RPT-Fitch Affirms Korea Student Aid Foundation at 'AA-'; Outlook Stable

Wed Sep 11, 2013 3:48am EDT

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Sept 11 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Korea Student Aid Foundation's (KOSAF) Long-Term Rating at 'AA-' and Short-Term rating at 'F1+'. The Outlook on the Long-Term Rating is Stable.

KEY RATING DRIVERS

KoSAF's ratings are linked to the ratings of Korea (AA-/Stable) due to its public-sector status and a strong probability of extraordinary government support, in case of need. Fitch has classified KoSAF as a dependent public-sector entity. The company's strategy policy is dictated by and closely monitored by the government of Korea. Fitch has applied a top-down approach in its analysis of KoSAF.

The company is a not-for-profit, quasi-government institution established in May 2009 under the Korea Student Aid Foundation Act. The entity operates as the government arm in providing loans and scholarships to students from mid-to-low income families. The government provided 99.9% of KoSAF's contributed fund capital. Given the company's non-profit maximisation focus and brief history, its standalone credit profile is weak.

The provision of higher education is a government priority and strategically important. Fitch expects strong demand for KoSAF's services, as it is important in Korea's competitive society to gain access to a satisfactory career through university education.

The management of the company is appointed and controlled by the government. Its operations and strategy are under the direct control of the Ministry of Education, while its annual budget plans and the guarantee limit for its bonds are reviewed by the Ministry of Strategy and Finance (MOSF) before submission for approval by the National Assembly. Adherence to budget plans is monitored by the MOSF.

KoSAF's funding has so far come mainly from issuance of government-guaranteed KRW-denominated bonds, which were mainly sold to domestic institutional investors. The National Assembly has authorised KoSAF to issue bonds up to KRW3.1trn in 2013. These will be directly guaranteed by the sovereign.

The foundation is still small, with total assets of KRW 134.8bn in the internal account and KRW 7,591.7bn in the student loan account at end-2012. The student loan account is the main account where major loans/borrowings are booked. The internal account is used for internal management. Fitch expects KoSAF's loans to grow, as demand for low-cost student loans remains strong.

KoSAF's student loans rose by over 25% in 2012 due to continued strong demand. Demand is forecast to remain strong with projected annual growth of 20%-25% up to 2014. Growth will be mainly funded by government-guaranteed bond issuance.

Fitch expects KoSAF to incur some operating losses in 2014 and beyond, as it continues to provide loans to students at interest rates below its funding cost. Nevertheless, continuous government subsidy is expected to cover KoSAF's operating losses arising from its policy role. The delinquency rate of the issuer's student loan portfolio stood at 5.91% at the end of May 2013.

RATING SENSITIVITIES

A positive rating action of the sovereign, in conjunction with continued strong support from the state, would lead to a similar change in KoSAF's rating.

A downgrade of Korea, significant changes that would lead to a dilution in state ownership and public control, or evident weakening in links with the government, including the importance of the foundation's public policy role and budgeting relationship, could trigger a downgrade or result in KoSAF. This is because the company, under these circumstances, would no longer be classified as a dependent public sector entity and, therefore, no longer credit-linked to the sovereign rating.

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