With the implementation of the mark-to-market evaluation system for bonds, ITCs and ITMCs are required to reveal bad assets, mainly bad bonds, in trust funds. Furthermore, the bad assets were required to be fairly evaluated and written off in order to regain investor confidence by enhancing transparency in fund asset management. As a result, all funds at ITCs, ITMCs and merchant banks were evaluated and audited by outside experts as of June 30, 2000. According to the evaluation and audit results, all of the funds have been completely cleaned of bad assets and their financial status have been fairly stated.

ITCs and ITMCs transferred bad assets from trust accounts to their own accounts and issued Collateralized Bond Obligations (CBOs), thereby sharing a major portion of the losses stemming from bad assets between IT(M)Cs and fund selling agencies. In addition, ITCs and ITMCs wrote off 1.2 trillion won of bad assets in the funds. According to the evaluation, bad assets in trust accounts totaled 2.3 trillion won and total losses were estimated at 1.2 trillion won, or 53.5 percent. The remaining 1.1 trillion won, which represents 0.8 percent of total assets in trust accounts, is expected to be collected from debtors.

Bad assets were written off at ratio set under strict criteria in order to be fully account for. Write-offs were made for both Bankrupted bonds and Quasi-bankrupted Bonds, which are bonds that did not go into bankruptcy yet but were deemed so by the government. Bankrupted Bonds were written off at a ratio of above 50 percent, and Quasi-Bankrupted Bonds at a ratio of above 20 percent.

Despite write-offs, fund yields were not affected, remaining at around 8 percent per annum. Funds under the mark-to-market evaluation system recorded higher yields than the funds under the book value evaluation system.

In order to enhance transparency in fund management, the results of fund management such as yields on securities, amount of bad assets and write-off ratios will be disclosed through the Korea Investment Trust Companies Association (KITCA) on July 1, 2000. All funds worth more than 10 billion won at the time of establishment will be subject to above mentioned management disclosure. With the rules, both investors and the public will have access to the management results of all funds through KITCA’s web site.

Until now, the losses in the ITC industry have resulted mainly from the transfer of bad assets to ITCs’ own accounts, and the majority of the losses occurred at the major 3 ITCs, Korea Investment Trust Company, Daehan Investment Trust Company, and Hyundai Investment Trust Securities. However, the losses have been made up by injection of public funds and capital increases. Other ITCs and ITMCs are also expected to compensate for the losses from the transfers through write-offs and capital increases.

The government will continue to conduct policy measures to enhance transparency in management of ITCs and ITMCs in order to regain investor confidence.

* Please refer to the attached file for details.