A view from Korea

These transactions have highlighted several key legal points to those considering securitisation in Korea under the Asset Backed Securitisation (ABS) Act.
Under the ABS Act the requirement to give notice to obligors is replaced with a process of registration with the FSS (a department of the Korean financial regulatory authority the FSC) of the assets being securitised. The FSS requires final agreed copies of the sale and purchase agreement, the servicing agreement, the administration agreement for the Korean special purpose company (SPC), and the transaction administration signed by all parties at least 14 days before closing, although a practice of submitting drafts to the FSS for prior informal review has developed.
Once approved, the FSC will publish the list of transferred assets on its website. Such publication constitutes approval of the sale and 'perfection' of the sale for most purposes under Korean law. However, it does not apply for all purposes. For example, rights of set-off between the obligors and the originator will persist until the obligors receive actual notice of the transfer – this is not satisfied by publication on the FSC website. Provided that the conditions of the ABS Act are satisfied, the transfer will be deemed to constitute a sale transaction as opposed to a secured loan transaction.
In revolving deals, registration of each sale of receivables during the revolving period must also be registered with the FSS – a process that takes approximately three working days. The assets should be sold to the SPC free of charge, followed by the list of sold assets being submitted to the FSS for approval. Once the FSS has approved the sale and published the list of assets on the FSC website, the sale is 'perfected' and the SPC can pay for the assets.
The Korean SPC incorporated under the ABS Act should be 'bankruptcy remote'. Domestic Korean practice differs from international practice for bankruptcy remoteness. For example, the originator will often hold shares in the SPC. It will be necessary to obtain a pledge over the shares of the SPC held by the originator so that it cannot exercise rights over those shares during the life of the transaction. The SPC should also pledge its assets as security for the bonds it issues. It is not possible under Korean law for such a pledge to be in favour of a trustee for the benefit of the bondholders and other creditors of the SPC. The pledge must be in favour of each of the SPC's creditors (although it is possible for the creditors to appoint a security agent to act on their behalf).
Although there is no withholding tax on payments by the SPC to offshore bondholders or swap counterparties, the SPC must withhold tax on payments to Korean bondholders. Therefore, if subordinated bonds are issued by the SPC as part consideration for the acquisition of the assets, the Korean originator will receive interest on those subordinated bonds net of withholding tax. This really only amounts to a timing matter as the originator will be able to recover such withholding tax from the tax authorities in due course.
It will be necessary to report to the ministry of finance and economy in relation to the issue of the senior bonds by the SPC. The approval of the Bank of Korea for performance of the originator's obligations involving payment of foreign currency to offshore parties will also be required. The retransfer of receivables following any breach of representation will require registration with the FSS.
Patrick Lines is a partner at Freshfields Bruckhaus Deringer, Hong Kong