1998: Trouble spreads

The turmoil in South-East Asia claimed its first victim in Hong Kong at the beginning of 1998, when homegrown investment bank Peregrine’s aggressive underwriting in Indonesia led to its downfall. The trouble spread, however, and by August the Hong Kong government was forced to intervene to prop up local stocks.

South Korea quickly restored its access to global markets, after a giant bailout loan from a group of US banks and G7 governments on Christmas day 1997. China, meanwhile, was in danger of losing its own international window after allowing GITIC to default on its overseas debt. The first sign that China might not repay local government debt is as relevant today as it ever was.

IFR Asia 43 – January 10, 1998

ZCI pulls out of Peregrine deal

Trading in shares of Peregrine Investments Holdings was suspended from Wednesday last week amid concerns over the bank’s exposure to ailing Southeast Asian corporates. On the morning of the suspension, Peregrine’s share price had declined by 14% to HK$4.30 from the previous day. On Friday, the Hong Kong SFC served a restriction notice on Peregrine Brokerage and the stock exchange suspended membership of the company.

A statement by Peregrine late on Friday revealed that discussions with Zurich Centre Investments (ZCI) over a prospective US$225m investment in the group had been terminated. Peregrine staff were told that the company’s component businesses will be sold piecemeal, with marketing set to begin immediately.

Earlier in the week, the failure of Indonesian transport group. Steady Safe to secure regulatory approval for a US$75m rights issue, which was to have been underwritten by Peregrine, further damaged investor sentiment.

In a statement issued on January 7, Peregrine said the continuing decline in the region’s currency markets and the downgrading of the credit ratings of Indonesia and South Korea had triggered a revision in the terms of ZCI’s planned US$225m convertible preference share investment, first announced in November.

Under terms of a deal announced in November, ZCI had been expected to acquire a 24.1% stake in Peregrine.

IFR Asia 55 – April 11, 1998

Korea global passes test as signs of confidence reappear

The Republic of Korea’s long-awaited global bond did not disappoint. With record demand, the US$4bn two-tranche issue was an instant sell-out, leaving investors short of bonds but the government delighted that its name has gone a long way towards rehabilitation in the international financial markets.

It was a test that the Korean Government refused to fail. By all accounts, the roadshow was one of the most impressive they can remember. In New York on April 2, over 200 investors turned up to a lunchtime presentation, and were not disappointed. The candour of the Koreans was applauded, and potential bond buyers appreciated the level of disclosure on the country’s finances.

A lot of hyperbole had surrounded the deal, stoked up to some degree by the secrecy over the size, shape and pricing of the transaction. No one can argue with the result. Lead managers Goldman Sachs and Salomon Smith Barney had a book of over US$12bn of orders - probably the largest set of orders for an emerging market international bond issue ever seen. At that size, and with over 300 investors taking an allocation, it may well also have been the biggest fixed income book-building exercise either of the investment banks have been through.

After weeks of anticipation, the deal emerged as a US$1bn five-year and US$2bn 10-year two-tranche issue. After assessing the demand, the 10-year was increased soon after to US$3bn. The US$4bn of new money will go directly to the country’s reserves, which are now standing at around US$25bn, well up from three months ago.

This two-tranche deal is being seen as an important landmark in the rehabilitation of Korea in the international capital markets. Following its agreement on a US$57bn rescue package with the International Monetary Fund in January and the successful rescheduling of close to US$22bn of short-term private sector bank debt, the final test was being able to borrow new money from institutional investors at a price that was within the bounds of acceptability.

IFR Asia 81 – October 10, 1998

China on a knife-edge as GITIC liquidated for debt failure

The curtailment of the financing activities of Guangdong International Trust & Investment Corp (GITIC) has opened a can of worms which jeopardises all lending to China and possibly the country’s reserves, believe bankers.

Relief that the Chinese government moved swiftly to shut down an ailing financial institution was overshadowed by doubts that all creditors would get their money back. Others believe it is now only a matter of time before smaller ITICs go into default and the People’s Bank of China (PBoC) could find itself unable to guarantee the debts of the entire sector.

While the PBoC has pledged to give priority to foreign creditors, a massive amount of debt, primarily bilateral loans of less than a one-year tenor, was extended without State Administration for Foreign Exchange (SAFE) approval. Japanese banks are rumoured to be particular culprits of unapproved lending, in an attempt to gain market share in boom times.

Likewise, several banks’ derivatives, currency options and swap exposures eluded SAFE approval, covering their tracks through commodity swaps. This means that the provincial government guarantee, which the PBoC is honouring, is not in place and that these debts need not be paid.

The termination of GITIC’s financing licence and the government assumption of its debts spells the end of the ITICs as foreign borrowing vehicles for China’s state-owned enterprises.

The implications of GITIC’s failure reach far beyond this sector, however, highlighting the similar weaknesses of several red chip companies. Guangdong Enterprises, one of the most prominent red chip borrowers, suffers from similar over-leverage and weak asset quality - and has a US$50m loan in the market via Credit Agricole Indosuez, which is expected to be pulled. Since red chips’ debts are not SAFE-registered, and benefit only from letters of comfort rather than full provincial government guarantees, they are even riskier credits than the ITICs and are expected to be hit hard by this crisis.

IFR Asia 91 – December 19, 1998

Kexim to launch US$675m ABS

In a development that bodes well for the revitalisation of Asia’s capital markets in the new year, Export-Import Bank of Korea (Kexim) will launch a US$675m rule 144a asset-backed transaction via Warburg Dillon Read this week.

The deal will close in a year that Asian capital markets professionals would prefer to forget and raises the chances of a spate of issuance from Korean borrowers that almost guarantees the first quarter will be a busy one.

The issue size is higher than previously reported after Kexim agreed to the creation of a third unrated, subordinated tranche, amounting to US$410m.

A US$230m Class A tranche was recently awarded a Triple A rating by both Moody’s and Standard & Poor’s, piercing the sovereign ceiling of Ba1 by a massive 10 notches.

This tranche, which has an average life of between 1.6 and two years is tentatively priced at 150bp over Libor. No details were available on the pricing of the other two tranches.

The middle tranche, US$35m of Class B notes, has been awarded a Aaa rating by Moody’s.

Unlike most of the planned securitisations, which are to be backed by domestic and foreign loans and securities, the Kexim issue is backed by more than 100 promissory notes from foreign imports of the country’s goods.