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Fitch Ratings says the South Korean structured finance (SF) transactions that it rates are likely to be resilient should South Korean interest rates rise.
Fitch expects the asset performance of the transactions to remain satisfactory, in part due to the strong labour market in South Korea. Fitch expects that interest rates will rise gradually because global monetary authorities will tighten their policies as their economies recover, and forecasts the Bank of Korea’s base rate to average 2.6% in 2014 and 3.6% in 2015.
The rated RMBS transactions are well positioned to absorb expected stresses, in Fitch’s opinion. This is due to deleveraging and the resulting growth in credit enhancement (CE) to 52% on average in August 2013, that is 4.6x better than at their closing. Fitch expects rising interest rates to have only a mild effect on the RMBS portfolios even though the underlying mortgages are floating-rate loans. This is because the portfolios are highly seasoned with low loan-to-value ratios and there are no interest-only mortgage loans remaining in the portfolios. This suggests that the loans in the portfolios are less susceptible to sharp payment increases than the national mortgage sector and are more able to withstand some decline in property prices.
The credit card receivables and auto loans in Fitch-rated ABS transactions have fixed rates and so may not be directly affected by any rise in interest rates. Fitch believes the ABS ratings are protected by adequate CE, which ranged between 22% and 44% as of end-August 2013, and other structural protection mechanisms. The eligibility criteria of existing auto loan ABS limit the receivables to new cars, whose obligors have better credit profiles than the obligors of used-car financing, while the eligibility criteria of credit card ABS exclude high-risk card loan products. The performance-related early amortisation triggers protect the transactions from prolonged periods of stress. This is particularly beneficial for credit card ABS, which have high payment rates that help to pay down the notes rapidly on the declaration of an early amortisation event. The ABS transactions also have excess spread to absorb defaults.
In the first eight months of 2013, Fitch affirmed all 17 tranches of 11 publicly rated South Korean SF transactions at ‘AAAsf’ with a Stable Outlook. The overall asset performance of Fitch-rated Korean SF transactions has been strong, with low delinquency and default rates. RMBS and credit card transactions, in particular, demonstrate healthy payment rates while in ABS transactions, excess spread has absorbed all reported defaults.
The assets backing Fitch-rated RMBS, credit card ABS and auto ABS represent a small portion of the nationwide market sector– 0.2%, 5.4% and 5.9%, respectively, as of August 2013. The performance of the transactions could be different from the nationwide sector.
