[Revived Deposit Securitization] ① 3 Trillion Won Poured into Deposit ABCP in One Month... Securities Firms Also Seek Stable Returns

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Institutional funds have recently been flowing back into time deposit asset-backed commercial paper (ABCP). As liquidity pours into short-term financial products such as money market funds (MMFs), which are considered safe assets, demand for time deposit ABCP?offering both high stability and relatively high interest rates?has increased simultaneously. Small and medium-sized securities firms, whose profit structures have weakened due to the real estate project financing (PF) market downturn, are creating and increasing the supply (issuance) of time deposit ABCP as an alternative source of revenue.

According to the investment banking (IB) industry on the 17th, special purpose companies (SPCs) named ‘Shinhan Champion 13th’ and ‘The First Shining 13th’ have been consecutively issuing time deposit securitization bonds. These SPCs were established by Eugene Investment & Securities and Daol Investment & Securities, respectively. These securities firms subscribed to time deposits at Shinhan Bank and NongHyup Bank through the SPCs and issued time deposit ABCP worth 240.5 billion KRW and 246.4 billion KRW, respectively, backed by these deposits.

The structure of time deposit ABCP is straightforward. The securities firm acting as the lead manager subscribes mainly to one-year time deposits through a trust. Then, the SPC issues ABCP and uses the raised funds to purchase trust beneficiary certificates of the time deposits. The securities firm earns a small intermediate margin and pays the principal and interest cash flows generated from the trust beneficiary certificates to the ABCP investors.

Recently, SPCs created by securities firms for issuing time deposit ABCP include Shinhan Sarang 1st (168 billion KRW), Shinhan Sarang 8th (240.4 billion KRW), Kookmin Champion 4th (240.4 billion KRW), Kookmin Champion 5th (245 billion KRW), Hansol 1st (240.4 billion KRW), NongHyup Champion 3rd (245 billion KRW), Jeil Sarang 4th (490 billion KRW), Jeunggeum Time 11th (245 billion KRW), and Je Dream 27th (200 billion KRW).

These SPCs subscribe to time deposits at Kookmin Bank, Shinhan Bank, NongHyup Bank, Standard Chartered Bank Korea (SC Bank Korea), and Korea Securities Finance Corporation, issuing several hundred billion KRW worth of time deposit ABCP each. The total amount of time deposit ABCP issued recently has exceeded approximately 3 trillion KRW in just the past month.

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The increase in time deposit ABCP is highly correlated with the growth of short-term financial products such as money market funds (MMFs) and money market trusts (MMTs). According to the Financial Investment Association’s ‘Fund Market Trends for Q1 of this Year,’ the net asset value of MMFs reached 211 trillion KRW on February 6, marking the highest level in Q1 of this year. The average net asset value of MMFs surged from 159.7 trillion KRW in Q1 last year to 194.7 trillion KRW in Q1 this year. MMTs have also been rapidly increasing recently, mainly centered on specific money trusts.

MMFs and MMTs are products that invest in low-risk short-term financial instruments to generate returns. They allow relatively free deposits and withdrawals, similar to bank deposits. When institutional funds flow into MMFs or MMTs, asset management companies and securities firms primarily invest in short-term securities with maturities under three months. Since these are demand deposit-type products that institutions can redeem freely, it is difficult to include many long-term assets.

Therefore, most MMF investment portfolios have more than half of their holdings in short-maturity commercial paper (CP) and short-term electronic bonds (STB). An asset management company MMF portfolio manager explained, "Time deposit ABCP has a credit rating of A1, which is more stable than CP issued by general corporations, and due to the large issuance volume, it is widely included as an investment asset." The official added, "After the Legoland incident last year, liquidity risks in the CP market emerged, causing a significant decline in time deposit ABCP issuance, but recently, issuance has been on the rise again."

Small and medium-sized securities firms are analyzed to be using time deposit ABCP as an alternative revenue source replacing PF securitization. Although time deposit ABCP is less profitable than PF ABCP, it is often issued in large-scale amounts of several hundred billion KRW. It is a ‘low margin, high volume’ type product, and the profit from underwriting time deposit ABCP issuance is known to be substantial.

Large securities firms also sometimes underwrite time deposit ABCP issuance as needed. However, most of the volume is handled by small and medium-sized securities firms such as Eugene Investment & Securities, Daol Investment & Securities, Hanyang Securities, and DB Financial Investment. These firms share the common characteristic of having aggressively expanded PF in the past.

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An IB industry insider said, "Small and medium-sized securities firms earned significant income from PF, including securitization, until last year, but as real estate market conditions worsened and PF profits sharply declined, they are increasing the supply of time deposit ABCP."

There is also an advantage that when an SPC subscribes to deposits as a general corporation, it can subscribe to time deposits at higher interest rates than when subscribing as a financial institution. Since the subscription targets are banks’ high-interest special time deposits, it is possible to offer relatively high interest rates to ABCP investors while still earning a margin.

A securities firm trust management department official said, "Time deposit ABCP has various maturities compared to time deposits and can be sold immediately in the market, so liquidity is good." He added, "Because the underlying asset is a stable time deposit, investors consider it a similar investment target to currency stabilization bonds." The official also noted, "Due to maturity regulations on MMT management, there are not many short-term investment targets to manage. With the interest rate hike cycle settling down, demand will continue from securities firms and bank MMTs."

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