OREANDA-NEWS. Fitch Ratings has affirmed Korea Housing Finance Corporation's (KHFC) Long-Term Issuer Default Rating (IDR) at 'AA-' and Short-Term IDR at 'F1+'. The Outlook on the Long-Term IDR is Stable.

The IDRs were affirmed because KHFC continues to be a quasi-government financial institution acting as a policy arm of the government, and is 100% owned by the state.

KEY RATING DRIVERS

KHFC's ratings are equalised to the ratings of Korea (AA-/Stable/F1+) because of its close links to the state, which results in a strong probability of extraordinary government support, if needed. KHFC's policy is dictated and closely monitored by the government of Korea. Under Fitch's public-sector entities rating criteria, KoSAF is classified as a credit-linked entity

The government is by law obliged to replenish KHFC's deficit when its own reserves fall short. State support is also evident in the government capital infusions in 2012, 2013 and 2015, which helped KHFC maintain its regulatory required capital adequacy ratio (CAR) at above 8% (10.12% in 2014).

KHFC is a non-profit entity that is mandated to facilitate access to housing finance for low- and middle-income earners. Recent government policy requiring Korean financial institutions to bring fixed-rate amortising mortgage loans to 30% of their outstanding portfolios by end-2016 enhances KHFC's policy role. Fitch expects the entity will take a leading role in providing funding to achieve this target.

KHFC is wholly owned by the state and, as such, is closely supervised by the government. It reports to the Ministry of Strategy and Finance and is supervised by Korea's financial regulator, the Financial Services Commission (FSC). Its president is appointed by the government and works as a public servant attached to the FSC. Its auditor is also recommended and appointed by the government.

KHFC's strong liquidity and funding status is backed by its solid reputation in both domestic and international capital markets. Its funding channels are also well-diversified through mortgage-backed securitisation, covered bonds, senior unsecured bonds, and commercial papers.

KHFC suffers from funding mismatches as its loan portfolio has maturities of 10-30 years, but it is funded by commercial paper and bonds with relatively shorter tenor. Nevertheless, the mismatches are partly mitigated by the entity's continuing securitisation of its mortgage loan portfolio, and shorter effective mortgage tenor (generally seven to eight years) due to the tendency of Koreans to repay loans early.

KHFC is a state-owned non-banking financial institution established to promote stable and long-term housing finance. KHFC is mainly involved in four businesses: supply of long-term fixed mortgage loans, housing finance credit guarantee, reverse mortgage guarantee, and securitisation. It had total assets of KRW57.2trn at end-2014, with KRW47.8trn (83.4%) in mortgage loans. KHFC has maintained a positive profit margin in recent years.

RATING SENSITIVITIES

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

A sovereign downgrade, significant changes that would lead to a dilution in state ownership and public control, or evident weakening of links with the government, including deterioration in the importance of the foundation's public-policy role and its budgeting relationship with the government, could trigger a downgrade.