Speculative Grade Companies Will Also Be Able to Issue ABS

[Asia Economy Reporter Koh Hyung-kwang] Going forward, companies with credit ratings classified as speculative grade 'BB+' or lower will also be allowed to issue Asset-Backed Securities (ABS). Additionally, royalty income rights such as patent rights and copyrights will be securitized.

On the 18th, the Financial Services Commission held a meeting chaired by Vice Chairman Son Byung-doo to announce a comprehensive improvement plan for the asset securitization system, significantly easing the eligibility and procedures for issuing ABS.

First, the credit rating requirement (BB rating) for general companies eligible to issue ABS will be abolished. Currently, only financial companies, public enterprises, and general corporations with a credit rating of BB or higher can issue ABS. However, this requirement will be removed to allow participation from various companies holding high-quality assets and to expand funding channels for innovative and small-to-medium enterprises. This means companies with speculative grade ratings of 'BB+' or lower will also be able to issue ABS.

However, from the perspective of investor protection, issuance will be allowed only for corporations meeting certain criteria such as being subject to external audits in the short term. A Financial Services Commission official explained, "This is to improve the efficiency of managing national and local government assets, as well as assets of financial institutions serving low-income groups, by allowing ABS issuance by the state, local governments, and low-income financial institutions with a certain loan scale or more."

To manage risks in the ABS market, a 'risk retention regulation' will be introduced, requiring asset holders to bear part of the ABS credit risk (around 5%). This is a measure to prevent moral hazard such as asset holders securitizing non-performing assets. The United States, Japan, and the European Union (EU) also utilize this system.

The utilization of securitized assets by corporations will also increase. To allow intangible property rights and future assets to be widely used in securitization, the criteria for eligible assets will be flexibly revised from the current bonds, real estate, and other property rights to include both tangible and intangible property rights. The ABS Act was enacted based on the securitization of non-performing loans and defines securitized assets as "bonds, real estate, and other property rights." However, the interpretation of "other property rights" is unclear, and in practice, it has been narrowly interpreted as confirmed rights equivalent to bonds and real estate, which restricts the use of various assets.

The Financial Services Commission plans to start revising the 'Asset Securitization Act' based on the discussions at the meeting. They intend to announce the legislative proposal within the first half of the year and complete the revision of subordinate regulations as quickly as possible. Vice Chairman Son emphasized, "Asset securitization is a useful means for companies to securitize various assets they hold and raise funds under favorable conditions. For the registered securitization system to evolve from a system used only by some financial institutions and large corporations to one actively used by various companies, comprehensive institutional improvements including amendments to the Asset Securitization Act are necessary."

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