TIME Asia | The Hunt Is Over

HONG KONG: The collapse of Peregrine Investments highlights the risky dealings that underpin the region's economies INDONESIA: Threatened by food riots and a crumbling currency, Suharto finally tackles the corrupt business empires he helped build	ASIA	January 26, 1998 VOL. 151 NO. 3
The Hunt Is Over As bad loans bring down high-flying Hong Kong securities house Peregrine, investors search the rubble for lessons By ANTHONY SPAETH he peregrine is one of the strongest and swiftest birds in the falcon family. That was a fact noted frequently, and approvingly, by Philip Tose, co-founder of Peregrine Investments, a high-flying securities trader and investment bank that swelled in nearly a decade to become Asia's largest financial house outside Japan. "If we have proven anything," Tose told an interviewer three years back, "it is that if you stay focused, it is difficult to get it wrong in Asia." Tose's mouth is full of falcon feathers these days. Peregrine crashed to earth last week with no obvious sign that its management had become unfocused. Rather, its collapse was precipitated by an unhedged U.S.-dollar denominated loan of $265 million to a taxicab company in Jakarta: quite a venture for a financial firm with a capital base of only $900 million. The taxi company can't pay its debt because the value of Indonesia's currency, in which local cab fares are denominated, has gone through the ocean floor. At a press conference last week, Tose was unrepentant, scoffing at pundits who call hindsight wisdom. "What happened was a complete meltdown," he insisted, saying further that the collapse of the Indonesian rupiah was something "no one in their right mind would have even factored in." No one who wanted to stay in business, anyway. What Peregrine's collapse demonstrates is that if you fly high, you've got to be ready for some downdrafts. "There are advantages to being seen as aggressive," says an executive at a rival Hong Kong securities firm, "but you still need risk management." And though all of Peregrine's fumbles have yet to be revealed--Hong Kong's South China Morning Post reported last week that the company's senior management said it was unaware of the firm's huge bond exposure until mid-November--Peregrine's ways seem to epitomize much that is wrong about how money was shoveled around Asia in recent years. Many companies were lent funds because they had political connections or big ambitions, and not always because they had solid records of performance. That could produce big bucks in good times; it did for Peregrine. But when the Asian economic boat started to rock, the best skills were not how to spread money around but how to manage risk--which clearly wasn't Peregrine's strength. Says a U.S. banker in Jakarta: "Everyone is guilty of the same crime. They haven't hedged their exposure." Peregrine was the biggest bubble to implode along Hong Kong's economic skyline, and Tose appealed to the Hong Kong government for a last-minute financial parachute. Hong Kong said no, rejecting the example of Thailand, Indonesia and, until recently, Japan, all of which have tried to prop up shaky financial institutions. Such resoluteness is supposed to limit the fallout to include only Peregrine's 1,700 employees worldwide. Even Tose admitted the authorities had probably made the correct decision. "I don't like it," he said at last week's press conference, as Peregrine co-founder Francis Leung sat beside him fighting back tears, "but that's life." The event, however, did little to bolster confidence in a territory highly uncertain of the effect of the subsiding economies all around it. The Hong Kong stock market plunged 9% the day Peregrine collapsed, bounced back and then plunged a further 7% later in the week. Residential real estate prices have dropped some 25% in recent months and there are growing fears a few property firms might be in trouble. Interest rates have been jacked up to protect the value of the Hong Kong dollar, squeezing one and all, and are likely to remain high: officials insist the currency's peg to the U.S. dollar won't be abandoned. "If we don't hold the peg," said Chief Executive Tung Chee-hwa, "the consequences are unimaginable." So, to many locals, was the demise of Peregrine, which had been one of Hong Kong's biggest success stories. Tose, 52, is a familiar face in the territory, staring out from local society pages with the icy charm of a James Bond villain. (And, according to many, the same quotient of humility.) Born in Britain, he was a race car driver until a bad accident in 1968 propelled him into the quieter realm of finance. He landed in Hong Kong in 1972 as representative of a London brokerage firm and soon became a friend of such rising business stars as Li Ka-shing, a Hong Kong billionaire, and later of tycoon Larry Yung, son of Chinese Vice President Rong Yiren. Working for Citicorp in the 1980s, Tose met Francis Leung, and the two opened Peregrine in 1988 to capitalize on Asia's growing hunger for finance. Its first businesses were securities trading and underwriting, with special emphasis on local companies and, increasingly, mainland firms wanting to raise money in Hong Kong. In 1996, Peregrine became Asia's No. 1 equity underwriter--up from No. 20 the year before--and in the first quarter of that year pulled in more business than any other investment bank in the world. That business was aided immensely by Tose and Leung's guanxi, or connections. But Tose also gets credit for building a business in other financial instruments relatively unexploited in Asia. New or relatively obscure companies in the thriving economies of Southeast Asia needed sources of funds other than traditional banks. So in 1994, Tose lured 30-something Korean-American financial wizard Andre Lee from Lehman Brothers to start up a bond shop for Peregrine. It floated foreign-currency-denominated bonds for cash-hungry companies; the firms had to pay higher interest rates than those offered local blue chips, but the money was still cheaper than what they could get from their commercial banks. According to Basis Point, a Hong Kong-based trade publication, Peregrine raised $2.6 billion in bonds for Thai and Indonesian companies in 1996 and 1997, and the bond business eventually contributed about 50% of Peregrine's profits. The risk all around was that the currencies of those countries, which were linked to the U.S. dollar, would be devalued and the companies couldn't repay in dollars. But the cost of "hedging" loans against a currency devaluation--usually by buying forward contracts--was an additional 6% to 7%, and the dollar links seemed secure. So few companies bothered. In fact, bond underwriters don't traditionally take much of a risk: they sell the bonds to other institutions�say, Japanese or South Korean banks--and basically act as intermediaries. But during Asia's boom, financial firms got more aggressive, lending companies money up front before offloading the debt as bonds. In the past few years, Peregrine was known for taking the biggest risks, as the fatal loan to the Indonesian taxicab company, Steady Safe, ultimately demonstrated. When the rupiah began its slide, Peregrine realized it was in trouble. In November, the Zurich Group, a Swiss insurance company, said it would buy a quarter of the company for $200 million. But as Asia's currencies continued to weaken, the Swiss firm asked for renegotiations. In January, Zurich walked away from the deal. Tose tried finding other saviors, but his famed Rolodex was of little use given his hopeless balance sheet. The courts called in the accounting firm Price Waterhouse, which laid off 640 Peregrine employees. They will not be alone. Last week, Schroders Securities Asia announced it was closing all of its regional offices and cutting 200 jobs. The merger between Swiss Bank and Union Bank of Switzerland last year promises at least several hundred layoffs across Asia. "There is massive overcapacity in the financial industry," says Andy Xie, an economist with Morgan Stanley. Overcapacity and bloodbath are words that are becoming all too common in Asia's fumbling economies. At the end of his press conference last week, Tose told reporters, "Now I would like some peace and quiet." But on his way out of the hotel, a scuffle broke out between hotel staff and a pursuing photographer. For Tose, whose leadership of Peregrine will face more embarrassing scrutiny in the future, peace and quiet may prove as elusive as for the rest of unsettled Asia. Reported by Rahul Jacob/Hong Kong
time-webmaster@pathfinder.com

As bad loans bring down high-flying Hong Kong securities house Peregrine, investors search the rubble for lessons

By ANTHONY SPAETH

he peregrine is one of the strongest and swiftest birds in the falcon family. That was a fact noted frequently, and approvingly, by Philip Tose, co-founder of Peregrine Investments, a high-flying securities trader and investment bank that swelled in nearly a decade to become Asia's largest financial house outside Japan. "If we have proven anything," Tose told an interviewer three years back, "it is that if you stay focused, it is difficult to get it wrong in Asia."

Tose's mouth is full of falcon feathers these days. Peregrine crashed to earth last week with no obvious sign that its management had become unfocused. Rather, its collapse was precipitated by an unhedged U.S.-dollar denominated loan of $265 million to a taxicab company in Jakarta: quite a venture for a financial firm with a capital base of only $900 million. The taxi company can't pay its debt because the value of Indonesia's currency, in which local cab fares are denominated, has gone through the ocean floor. At a press conference last week, Tose was unrepentant, scoffing at pundits who call hindsight wisdom. "What happened was a complete meltdown," he insisted, saying further that the collapse of the Indonesian rupiah was something "no one in their right mind would have even factored in."

No one who wanted to stay in business, anyway. What Peregrine's collapse demonstrates is that if you fly high, you've got to be ready for some downdrafts. "There are advantages to being seen as aggressive," says an executive at a rival Hong Kong securities firm, "but you still need risk management." And though all of Peregrine's fumbles have yet to be revealed--Hong Kong's South China Morning Post reported last week that the company's senior management said it was unaware of the firm's huge bond exposure until mid-November--Peregrine's ways seem to epitomize much that is wrong about how money was shoveled around Asia in recent years. Many companies were lent funds because they had political connections or big ambitions, and not always because they had solid records of performance. That could produce big bucks in good times; it did for Peregrine. But when the Asian economic boat started to rock, the best skills were not how to spread money around but how to manage risk--which clearly wasn't Peregrine's strength. Says a U.S. banker in Jakarta: "Everyone is guilty of the same crime. They haven't hedged their exposure."

Peregrine was the biggest bubble to implode along Hong Kong's economic skyline, and Tose appealed to the Hong Kong government for a last-minute financial parachute. Hong Kong said no, rejecting the example of Thailand, Indonesia and, until recently, Japan, all of which have tried to prop up shaky financial institutions. Such resoluteness is supposed to limit the fallout to include only Peregrine's 1,700 employees worldwide. Even Tose admitted the authorities had probably made the correct decision. "I don't like it," he said at last week's press conference, as Peregrine co-founder Francis Leung sat beside him fighting back tears, "but that's life."

The event, however, did little to bolster confidence in a territory highly uncertain of the effect of the subsiding economies all around it. The Hong Kong stock market plunged 9% the day Peregrine collapsed, bounced back and then plunged a further 7% later in the week. Residential real estate prices have dropped some 25% in recent months and there are growing fears a few property firms might be in trouble. Interest rates have been jacked up to protect the value of the Hong Kong dollar, squeezing one and all, and are likely to remain high: officials insist the currency's peg to the U.S. dollar won't be abandoned. "If we don't hold the peg," said Chief Executive Tung Chee-hwa, "the consequences are unimaginable."

So, to many locals, was the demise of Peregrine, which had been one of Hong Kong's biggest success stories. Tose, 52, is a familiar face in the territory, staring out from local society pages with the icy charm of a James Bond villain. (And, according to many, the same quotient of humility.) Born in Britain, he was a race car driver until a bad accident in 1968 propelled him into the quieter realm of finance. He landed in Hong Kong in 1972 as representative of a London brokerage firm and soon became a friend of such rising business stars as Li Ka-shing, a Hong Kong billionaire, and later of tycoon Larry Yung, son of Chinese Vice President Rong Yiren. Working for Citicorp in the 1980s, Tose met Francis Leung, and the two opened Peregrine in 1988 to capitalize on Asia's growing hunger for finance. Its first businesses were securities trading and underwriting, with special emphasis on local companies and, increasingly, mainland firms wanting to raise money in Hong Kong. In 1996, Peregrine became Asia's No. 1 equity underwriter--up from No. 20 the year before--and in the first quarter of that year pulled in more business than any other investment bank in the world.

That business was aided immensely by Tose and Leung's guanxi, or connections. But Tose also gets credit for building a business in other financial instruments relatively unexploited in Asia. New or relatively obscure companies in the thriving economies of Southeast Asia needed sources of funds other than traditional banks. So in 1994, Tose lured 30-something Korean-American financial wizard Andre Lee from Lehman Brothers to start up a bond shop for Peregrine. It floated foreign-currency-denominated bonds for cash-hungry companies; the firms had to pay higher interest rates than those offered local blue chips, but the money was still cheaper than what they could get from their commercial banks. According to Basis Point, a Hong Kong-based trade publication, Peregrine raised $2.6 billion in bonds for Thai and Indonesian companies in 1996 and 1997, and the bond business eventually contributed about 50% of Peregrine's profits. The risk all around was that the currencies of those countries, which were linked to the U.S. dollar, would be devalued and the companies couldn't repay in dollars. But the cost of "hedging" loans against a currency devaluation--usually by buying forward contracts--was an additional 6% to 7%, and the dollar links seemed secure. So few companies bothered.

In fact, bond underwriters don't traditionally take much of a risk: they sell the bonds to other institutions�say, Japanese or South Korean banks--and basically act as intermediaries. But during Asia's boom, financial firms got more aggressive, lending companies money up front before offloading the debt as bonds. In the past few years, Peregrine was known for taking the biggest risks, as the fatal loan to the Indonesian taxicab company, Steady Safe, ultimately demonstrated.

When the rupiah began its slide, Peregrine realized it was in trouble. In November, the Zurich Group, a Swiss insurance company, said it would buy a quarter of the company for $200 million. But as Asia's currencies continued to weaken, the Swiss firm asked for renegotiations. In January, Zurich walked away from the deal. Tose tried finding other saviors, but his famed Rolodex was of little use given his hopeless balance sheet. The courts called in the accounting firm Price Waterhouse, which laid off 640 Peregrine employees. They will not be alone. Last week, Schroders Securities Asia announced it was closing all of its regional offices and cutting 200 jobs. The merger between Swiss Bank and Union Bank of Switzerland last year promises at least several hundred layoffs across Asia. "There is massive overcapacity in the financial industry," says Andy Xie, an economist with Morgan Stanley.

Overcapacity and bloodbath are words that are becoming all too common in Asia's fumbling economies. At the end of his press conference last week, Tose told reporters, "Now I would like some peace and quiet." But on his way out of the hotel, a scuffle broke out between hotel staff and a pursuing photographer. For Tose, whose leadership of Peregrine will face more embarrassing scrutiny in the future, peace and quiet may prove as elusive as for the rest of unsettled Asia.

Reported by Rahul Jacob/Hong Kong