ABS Act

The ABS Act (자산유동화에 관한 법률/資産流動化法) stands for the Asset-backed Securities Act established on September 16, 1998 just after the so-called IMF Crisis.

The legislation of the ABS Act was triggered by the needs how to effectively dispose of the non-performing assets of debt-ridden financial instutions to improve financial conditions and secure stable cash flows. In this regard, the mechanism that a special purpose company (SPV) is formed to acquire such non-performing assets to securitize them was regarded as highly efficient and effective in view of precedents of the United States, Japan and Thailand.

Key words
securitization, non-performing assets, structuring, special purpose vehicle (SPV)

Characteristics of the ABS Act
The ABS Act is charaterized by:
 * Structuring or the establishement of a limited liability speciail purpose company (특수목적 유한회사);
 * Special treatment of the "true sale" requirement to ensure the legally safe conveyance of properties to be securitized;
 * Special consideration in order to secure the stable cash flows from the ABS-oriented properties;
 * Exemption of related taxes on the transfer of properties and business profits;
 * Streamlined procedure of the registration of properties to be securitized.

Purpose of the ABS Act
The ABS Act has been an efficient legislative tool to recognize a special purpose vehicle (SPV) to secuitize non-performing loans (NPLs) possessed by financial institutions, the Korean Asset Management Corporation (KAMCO) and general corporations. As for the mortgage loans, a separate law called the Mortgage-Backed Securitization Act (the "MBS Act") was enacted in 1999 in order to secure additional source of funds for housing finance.

ABS is a financial scheme by which an originator with financial difficuties conveys cash flow-generating assets to an SPV to be paid by the proceeds after the sale of credit enhanced asset-backed securities. ABS is also effective to improve the BIS ratio of the originator-financial institutions by the off-balance sheet treatment. The ABS Act was used as a policy tool to weather the financial storms. There was a good precedent that, when a number of savings and loan associations (S&Ls) were collapsing in the United States in 1989, the Resolution Trust Corporation (RTC) bailed out S&Ls by means of securitization, among others. As Korean legal system was not familar with ABS, it was urgent to make legal bases or arrangements for a paper company for bankruptcy remoteness (SPV) and securitization.

Origin of ABS
Initially in the United States, after the thrift institutions (S&Ls) extended mortgage loans to residents in the neighborhood, the Ginnie Mae (GNMA) used to pool such mortgage loans to float mortgage-backed securities (MBS). In the early 1980, Salomon Brothers, one of the Wall Street investment banks, found out the marketability of MBS and staged a market maker of MBS to make a full-fledged bond market. Modeling after success of MBS market, similar securitiztion based upon assets became to flourish. For example, Sperry Corporation was successful in securitizing lease receivables in 1985; General Motors Accepting Corporation (GMAC), auto loans in 1986; BancOne, credit card receivables in 1987; Mexican telephone company, long distance line charge receivables in 1987, respectively.

Consequence of ABS
In consequence, once a stable cash flow is expected from a group of assets, the orinator structures a bankruptcy remote entity via a special purpose company (SPC) or trust, and transfer the pooled assets to such an entity. Then the SPV will securitize the cash flow-generating assets and pay back the proceeds of the asset-backed securities to the originator.

Taking advantage of the true-sale requirement and other special treatments provided by the ABS Act, ABS transactions increased rapidly in the Korean capital market. It was contrary to the U.S. transactions of ABS which have been supported by case law.

Outcome of the ABS Act
With respect to how the Korean economy survived the financial crises, see the ABS effect.