6. Why is Kamco considering the cross border securitisation proposal? What benefits may it expect to gain fom it?

7. What is the role played by the put options in this transaction? How important they are?

Put options are a financial industry term for an agreement between two parties which gives the holder of the put the right to sell an asset at a predetermined price to another party, this agreement obliges the seller of the put to buy the asset at a certain predetermined price however it does not give the holder of the put the obligation to sell it. This type of financial instrument is most commonly used as a form of insurance as it was in the case of Kamcos cross border securitization efforts where it acted as insurance should the borrower enter into default. Kamco, acting as an agent of the special purpose corporations created to manage the asset backed securities, would in case of borrower default contact the bank where the loan had originated from and force them to repurchase the loan Kamco had bought, securitized and then sold overseas at a previously determined price transferring the proceeds to the special purpose corporations who would then distribute them to the investors in the asset backed securities. Since the originating banks were the largest banks in Korea and were considered to be systemically important they were implicitly guaranteed by the government meaning that investors could have a high degree of certainty that their insurance (the put options) would pay out in case the situation in Korea deteriorated. This put option served to give the investors in the risky asset backed securities some assurance regarding the future value of the securities they were investing in and effectively increased the value of these securities in the eyes of investors who might otherwise be too nervous to invest in securities that were after all based on non-performing loans, this meant that Kamco and its parners could count on more interest from investors and a higher valuation for the securities than they otherwise would.

8. What are the main issues from Kamco's perspective? How can they be solved? What should it do?

One of the sticking points of this deal is the asking price, Kamco is hoping to attract investors based on being comparatively less expensive yet comparing the premium this ABS offered versus others with a similar risk profile shows that they are actually offering less value to investors than the norm. This can be explained by the put option that forms part of this deal which offers greater security for investors and the fact that this deal is being implicitly underwritten by a sovereign, this is reflected in the deals credit rating being the same as that of the Korean government, this means that these ABS are fundamentally different from others on offer and comparatively more attractive to investors than you would expect by looking simply at its rating. The increased security offered to investors via this ABSs direct conne ction to the Korean government is another conundrum for the deal, if the deal is so dependent on Korean Development Bank and yet the premium paid to investors in the ABS is significantly greater than the premium paid on unsecured debt from KDB itself, this gives a clear incentive to having KDB raise the debt at a lower premium and then use it to finance these NPLs itself, simply holding the NPLs to maturity or reselling them to the originating banks if they defaulted. This approach has the problem that while in this particular circumstance it would indeed be cheaper to have the KDB raise the debt necessary to finance the NPLs itself it doesnt actually help solve Koreas debt overhang and puts more pressure on the sovereign, having the NPLs be financed through an ABS and sold to foreign investors helps relieve pressure from Korean institutions while still raising the money required. A wrench in this plan is the put options, the fact that the originating banks are still on the hook for the loans if they default even though they have been sold to foreign investors means that the banks are never actually decoupled from their bad loans and this does not help solve Koreas debt problem to the extent that an ABS with no put options would. This ABS sale is the first of its kind for Korea so it is not unwise for them to want to give greater assurance to investors however should Kamco be successful in setting up a market for ABSs backed by Koreas non-performing loans then in the future these guarantees could be relaxed and Kamco could then start to actually reduce the risk to the Korean banking system that is attached to these loans. A fully developed market for ABSs based on non-performing loans originating from Korean banks that is not implicitly guaranteed by the Korean government is a huge boon for Kamcos mission to solve Koreas NPL problem and success

here would set an example for other countries on how to deal with NPL crises and put Kamco In a privileged position in the world of distressed debt.

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