Research: Rating Action: Moody’s assigns definitive Aaa to KHFC’s mortgage covered bonds

EUR500 million in debt securities rated

Hong Kong, July 19, 2022 — Moody’s Investors Service has today assigned a definitive Aaa long-term rating to covered bonds (CB) issued by Korea Housing Finance Corporation (KHFC, long-term foreign currency issuer rating Aa2, stable) under KHFC’s U.S.$15,000,000,000 Global Covered Bond Programme.

The complete rating action is as follows:

Issuer: Korea Housing Finance Corporation

….Series 2022-1 EUR500,000,000 1.963% Social Covered Bonds due 2026, Definitive Rating Assigned Aaa

RATINGS RATIONALE

A covered bond benefits from (1) the issuer’s promise to pay interest and principal on the bonds; and (2) following a CB anchor event, the economic benefit of a collateral pool (the cover pool). The rating for this transaction therefore reflects the following factors:

(1) The credit strength of the issuer and a CB anchor of the long-term foreign currency issuer rating plus zero notches.

(2) Following a CB anchor event, the value of the cover pool. The stressed level of losses on the cover pool assets following a CB anchor event (cover pool losses) for this transaction is 24.9%.

Moody’s considered the following factors in its analysis of the cover pool’s value:

a) The credit quality of the assets backing the covered bonds. The covered bonds are backed by Korean residential mortgage loans. The collateral score for the cover pool is 8%.

b) The KHFC Act regarding the issuance of “mortgage-backed bonds”, as defined in the Act, which provides for the separation of the cover pool from the insolvency estate of KHFC. The covered bond transaction is designed to comply with the provisions of the KHFC Act with respect to the residential mortgages in the cover pool.

c) The transaction’s structural features that aim to mitigate various risks; the features are:

(i) A liquidity reserve to be funded by the issuer if the rating of the issuer is downgraded below A2.

(ii) Advance payment under the swap by the issuer if the rating of the issuer is downgraded below A2.

(iii) The appointment of an asset monitor, Nexia Samduk, to manage the cover pool when KHFC is in default.

(iv) Cross-currency swaps to mitigate currency mismatch between the KRW-denominated cover pool and the covered bonds, which are denominated in other currencies.

(v) Contractual pre-maturity test, by which the issuer will be required to pre-fund the hard bullet covered bonds maturing in the coming 12 months upon downgrade of its short-term rating to below P-1. The issuer will pre-fund the covered bonds using either collections from the cover pool, or by entrusting cash or eligible liquid assets to a Korean trustee for the benefit of the covered bond trustee, which will then hold the assets for the benefit of the covered bondholders.

d) The exposure to market risk, which is 19.5% for this cover pool. The main components are the interest rate risk and refinancing risk.

e) The over-collateralisation (OC) in the cover pool is 32.8%, of which the issuer provides 8% on a “committed” basis (see Key Rating Assumptions/Factors, below).

The timely payment indicator (TPI) assigned to this transaction is “Probable”, and Moody’s TPI framework does not constrain the rating.

KHFC is a quasi-government non-bank financial institution managing funds and providing housing finance to borrowers. Eligible mortgage loans in the cover pool are long-term fixed-rate mortgage loans introduced by KHFC to promote the welfare of people in Korea. The loans can be extended by certain Korean financial institutions in accordance with pre-arranged acquisition agreements.

As of the pool cut-off date on 30 May 2022, the total current aggregate loan balance of the cover pool was approximately KRW877 billion, comprising 4,773 residential mortgage loans. The residential mortgage loans have a weighted-average (WA) seasoning of 9.76 months, a WA remaining term of 30 years and a WA current unindexed loan-to-value (LTV) ratio of 57.8%, based on current loan balances, where the amount has been adjusted with “super priority right” amounts net of the amounts covered by mortgage guarantees, and unindexed property values.

The “super priority right” amount refers to the potential claims from the tenants under residential leases, which may rank ahead of the mortgage claims under Korean regulations. The lender has included the net amount after deducting the mortgage guarantee coverage when calculating the regulatory LTV in its loan origination. In its analysis, Moody’s has considered the “super priority right” amount without deducting the mortgage guarantee coverage, which results in a Moody’s adjusted LTV of 59.8%, or an increase in the unindexed LTV by around 2% on top of the 57.8%.

Moody’s also considered that the initial cover pool includes about 37.2% non-recourse loans for which the lender only has recourse to the property but not the borrower’s general assets. KHFC started to offer non-recourse mortgage loans in mid-2017 as part of a government initiative. Such loans are subject to similar underwriting criteria as its other loan products, and to additional requirements on the evaluation score of the property.

Everything else being equal, in a severe recession scenario, it is more likely for borrowers to default on non-recourse loans, compared to loans that also have recourse to the general assets of the borrowers. Moody’s has stressed the default frequency of such loans in its modeling by applying an absolute increase of 3.3% to the standard default frequency curve for Korea. This 3.3% increase corresponds to the largest absolute difference between the default frequency curves of the non-recourse new securitization market and the recourse new securitization market. The WA current unindexed LTV is 61.7% for the non-recourse loans in the initial cover, and their Moody’s adjusted LTV is not higher than 70%.

KEY RATING ASSUMPTIONS/FACTORS:

Moody’s determines covered bond ratings using a two-step process: an expected loss analysis and a TPI framework analysis.

EXPECTED LOSS: Moody’s uses its Covered Bond Model (COBOL) to determine a rating based on the expected loss on the bond. COBOL determines expected loss as (1) a function of the probability that the issuer will cease making payments under the covered bonds (a CB anchor event); and (2) the stressed losses on the cover pool assets following a CB anchor event.

The CB anchor for this program is the long-term foreign currency issuer rating plus zero notches.

The cover pool losses for this transaction are 24.9%. This is an estimate of the losses Moody’s currently models following a CB anchor event. Moody’s splits cover pool losses between market risk of 19.5% and collateral risk of 5.4%. Market risk measures losses stemming from refinancing risk and risks related to interest-rate and currency mismatches (market losses may also include certain legal risks). Collateral risk measures losses resulting directly from the cover pool assets’ credit quality. Moody’s derives collateral risk from the collateral score, which for this program is currently 8%.

The OC in the cover pool is 32.8%, of which the issuer provides 8% on a “committed” basis. Under Moody’s COBOL model, the minimum OC level consistent with the Aaa rating is 8%. These numbers show that Moody’s is not relying on “uncommitted” OC in its expected loss analysis.

For further details on cover pool losses, collateral risk, market risk, collateral score and TPI Leeway across covered bond programs rated by Moody’s please refer to “Covered Bonds Sector Update”, published quarterly.

TPI FRAMEWORK: Moody’s assigns a TPI, which is its assessment of the likelihood of timely payment of interest and principal to covered bondholders following a CB anchor event. TPIs are assessed as Very High, High, Probable-High, Probable, Improbable or Very Improbable. The TPI framework limits the covered bond rating to a certain number of notches above the CB anchor.

For Korea Housing Finance Corporation’s Global Covered Bond Programme, Moody’s has assigned a TPI of Probable.

RATING METHODOLOGY

The principal methodology used in this rating was “Moody’s Approach to Rating Covered Bonds” published in December 2021 and available at https://ratings.moodys.com/api/rmc-documents/360326. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Factors that would lead to an upgrade or downgrade of the rating:

The CB anchor is the main determinant of a covered bond transaction’s rating robustness. A change in the level of the CB anchor could lead to an upgrade or downgrade of the covered bonds. The TPI Leeway measures the number of notches by which Moody’s might lower the CB anchor before the rating agency downgrades the covered bonds because of TPI framework constraints.

Based on the current TPI of “Probable”, the TPI Leeway for this transaction is 4 notches. This implies that Moody’s might downgrade the covered bonds because of a TPI cap if it lowers the CB anchor by more than 4 notches, all other variables being equal.

A multiple-notch downgrade of the covered bonds might occur in certain circumstances, such as (1) a country ceiling or sovereign downgrade capping a covered bond rating or negatively affecting the CB anchor and the TPI; (2) a multiple-notch downgrade of the CB anchor; or (3) a material reduction of the value of the cover pool.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

Moody’s did not use any stress scenario simulations in its analysis.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Moody’s considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody’s. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody’s with information for the purposes of its ratings process. Please refer to https://ratings.moodys.com for the Regulatory Disclosures for each credit rating action, shown on the issuer/deal page, and for Moody’s Policy for Designating Non-Participating Rated Entities, shown on https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Joe Wong
VP – Senior Credit Officer
Structured Finance Group
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Jerome Cheng
Associate Managing Director
Structured Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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