LG CARD
Raising Capital - Finding Value
SITUATION
Financial institutions are expected to finance risky assets with equity. During the 2002 Credit Card Crisis, Korean credit card companies had been selling defaulted receivables at significant discounts to raise capital. They also retained restructured ones deemed insufficient as collateral for bank loans.
The deal team, led by Mr. Riebe, rejected buying defaulted receivables as too uncertain. Instead the team focused on the restructured receivables as better credits with a proven performance over defaulted cards. Analysis of the restructured receivables held promise but Buy Value to Purchase Price differential was too great.
SOLUTION
Solution was a structured loan collateralized by these assets after assessing their ability to repay.
The solution was to use traditional securitization methodologies, but this time using highly stressed collateral.
Key problems were:
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Valuing the collateral
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Performance characteristics after restructure
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The ability to ID debtors in a market with tremendous last name commonality and mobility
Structure allowed LG to borrow US$500 Million against assets that no other lender would accept. This allowed the lender to be well protected.
APPROACH
MR. Riebe used Data analysis to identify certainty of repayment given defaulted credit cards exhibited low recoveries. Key was to use Restructured receivables which not only had updated borrower info but came with 3rd party guarantees (typically a parent) and exhibited consistent (but not full) repayment profiles.
Second key was to understand dependency of Korea on LG card which processed 18% of all payments.
Last to create a structure in a country where floating lien laws were relatively new.
OUTCOMES
Loan closed shortly before LG card defaulted. Korean banks assumed the facility structure which repaid itself in full.
