This press release is to clarify the completion of clean-up efforts regarding trust funds at domestic Investment Trust Companies (ITCs), Investment Trust Management Companies (ITMCs), and merchant banks. With implementation of the mark-to-market evaluation system for bonds, all ITCs, ITMCs and merchant banks are required to reveal bad assets, mainly bad bonds, in trust funds. Furthermore, bad assets must be duly assessed and written off in order to regain investor confidence by enhancing transparency in fund asset management. As a result, all trust funds at ITCs were evaluated and audited by outside experts as of June 30, 2000. According to the results of the evaluation and audit, all of the funds have been completely cleaned of bad assets and their current financial status has been accurately reported.

The total amount of bad assets held by ITCs was estimated at 7.1 trillion won as of the end of January 2000. Of this total, it was estimated that 3.1 trillion won was to be written off or assumed as losses. As of the end June 2000, however, potential losses amounted only to 0.9 trillion won as 2.2 trillion won had already been written off. Potential losses refer to bad assets that should be recognized as losses but are not realized through write-offs.

In fact, three different methods were utilized to clean up bad assets in ITC trust funds as of the end of June 2000: the write-offs of bad assets from trust accounts, transfer to sales units, i.e. securities companies, in light of burden sharing, and the securitization of bad assets through the issuance of Collateralized Bond Obligations (CBOs). As such, total bad assets were assessed from three different sources. 2.3 trillion won was held in the ITCs’ trust accounts, 0.4 trillion won was recognized as it originated from ITCs although transferred to sales units, and 4.4 trillion won arose from buying back subordinate class CBOs.

First, ITCs subsequently wrote-off 1.2 trillion won, or 53.5%, of the 2.3 trillion won held in their trust accounts. And, since the remaining 1.1 trillion won is recoverable from debtors and reflects the residual value at liquidation, the bad assets in the ITCs’ trust funds were effectively and completely cleaned up. The write-offs actually included 29.4 billion won worth of unsold beneficiary certificates held by the sales units, and written off by the sales units. (See Press Release dated on July 1, 2000 for further details.)

Second, bad assets transferred to sales units were worth 443.1 billion won based on book value, and estimated losses from those assets remained at 122.8 billion won. Since sales units have not yet written them off, potential losses remain to be 122.8 billion won. The residual value of 320.3 billion won is deemed recoverable.

Third, with regard to the issuance of CBOs, ITCs sold 4.4 trillion won worth of bad assets together with clean assets to special purpose companies (SPCs). The SPCs then pooled them together for the issuance of CBOs worth a total 17.8 trillion won. The CBOs issued by the SPCs were tranched into three classes: a senior class worth a total 10.8 trillion won; a senior-subordinate class worth 6.9 trillion won; and a junior-subordinate class worth 0.8 trillion won.

Senior class CBOs hold investment grade because they are backed by clean assets. They were sold in the secondary market and mainly purchased by Bond Stabilization Funds and other institutional investors. Junior-subordinate class CBOs were structured with underlying assets that were deemed virtually insolvent among the bad assets of ITCs. Junior-subordinate CBOs of 781.4 billion won were entirely absorbed by the ITCs’ own accounts and 747.2 billion won of this total was subsequently written off, leaving only 34.2 billion won as potential losses. The senior-subordinate class CBOs were collateralized by bad assets of ITCs worth 3.6 trillion won as well as clean assets from other sources, and were mostly underwritten by ITCs for inclusion in their trust accounts.

Therefore, out of the total 4.4 trillion won in bad assets originally sold to SPCs, 3.6 trillion won remains in ITC trusts funds in the form of the senior-subordinate class CBOs. In the light of this, third party credit enhancement was provided by the creation of a cash reserve of 1,025 billion won in the form of deposits by sales units. Daehan Investment Trust Company has already written off 300 billion won worth of bad assets with its cash reserve. Potential losses related to CBO buy-backs thus remain at 759.2 billion won, inclusive of 34.2 remaining in the junior-subordinate class.

Viewed from a different perspective, total bad assets worth 7,133.6 billion won has been and will be cleaned up with write-offs and cash reserve provisioning worth 3,140.0 billion won, leaving 3,993.6 billion won as residual value. The residual includes 1,373.3 billion won of recoverable assets, and 2,620.3 billion won of senior-subordinate class CBOs which can also be recovered as stability in the financial market is restored.

The possibility remains of a worsening in the status of underlying bad assets in the future. If the status of bad assets deteriorates further, however, all losses will be accounted for and written off in line with the strengthened loan-loss provisioning requirements of the Forward Looking Criteria (FLC) that are currently in place.

With the implementation of these clean-up measures and detailed disclosure of fund management, bad assets at ITCs have been successfully cleaned up, paving the way for a return to normal business operations. Investor confidence in the ITC industry is thus expected to restore in the near future.

* Please refer to the attached file for details.