has been making contributions to the national economy by helping overcome crisis and develop the economy through various supporting measures for the financial industry.
Nonperforming loans (NPLs) were at the heart of the financial crisis that engulfed the Korean economy during 1997–98. The recovery has also been characterized by a rapid and drastic reduction in the level of NPLs in the financial system.
The government played a leading role in financial and corporate restructuring, including strengthening the legal and regulatory framework, injecting public funds, and reinforcing the functions of nstitutions for crisis management, such as the Korea Asset Management Corporation (KAMCO).
KAMCO played an important role in facilitating the restructuring process and helping to develop financial markets. First, KAMCO purchased distressed assets from banks and other financial institutions, which allowed lending to resume at a time when liquidity was scarce. This objective was complemented by increased supervision to ensure that banks were operating on sound commercial principles.
Second, KAMCO’s resolution of NPLs contributed to the good progress made in Korea in recovering public funds injected by the government for financial sector restructuring. In addition, KAMCO disposed of many of these distressed assets through a number of innovative methods, including by issuing asset-backed securities (ABS), which launched an important new market in Korea.
Mr. Lee Jung-whoon, General Manager, Finance & Investment Dept., KAMCO, speaks about the crucial rope played by the organization and its role ahead.
Could you give us a brief introduction to KAMCO?
Since its inception in 1962, Korea Asset Management Corporation has been making contributions to the national economy by helping overcome crisis and develop the economy through various supporting measures for the financial industry.
During the Asian Financial Crisis in 1997, the national economy was facing the Asian economic crisis. In order to efficiently resolve non-performing loans (NPL) of financial institutions, KAMCO formed the NPL Resolution Fund of 39 trillion dollars, and acquired 111 trillion won of non-performing loans. And since 2009, with a view to proactively coping with global financial crisis, KAMCO has been operating the Restructuring Fund, as a full-time organization for restructuring process.
In addition, KAMCO is in charge of government-commissioned work such as state-owned property management, collection of overdue taxes, and assistance for consumer credit recovery. After the incumbent CEO Young-chul Chang took office, we categorized domestic properties into three: state-owned, financial, and credit properties. KAMCO is trying its utmost in managing all three categories as a comprehensive asset manager of the properties owned by the Korean government.
What is the performance of the NPL Resolution Fund and the Restructuring Fund like?
Using the NPL Resolution Fund, we collected 6.2 trillion won additionally to the amount of public fund invested, by acquiring non-performing loans of the face value of 111 trillion won and resolving 71% of them up to now.
In this process, we also converted some of the non-performing loans into equity, transforming them into blue-chip companies and selling them in the market. Some noticeable examples include Daewoo Heavy Industries & Machinery Co., Dongah Construction Industrial Co. Ltd., and more recently sold Daewoo International.
With lessons learned from the Asian economic crisis, we were able to proactively deal with the recent global financial crisis, by early establishing the Restructuring Fund. Since 2008, we have purchased PF bonds of 8.5 trillion won, swiftly and actively responding to the destabilizing factors of the financial market. In order to support shipping industry in liquidity crisis, KAMCO formed a shipping fund, having purchased 27 ships (worth of 860 billion won) so far.
We understand that your department is responsible for KAMCO’s overseas business. What are the progress and future plans?
KAMCO’s overseas business was launched with the mandate of assisting private sectors in overseas market creation and creating future growth engines of KAMCO, utilizing various domestic and international networks and experiences learned from the post-crisis process of resolving 111 trillion worth of NPL and performing corporate restructuring.
Investment preparedness provided through the revision of law to enable direct investment between 2005 and 2006 triggered full-scale implementation of the overseas business.
In the first round, in 2007, KAMCO acquired properties from a Chinese state-run AMC, followed by the successful investment brokerage in 2008. Afterwards, KAMCO established a local AMC with dispatched staff, and has been in full operation for management and collection.
Our view on the market indicates that, after the global financial crisis, it is high time for us to enter the NPL markets of advanced countries including the US. We are thus currently cooperating with domestic and overseas institutions to screen blue-chip investment grade targets.
This year has goals of exporting KAMCO Model, which is business knowhow accumulated through our on-going training and consulting business for developing countries, and successfully implementing pilot deals of investing in NPL in advanced countries such as the US.
Does it mean that KAMCO is also offering training for overseas institutions?
Yes. Since 2001, we have been providing training courses on our knowhow of NPL resolution and restructuring process, accumulated through overcoming the Asian economic crisis, for many governments such as China, India and Vietnam.
A total of 22 rounds of training courses have been completed, with a purpose of maintaining close relationship with organizations of other countries. In addition, we have concluded MOUs with 17 government organizations from 11 countries, contributing to the heightened international status of KAMCO.
Recently, local pension funds have been showing great interest in US real estate market, with some investment projects already initiated. What is impressive is the speed of the movement by public corporations. Do you have any experiences in the US market? What are they about?
There has been a series of prospects that says the US market shows a sign of recovery starting with the corporate sector, as recently seen in the continuous increase of corporate fixed investment. Both IMF and many IBs are competing in upwardly adjusting future economic growth rate assumptions.
However, a general consensus of the international financial community is that it will not be easy for a huge market like the US to recover in a short period of time. Examples include the increasing non-performance of commercial assets and continued bankruptcies of small-and-medium-sized banks.
KAMCO has also been monitoring the US market for investment ever since the financial crisis, with some cases almost striking the contract. But basically we are still focusing on risk management based on conservatism.
For example, it was in 2008 when we were conducting a preliminary underwriting for the purchase of a 450 million dollar portfolio owned by a global IB, reaching the stage of price negotiation. It was late August. The seller insisted that the asset price was almost bottoming out, but our underwriters said that there would be further dip of about 15% or more. Obviously, the deal was not possible to be closed.
After the failure of negotiation, our underwriting team backed out. And on the 15th of September, Lehman Brothers declared bankruptcy, suddenly elevating the financial risks all around the world, ultimately causing steep rise of foreign exchange rates in Korea and aggravating the investment environment.
So, it turned out to be a good thing that you had to break the deal?
Sure. The asset value was plummeting afterwards, as we had anticipated. And the foreign exchange rate increased by almost 50%. Even if the price was successfully negotiated, it must have been difficult to close the contract.
That was a very clear example of risk management. Also in 2009 and 2010, we had some cases of reaching the point of price negotiation, but we had to use our conservative stance again, believing that there was a possibility of further price drop.
Could you explain the nature of the investment business of KAMCO?
Our target focuses not only income generation but also assistance for the private sector in their overseas business. To do the latter, we are informing Korean institutional investors of high-grade investment targets and helping them with asset management.
Of course, to lead the overall deals, we also need to make some investment at the threshold level. We are also planning to establish JV-AMCs with local organizations, through which we can learn the systems of the countries to be invested and accumulate asset management knowhow. In China, where we had two deals closed, we have already established an AMC, gathering information on local investment systems and grasping the knowhow of asset management.
I am not saying that investment yield is not important. What I mean is that it is an important point of consideration that the intangible assets also need to be acquired at the same time. Domestic pension funds are also welcoming the business structure in which KAMCO participates in overall asset management.
The investment business will start from small-scale projects in advanced countries where the cycle is widely believed to be bottoming out. After making successful investment, we will expand the scale by phase.
First, we plan to start with selective high-grade investment targets out of troubled assets such as NPL or REO owned by local financial institutions. Currently, with a view to acquiring assets under bulk sale by FDIC, we are currently under joint consultation with an organization with successful bidding experiences.
There must be some difficulties experienced by a public corporation like KAMCO in dealing with IB business.
KAMCO has amassed a high international credit standing and credibility with fair business treatment, which are great advantages of our actual implementation of projects.
Currently, we have some difficulties in proactively exploring potential high quality projects, because of the limitation posed by the KAMCO Act, which stipulates that investment targets should be confined to the NPL Resolution Fund. However, we are planning to expand the target investments to the Restructuring Fund by amending the act.
And the issue of relatively long decision-making process as a public corporation could be substantially overcome by sharing roles with private counterparts.
Do you have any parting parting comments for our readers?
According to the IMF estimation, the total loss incurred by financial institutions worldwide amounts to 4,000 trillion won, with US and European markets alone at 2,000 trillion won.
When it comes to NPL markets of advanced countries, the barrier of entry used to be too high in the past. But, in a couple of years ahead, it is expected that opportunities will come for us to purchase high-quality assets at lower price. That might be a once-in-a-life-time chance, though.
We will do our best in actively and fully utilizing various experiences and rich networks of KAMCO, rather than neglecting them, so that KAMCO can be leading liquidity in the private sector toward more stable investment targets, thus contributing to the national wealth creation. This, I believe, is the true mission given to a public corporation.