Nurturing Korea’s embryonic socially responsible investing market

KHFC aspires to issue social mortgage-backed securities in Korea, and the provision of affordable loans to less affluent sections of society is a key part of sustainable finance


Korea Housing Finance Corporation (KHFC) aims to become the benchmark Korean social bond issuer given its task of providing a stable and long-term supply of housing finance in the country.

Following the issuance in October 2018 of its inaugural social covered bond amounting to 500 million euro (US$568 million), KHFC is positioning to launch social mortgage-backed securities (MBS) on the back of its social financing framework. This in turn will contribute to developing a domestic socially responsible investing (SRI) market by attracting more SRI investments within Korea.

KHFC established a social covered bond framework which fully complies with the social bond principles 2018 of the International Capital Market Association (ICMA). Sustainalytics, a renowned global second party opinion provider, has rendered its opinion that KHFC is well-positioned to issue social covered bonds. It notes the company’s social covered bond framework is robust, credible and transparent, as well as aligned with the four core components of the social bond principles 2018.

By issuing social covered bonds, KHFC demonstrates its commitment to contribute to the people’s welfare and to Korea’s national economic development through long-term and stable supply of housing finance. It aims to become a benchmark institution to lead social values related to housing welfare as the only Korean institution established for housing finance.

Other objectives of KHFC are to develop investment opportunities with positive social impact for investors and to create strategic dialogues with current and new investors who support making positive social impact.

KHFC’s first social covered bond was a landmark transaction in Asia, being the first deal of its kind in the region. All of its proceeds will be used exclusively to purchase KHFC’s mortgage loans that are aimed to support low to moderate income individuals, and stabilize and improve the structure of Korea’s mortgage loan market in accordance with the company’s social bond framework.

The new jurisdiction, the social element and debut euro transaction for KHFC underpinned a strong deal reception that saw its order book grow to over 1.75 billion euro prior to re-offer with the final demand amounting to about 1.66 billion euro from 93 accounts.

KHFC has been a regular issuer of covered bond and has continual access the US dollar bond market for its offshore foray. In tapping the euro bond market for the first time, KHFC notes its deeper investor base versus the US dollar covered bond market. In doing so, it aspires to broaden its investor base.

In addition, given that KHFC’s offering was in a social format and as the SRI investor base is centred in Europe, it wanted to take advantage of the social structure to reach out to the large euro SRI players in the region. Furthermore, there had been a strong interest towards Korean credits in the euro bond market at the time of issuance.

In pricing a euro covered bond, KHFC was able to print the offering at 57bp tighter than what it would have paid if it funded via the Korean won MBS in the domestic market and 23bp tighter than the yield of Korean won government bond with the same five-year maturity. Most of KHFC’s Korean won funding is fulfilled by MBS issuances. The funding costs for Korean MBS and Korean covered bond in the domestic market are mostly identical.

In executing the transaction, KHFC conducted a roadshow and met investors in Hong Kong, Singapore, Frankfurt, Zurich, Amsterdam, Paris, London and New York. It priced the euro covered bond at 99.927% with a coupon of 0.75%, representing a re-offer spread of 40bp over mid-swap. This was at the low end of the final price guidance of between 40bp and 45bp, and 10bp inside of the initial guidance of 50bp area.

By type of investors, the covered bonds were bought by asset and fund managers 60%, banks 24% and central banks 16%.

To support the fulfilment of KHFC’s mission for housing welfare and sustainable housing, the company offers a diverse range of ongoing mortgage loan products – bogeumjari loan, didimdol loan and conforming loan – in order to facilitate the supply of housing finance on a long-term and sustainable basis to large segments of the financially vulnerable population.

This directly correlates to KHFC’s social directive in that the provision of affordable and sustainable housing finance helps to meet the basic needs of the population and reduce social inequalities.

Bogeumjari loan is a unique variation of a long-term mortgage loan common in developed countries designed by KHFC to allow clients to repay the principal and interest of their loan over a period of 10 years to 30 years. To be eligible for didimdol loan, the combined annual income of the loan applicant and his/her spouse must be 60 million won (US$53,277) or lower, and 70 million won or lower in the case of first-time home buyers.

As indicated in KHFC’s social covered bond framework, and to promote social housing in the country, the company ponders various ways to fulfill the government’s policy targets and improve housing welfare in Korea:

·        Designs new public mortgage products and set new criteria not only for first time home buyers, underprivileged and low-income population, but also for various categories, including newlyweds and families with multiple children

·        Innovates internal system and regulation to enable mortgage application via online and mobile, as well as improve access to KHFC’s products

·        Achieves the tightest funding cost in domestic MBS issuances and international covered bonds to ease interest burden for low-income to middle-income class to fund housing in Korea.

In 2018, KHFC issued 24.8 trillion won worth of MBS and was able to reduce the borrowers’ interest burden by 15.6 billion won.

Going forward, KHFC will update its social covered bond framework to encompass more funding measures with a social theme and it will further solidify its base to create its “sustainable social value”.


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25 Feb 2019


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