SECURITY AND RISK Creating security 19. Please briefly list the main types of security that can be taken over the various assets of the SPV in your jurisdiction, and the requirements to perfect such security. In cross-border securitisations, all assets held by the SPC and the equity interests held by its equity holders are provided as security. In addition to equity in the SPC, these assets include its bank accounts and securitised assets (that is, the receivables) and security is created over these assets by a pledge in most cases. To create a perfected pledge over the receivables (including bank accounts) the parties must first enter into a pledge agreement to create a pledge over the assets and the pledgor (that is, the SPV) should deliver a notice of pledge with a fixed-date stamp on it (for example, by contents certified mail) to each of the obligors. To create a perfected pledge over the equity interests, the secured party must be registered as pledgee of the equity interests in the SPC s equity holders register. 18. Are choice of law clauses in contracts usually recognised and enforced in your jurisdiction? If yes, is a particular law usually chosen to govern the transaction documents? Are there any circumstances when local law will override a choice of law? The courts will recognise and give effect to a choice of another jurisdiction s laws to govern the transaction documents if the application of such law is not manifestly contrary to the public policy of South Korea. However, in any proceedings in South Korea, a court will apply: The laws of the jurisdiction where a party to the transaction documents has been incorporated (or, in the case of a natural person, the law of his home country) in relation to the capacity of that party to enter into the transaction documents. 20. How is the security granted by the SPV held for the investors? If the trust concept is recognised, are there any particular requirements for setting up the trust (for example, the security trustee providing some form of consideration)? Are foreign trusts recognised in your jurisdiction? Under the Civil Code, the creditor and the secured party must be identical. Accordingly, the security cannot be granted to a third party or a security trustee acting as trustee for the creditor. The only exception to this principle is under the SBTA ( see Question 5 ). Under the SBTA, foreign trusts are recognised in South Korea subject to the approval of the FSC. 126 CROSS-BORDER HANDBOOKS www.practicallaw.com/securitisationhandbook This chapter was first published in the Cross-border Finance Handbook 2008/09 Volume 2: Securitisation and is reproduced with the permission of the publisher,
Finance 2008/09 Volume 2: Securitisation South Korea Credit enhancement Profit extraction 21. What methods of credit enhancement are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the credit enhancement techniques set out in the Model Guide? 24. What methods of profit extraction are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the profit extraction techniques set out in the Model Guide? The methods of credit enhancement commonly used in South Korea include: Creating senior/subordinated tranches. A credit line from the originator or a third party financial institution. Monoline insurance. The most commonly used methods of profit extraction in South Korea include: The SPC issuing subordinated notes to the originator. The originator taking fees for servicing the portfolio of receivables. The originator holding equity interests in the SPC. Warranty liability for put-back of securitised assets. Letters of credit are not commonly used for credit enhancement in South Korea. The aggregated amount of credit enhancement provided by the originator cannot exceed 50% of the aggregated amount of the securities issued by the SPC under the FSS guideline. For further information on methods of credit enhancement, see Model Guide, Credit enhancement. Risk management and liquidity support For further information on methods of profit extraction, see Model Guide, Profit extraction. THE ROLE OF THE RATING AGENCIES 25. Are there any specific factors in your jurisdiction that affect the rating of the securities issued by the SPV (for example, legal certainty or political issues)? How are such risks usually managed? In general, the rating agencies provide a rating after conducting statistical analysis on the following: 22. What methods of liquidity support are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the provision of liquidity support as set out in the Model Guide? The most commonly used method in South Korea to ensure the SPV s liquidity is the liquidity provider s guarantee to purchase the commercial papers to be issued on a revolving basis by the SPC. Cash reserve funds or loan facilities are used in very limited circumstances. For further information on methods of liquidity support, see Model Guide, Risk management and liquidity support. CASH FLOW IN THE STRUCTURE Distribution of funds 23. Please explain any variations to the Cash flow index accompanying Diagram 9 of the Model Guide that apply in your jurisdiction. There are no substantial variations to the Cash flow index in Diagram 9 ( see Model Guide, Diagram 9 and box, Cash flow index ) (except that, in principle, security cannot be granted to a third party or a security trustee acting on behalf of the creditors ( see Question 20 )). The credit characteristics of the isolated receivables, such as default levels, history of defaults, and so on. The security. The legal integrity of the structure. The credit ratings of the parties involved. TAX ISSUES 26. What tax issues arise in securitisations in your jurisdiction? In particular: What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with. Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with. Are there any other tax issues that apply to securitisations in your jurisdiction? Transfer taxes There is no transfer tax applicable to the transfer of the receivables. CROSS-BORDER HANDBOOKS www.practicallaw.com/securitisationhandbook 127 This chapter was first published in the Cross-border Finance Handbook 2008/09 Volume 2: Securitisation and is reproduced with the permission of the publisher,
South Korea Finance 2008/09 Volume 2: Securitisation In the case of mortgage loans, the mortgages should be transferred with the loan receivables. For ABS Act securitisations, no mortgage registration tax is payable on the initial mortgage transfers from the originator to the SPC as the SPC acquires the mortgage interests when the asset transfer registration with the FSC is completed, without registration of the mortgage transfers in the relevant real estate registries ( see Question 14 ). However, a subsequent mortgage transfer by the SPC requires registration and, further, the initial mortgage transfer by the originator which was exempt from registration under the ABS Act must be registered before the registration of the subsequent mortgage transfer under the Civil Code. Therefore, mortgage registration tax is payable for the subsequent mortgage transfer by the SPC as well as the initial mortgage transfer from the originator to the SPC at the time of the subsequent mortgage transfer. The amount of tax payable for each mortgage transfer (including education surtax) is 0.24% of the mortgage amount. In addition, the transferee must purchase National Housing Bonds with a principal amount equal to 1% of a mortgage amount of KRW20 million (about US$22,700) or more (up to a maximum of KRW1 billion (about US$1.08 million) per mortgage) and a registration fee of KRW9,000 (about US$10) per mortgage. However, registration tax (and the surtax on it) payable in respect of the registration of the initial mortgage transfers (at the time of the subsequent transfer by the SPC ( see above )) is currently reduced by 50% (100% in the case of securitisations by the KHFC) under the Tax Exemption and Limitation Law for ABS Act securitisations (this reduction is scheduled to expire on 31 December 2009). The obligation to buy National Housing Bonds is also exempt for registration of initial mortgage transfers for ABS Act securitisations. Withholding tax SYNTHETIC SECURITISATIONS 27. Are synthetic securitisations possible in your jurisdiction? If so, please briefly explain any particularly common structures used. Are there any particular reasons for doing a synthetic securitisation in your jurisdiction? Although it is not clear whether synthetic securitisations are permissible under the current ABS Act, as a matter of practice, the FSS does not allow synthetic securitisations under the ABS Act. Whether to include synthetic securitisations in the ABS Act is still under discussion ( see Question 29 ). However, there are a few precedents of synthetic securitisation in the non-abs Act securitisations sector, where the SPC issues commercial paper instead of bonds because of the capital requirement for the issuance of bonds. Under the current Commercial Code, only a joint stock company can issue bonds and the aggregated amount of the issued bonds cannot exceed four times the amount of the issuer s net assets. Such restrictions do not apply to an SPC under the ABS Act. The SPC under the ABS Act is a limited liability company that cannot ordinarily issue bonds, but is allowed to do so under the ABS Act. OTHER SECURITISATION STRUCTURES 28. Which of the various structures, set out in the Model Guide or otherwise, are commonly used in your jurisdiction? The single issue structure, using one South Korean SPC, is the most common structure for domestic securitisations, and the dual SPC structure is for cross-border securitisations ( see Question 5 ). For an issuance of foreign currency denominated bonds to a non- South Korean resident which is not a South Korean entity, the payment of interest on bonds and the fees, if limited to the gross underwriting spread (for example, underwriting fee, selling commission and so on), which are directly related to the issuance of such bonds, are not subject to any withholding or deduction under any South Korean taxes ( Article 21(1), Tax Exemption and Limitation Law ). South Korean withholding tax may be levied up to the rate of 27.5% on any indemnity amounts paid by an SPC to a bondholder. Other tax issues For ABS Act securitisations, if the South Korean SPC distributes 90% or more of its distributable income by way of a dividend, such amounts will be deducted from the taxable income of the South Korean SPC. The master trust and conduit structures are also used in South Korea, while structured investment vehicles (SIVs) are not used yet. For further information on these different types of securitisation structure, see Model Guide, Other securitisation structures. REFORM 29. Please summarise any reform proposals and state whether they are likely to come into force and, if so, when. The ABS Act was introduced in September 1998 and a reform proposal is currently being discussed. Among other things, the major amendments being discussed include introducing provisions for synthetic securitisations and enabling the establishment of trusts for the purpose of providing collateral. The amendments are anticipated to come into force in 2008, though this is not assured. 128 CROSS-BORDER HANDBOOKS www.practicallaw.com/securitisationhandbook This chapter was first published in the Cross-border Finance Handbook 2008/09 Volume 2: Securitisation and is reproduced with the permission of the publisher,