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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

FINDING GOLD AMID THE RUINS

How an army of hard-nosed, cash-rich foreigners are finding, purchasing and polishing prize assets hidden in the financial garbage heap of Crisis-hit Asia

By Jonathan Sprague


Who Are These Guys?: Some of the Big Players in the Asian Assets Game

How To Buy Asia, And Win

No Accidental Tourists: Foreign bosses bring many advantages

When The Law Is An Asset

SEOULBANK WAS ON THE brink of collapse when the government took it over a year ago. Crushed by bad loans to failed and failing conglomerates, the 102-year old institution lost $1.9 billion last year. But to HSBC Holdings, it was a good investment. Last month the London-based global banking giant, whose biggest operations are based in Hong Kong, agreed to buy 70% of Seoulbank for $900 million. "It's a classic turnaround story," says Gareth Hewitt, an HSBC spokesman in Hong Kong. "We have done this before with other banks in other parts of the world."

Like HSBC, investors across Crisis-hit Asia, mostly foreign, are purchasing banks and insurers, snapping up dud loans, and forming ventures with local institutions. They are buying into the leaden heart of the Crisis - bad loans and lenders - aiming to turn it into gold.

In the process, Asia hopes, foreigners bring in capital and expertise to reduce the bad-debt overhang, revive cash-strapped banks and restore liquidity to credit-starved economies. No doubt, bank shareholders and governments still have to absorb mega-losses with every discounted asset sale. Moreover, the new rivals entering Asian markets may well push weak domestic players to the wall. But that's the free market. And the current malaise of financial paralysis and economic stagnation is far worse.

The asset shopping includes outright takeovers of domestic institutions or their operations. Investors have bought loan portfolios at state auctions in Thailand and Korea. Assets are also being repackaged into bonds. In every case, money flows in - followed by the steely eyes of investors focused on the bottom line.

Most buyers are financial institutions like Dutch bank ABN-Amro, which took over Thailand's Bank of Asia last year, and U.S. financial services company GE Capital, which has snapped up numerous insurers, leasing firms, and consumer credit operations from Tokyo to Bangkok. Some are investment funds like Newbridge Capital, which agreed in December to buy Korea First Bank. Not all are from the West. Singapore's DBS Bank, one of the first off the mark when it took control of Thai Danu Bank in January 1998, is on something of a regional buying spree. HSBC, while domiciled and listed in London, has its roots and much of its operations in Asia.

So how do these investors turn lead into gold? Well, strictly speaking, they don't. Rather, they look beneath the dirt, scratches and tarnish to see the gold hidden among seemingly worthless assets. "We are investing in established businesses that are decent and of good quality but which may be facing difficulties," says Tan Bien Kiat, the Singapore-based regional managing director of Newbridge Capital. That is, a bank's loan portfolio may be sunk in the Crisis, but its franchise, management, branches and other assets may be fundamentally sound.

Or the opposite: bad lender, good loans. When Bangkok auctioned off auto, mortgage and business loans of 56 failed finance companies last year, GE Capital was a top bidder. "Some loans were not bad," says Daniel Mudd, president of GE Capital Asia Pacific in Hong Kong. "But nobody was collecting, nobody was answering the phone, nobody was picking up the mail to keep the loans current."

But polishing grimy assets is not easy. Among GE Capital's newly purchased Thai loans, Mudd says only some borrowers are ready, willing and able to resume payments. "There's a piece in the middle for which we're going to have to work out the loan in the traditional sense - what's the collateral, what are the terms, what's the ability to pay," explains the regional CEO. "And then there's another group in which the loans are nothing more than pieces of paper."

Because many loans may turn sour, buyers never buy them at full price. Investors paid a fraction of face value at Bangkok's commercial loan auction last December. Those taking over institutions try to avoid paying for bad loans on their books. In Newbridge's pending deal to buy Korea First, certain dud assets are set aside under a "good bank/bad bank" structure and excluded from purchase-price negotiations. Seoul also promised to buy back all loans that go bad within a year, and a portion of them in two years.

Asian investors can look for gold too, but for the moment, the top prospectors are foreign. They have the money, and more important, they've done this before. Mergers and takeovers have been a constant drumbeat among Western financial institutions for years. So has the rehabilitation of troubled acquisitions and the repackaging of dud assets, particularly after the 1980s U.S. savings and loan debacle. In that crisis, Newbridge pioneered the "good bank/bad bank" structure in buying California's American Savings Bank. GE Capital also came to prominence then.

Skills built up in those bankruptcy-ridden financial dumps are perfect for asset alchemy in Crisis-hit Asia. Institutions are diving in, sorting through massive amounts of often confusing and unreliable data, working with governments, lenders, borrowers and the public, and coming up with deals that make sense. "Complicated situations have worked out for us before," says GE Capital's Mudd. "We have some degree of comfort that we understand the issues and can make the appropriate decisions."

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