Hyundai Capital Services hit two landmarks when it launched a RM650 million deal on May 20. It became the first Korean corporate issuer in Malaysian ringgit; and it raised the biggest single tranche by a foreigner in that currency.

Getting there was not especially straightforward. True, the three year senior unsecured fixed rate deal was launched amid a flurry of Malaysian interest in foreign issuers: Kexim had already been in the market by that stage, and Industrial Bank of Korea, so the interest of local investors in Korean names was already established. “The deal was based on elevated appetite from onshore investors for both the Hyundai Capital name and for Korean names in ringgit generally,” says Jan Wipplinger at Deutsche Bank, lead manager on the deal.

But that popularity brought a problem too. All Korean issuers, Hyundai included, needed to swap funds out of ringgit – in Hyundai’s case first into dollars, and then on to won. The problem was that by then the wealth of interest from Korean names in Malaysian issues had already had an effect on swap market capacity and pricing. In early April, Hyundai decided the widening basis swaps on both cross-currency trades made the deal uneconomical and delayed it.

As it happened, it was just a question of waiting for the right time, and when the circumstances came right just over a month later (the issue date ended up being May 20), the numbers were not just practical but enticing, and Hyundai upped the deal from a planned RM300 million to RM650 million.

Clearly, the credit was not the problem here, but the economics of the swap. “We did a roadshow to get investors familiar with the name, and then just needed to wait a few weeks to get the right window for the market to open,” Wipplinger says.

Most Korean names up to that time had had at least some state backing and had proven attractive to Malaysian pension funds. Hyundai Capital, lacking that backing, instead appealed to a different group of investors: fund managers, insurers and banks.

That said, there is an element of top-drawer backing in Hyundai Capital: the fact that GE Capital, with a AAA rating, holds a 40% stake in the company. This is believed to have proven attractive for the issuer in many of its offshore deals in recent years, and doubtless didn’t hurt in Malaysia either.

It proved a useful deal for the market, demonstrating there was still life in ringgit for Korean borrowers, and within weeks the issue had been joined by a RM380 million two-tranche bond from Woori Bank. While that might seem to owe more to the IBK and Kexim issues that preceded it, in some ways Woori had more in common with Hyundai: IBK and Kexim are both state-owned government policy banks, Woori and Hyundai represented pure commercial risk. Pricing was reasonably similar between the two as well, with Hyundai Capital’s deal paying 5.5%, and Woori paying 4.68% and 5% on three and seven-year tranches respectively.

Later in the year, Hyundai was back. On September 24, with the US stock markets in utter turmoil, it launched a RM205 million further drawdown off what is a RM2 billion MTN programme. This deal, a private placement of 1.5 year notes, was led by CIMB. This time the deal paid 6%, by which time its three-year notes were trading at around 6%.

Getting any such deal done in those markets was an achievement, and the private placement model appeared to be the only workable method at the time (and arguably still is for a foreign, non-state-backed credit). While the recap was watched closely, bankers were reluctant to read into it any improvement in the market for foreign issuers in ringgit, and so it proved: there would be no other foreign issue in the public markets for the rest of the year.

The notes carried a rating of AA1 from RAM, a rating that would struggle to find an audience in a public deal in today’s markets. But the size of the MTN programme suggests the issuer will be back sooner rather than later when markets allow. Merrill Lynch arranged the swaps on this second deal.

Twice in the space of a year, Export-Import Bank of Korea (Kexim) has launched landmark issues in the Malaysian ringgit bond markets – but they are landmarks for quite different reasons.

The first, in March 2008, was a M$1 billion sale of five- and 10-year notes. Given the slew of similar deals that followed it, it’s hard now to recall what a tough sell this must have been at the time. “To do a billion from a country that has not issued here before – it was not a walk in the park,” says Chay Wai Leong, managing director of RHB Investment Bank, which joint led the deal with CIMB and OCBC. “Many investors knew very little about the bank or Korea itself. Then there was the problem of the swap market to deal with. A lot of things had to be right for the deal to be successful. I can’t even explain in a few sentences the level of difficulty it took: an unknown name, swimming against the swap market.”

The swap market challenge – picking a moment when the economics of swapping ringgit into dollars and then on again into won still left the transaction commercially viable – would become more and more of a problem as the year went on. Instead, the novelty of a Korean issuer to a Malaysian investor base was arguably the bigger challenge to overcome, with a major knock-on effect on later deals. “It was very important for us to do it right,” Chay says.

Kexim is of course a major issuer in world markets and its arrival in Malaysia was welcomed as something of an endorsement. “They have done fund raising all around the world: Mexico, Turkey, Hong Kong, Singapore, and all the major currencies,” says Chay.

This first deal priced at Malaysia government bonds plus 55bp and 80bp on the five and 10-year deals respectively, pricing that looks very good now. The coupons were 4.08% and 4.5%. It went to about 40 onshore accounts, and provided Kexim not only with diversity of funds but also attractive pricing for the time. It also opened the floodgates: within a matter of weeks Industrial Bank of Korea, Woori Bank and Hyundai Capital had all also issued in ringgit.

The deal was the first hit out of a M$3 billion MTN funding programme, and one year on Kexim tapped it again, to widespread surprise. Chay says the second deal came about partly because of an update program. “It was very responsible of them,” he says. “They came back to update investors of Kexim and brought along a representative from the Ministry of Finance to update them on the Korean economy and financial markets. Because of that, demand was generated.”

That was remarkable given the scrutiny of Korea at the time – perhaps the Asian market most directly hit by the credit crunch. “There were still a lot of questions being asked of Korea, the economic numbers were all very bleak. The world was writing about Korea every week. Against that backdrop, how do you do a Korean deal?”

RHB and financial advisor Merrill Lynch targeted investor demand precisely, raising RM220 million in a three-year deal since that was what the market wanted. It priced at 4.75%, a spread of 227bp over the three year ringgit interest rate swaps and the equivalent of mid-swap of 395bp over Libor in US dollar terms – once again, effective funding.

Competitors were a little surprised to see the deal go through, particularly since it was widely accepted that swap rates had made such deals prohibitive (in fact, the lack of demand for these swaps meant the bank got a number of offers, according to Chay). But it got done, and not just through a bank relationship. “People have asked if it all ended up on our books,” says Chay. “Not a single dollar is on our book. There was a pension fund, banks, insurance companies.”

What’s not clear is if Kexim will once again have a galvanising effect on the markets, bringing other Korean issuers in its wake. Hana Bank is believed to be looking closely at a deal, but it is unlikely Malaysia will see quite the same slew of Korean bank names in its markets as was the case last year.

A year ago, Malaysia was enjoying a remarkable influx of foreign issuers raising capital in the ringgit debt markets. As G3 credit markets locked up and Asian issuers began to look for the widest possible range of funding sources, Malaysia seemed to have seized an opportunity to prove its depth, sophistication and flexibility.

One year on, it doesn’t look quite so rosy: investor appetite has changed as it has all over the world, and swap market pricing has turned against most potential issuers. But even in this environment deals are getting done, and Malaysia’s role as a credible funding source for foreign issuers is likely to remain a permanent fixture when the dust settles on today’s market volatility.

Foreign issuance in ringgit debt dates back to the Asian Development Bank in 2004, or arguably even to the Shell Islamic private placement back in 1990, but last year’s cluster of issues was kicked off by Export-Import Bank of Korea, or Kexim (see deal profile). The RM1 billion Kexim raised in five and 10-year funding in March 2008 through RHB, CIMB and OCBC demonstrated clearly that the bulging liquidity in Malaysia was prepared to find a home in foreign paper, provided it was the right kind of paper.

By April it had been followed by a RM1 billion three-tranche deal from Industrial Bank of Korea, led by RHB and CIMB. This was in some respects a similar deal: a Korean policy bank, with state backing, which was enough to give Malaysian investors comfort about the creditworthiness of the issuer. Later deals, though, would show a greater daring among investors. Hyundai Capital Services, a corporate borrower with no state backing (but part-owned by AAA-rated GE) raised RM650 million through Deutsche in May, followed later that month by a three-tranche, RM530 million deal for Woori Bank through RHB and CIMB.

Alongside this Korean influx came some promising signs that Gulf institutions were willing to issue in ringgit. In January 2008 Gulf Investment Corp succeeded in raising RM1 billion in a dual tranche deal led by ABN Amro (now RBS) alongside RHB Bank and Standard Chartered; GIC is an investment company owned by the six nations of the Gulf Cooperation Council. This was a conventional issue, and was followed in August by a sukuk from Islamic Development Bank, which raised RM300 million for IDB projects in Malaysia in an issue of five-year notes. CIMB and Standard Chartered led this deal.

But these were the good times: high liquidity, investor appetite for foreign names, attractive pricing both in terms of the local markets themselves and the swap markets to get the proceeds out again. Nothing good lasts forever, and it didn’t.

Markets are nothing like as easy now for foreign issuers as they were then. “Liquidity for foreign issuers is becoming very limited, for a few reasons,” says Seohan Soo, head of debt capital markets at AmInvestment Bank. The first is that there are very good opportunities for investors among local issues. “If I invest in Cagamas rated bonds today, I’ll get MGS plus 80 to 95 basis points for a 10 year deal. There’s no compelling reason for investors to take riskier assets for a slightly better return.”

Besides, investors are focusing on protecting capital (hence the flood of government guaranteed bonds in the market – see the next article for more). “So investors are looking at local issuers whose credit they are familiar with, and they have the comfort of knowing that the assets reside in Malaysia. On the other hand, if you buy a bond from a Korean state-owned bank with zero assets in Malaysia, a credit downgrade or default would actually be a much bigger risk for them. This is an added disincentive for investors to invest more in foreign names.”

Tan Ai Chin, head of investment banking at OCBC Malaysia, adds: “There is still a market for foreign issuers but investors are a lot more cautious about the underlying credit profile of the issuer and also the economic fundamental of the domicile country.” In her view it is unfortunate that most of the foreign issuers who have come to market have been financial institutions, which is probably the sector under most scrutiny from investors today.

It’s all turning to custard in Asia. Stock markets have plunged this year: China down 46.5%, India 35.5%, Hong Kong 23.6%, Singapore 16.9% – all of it much worse than the USA (the S&P 500 is down 13.7%) despite the fact the current problems stem chiefly from the US economy and American investment banks.

There may still be worse to come. But when the dust settles, there’s no question there are going to be some bargains to buy in Asia. “Asia has absolutely not been immune” to the problems in global markets, says Peter Sartori, founder of Treasury Asia Asset Management in Sydney. “But the positive spin is that a stack of stocks across the region really look dirt cheap.”

There are many fund managers who offer Asia managed funds in Australia: apart from Treasury Asia, others include products from Challenger, BT, Platinum, Aberdeen, Invesco, Fidelity, Perennial and Schroders, among others.

Smart Money asked several portfolio managers to identify stocks they think look well positioned for the long run, even if (or because) they’ve taken a hammering recently. We also looked at other portfolios to build up a list of five stocks that Asia specialists are holding in hope.

CHINA CONSTRUCTION BANK

Country: China

Listing: Hong Kong

Price/earnings ratio: 12 times 2008 earnings

This is the pick of Matthew Ingram, equity analyst with Perennial Investment Partners. Even assuming you’re only looking at Chinese stocks that are listed in Hong Kong (known as H-shares), there are still a number of Chinese banks to choose from; why CCB?

Partly because it’s in a safe area. CCB is the largest mortgage lender in China, and is also an active corporate lender. “GDP growth in China of 8 to 9% is expected to continue to drive strong lending growth in both the retail and corporate sectors,” says Ingram. “Despite rising interest rates, the quality of CCB’s loan book has improved markedly in recent years due to strong risk management and limited exposure to the more risky lending segments.” CCB is enjoying strong fee growth, driven by cross-selling mutual funds and other products to its mortgage customer base, and this is likely to increase as demand grows for capital protected products.

It’s true that CCB had some sub-prime exposure, but it wrote off the bulk of this exposure in 2007. “CCB has the fastest growing earnings of any of the Hong Kong-listed government-owned Chinese banks,” says Ingram. “Earnings per share growth is expected to be over 40% this year.”

SAMSUNG ELECTRONICS

Country: Korea

Listing: Korea, USA (ADR issue)

Price/earnings ratio: Approx 12 times 2008 earnings

Samsung Electronics is arguably the staple of Asian portfolios. If we’d written this article five years ago, Samsung would have been in it; if we write it in another five, it will probably still be there. It is, for example, the largest holding of Aberdeen Asset Management in its Asia fund; and when last disclosed on March 31, it was a top three holding in Asia products from BT and Platinum.

Why? “There are many legs in the group,” explains Adrian Lim, portfolio manager at Aberdeen Asset Management in Singapore. “There’s simple things like white goods, the stuff you have in the kitchen like fridges and washing machines; on the other hand it has TFT-LCDs [a type of computer chip used in televisions, particularly the latest flat-screen models] and other chips.” It has demonstrated over the last 10 to 15 years that it can squeeze out market share quite gradually: they’ve done a very good job of building a brand, understanding the distribution channels locally and abroad, and steadily carving out a segment for itself.” Samsung is also unusual in Korean terms in being union free: important in a country which has arguably the strongest industrial unions in the world, and certainly among the most volatile.

Incidentally, the other mainstay of Asian portfolios, Taiwan Semiconductor Manufacturing Co (TMSC), is absent from this list, mainly because of the bleak outlook for the end of the electronics market it operates in. But many fund managers have held it for years and expect to do so for much longer, attracted by the quality of the management, the market-leading technological ability and – increasingly – a hope that Taiwan might lose its laggard status among Asian stock markets thanks to a change of government that has brought a more pro-China leader to the helm. Invesco, for example, increased the Taiwan weighting in its ex-Japan Asia fund in the first quarter. “It was generally believed that a KMT win [the new party] would be beneficial for both the Taiwan economy and equity market, as the KMT party pledged to boost the island’s economy by building closer ties with China,” said Invesco in its most recent quarterly report, explaining its decision. Strangely, though, Taiwan’s market did shoot up almost 20% after the election but has since lost it all again.

Hutchison Whampoa

Country: Hong Kong (active globally)

Listing: Hong Kong

Price/earnings: 11

There was a time when Hutch was a real market darling. One of the two companies (the other being Cheung Kong) of Li Ka-Shing – the billionaire’s billionaire, and arguably Asia’s most famous entrepreneurs – for years it seemed it could never put a foot wrong, whether in ports, property, retail, energy or telecoms. And then it got into 3G.

“That company has been a complete dog since Li Ka-Shing bought into 3G in Europe,” says Peter Sartori at Treasury Asia Asset Management. “It has underperformed significantly since then: 3G has been a disaster.” But Sartori has recently bought in, and he’s not alone: it is among the biggest holdings of the Platinum Asia Fund. Why? “Firstly, it’s well and truly in the price. It’s now at a big discount to net asset value. And finally, after all these years, there’s a little bit of light at the end of the tunnel [for 3G]; it will be cash flow positive in the next 12 months and the rest of the businesses are in pretty good shape.”

Not everyone agrees, though: Macquarie’s Gary Pinge is neutral on the stock. He believes many fund managers are looking at Hutchison as a defensive investment, but doesn’t think they should, particularly since 30% of Hutch’s net asset value is derived from Europe which is where the US-led slowdown may go next. He still sees challenges to the 3G business with regulatory and competitive risks.

China Travel

Country: China

Listing: Hong Kong

Price/earnings:  13 times 2008 earnings

While Sartori finds Hutch interesting, he is more excited about a much smaller stock, China Travel, which covers travel and tourism in China from tour operations to hotels and theme parks. It has been absolutely smashed in the markets – it was trading at HK$2.10 last week compared to a 52-week high of HK$6.38. But that makes it well worth a look, Sartori believes. “Because the share price has come down so far, the valuations look attractive for the first time in a long time.”

The stock is geared to macroeconomic trends like growing Chinese wealth and disposable income, a greater willingness to travel both domestically and overseas, and the increasing interest from foreigners in spending time in China. “The whole tourism story in Asia, and particularly in China, is a secular growth story,” says Sartori. “We think it could grow at a minimum 20% a year for the next five years plus.

“Sentiment towards the sector and industry is very poor at the moment , because of the earthquakes and with the Olympics now on the nose, so we think it’s an opportunity to buy into a long term secular story.”

OLAM INTERNATIONAL

Country: Singapore

Listing: Singapore

P/E Ratio: 30.7 times (current).

When Macquarie Research published its vast Asia Equity Guide in March, one of its very top recommendations for the whole region was Olam International, a Singapore-based company that has built itself into every area of the supply chain for agricultural products and food ingredients from the farm gate to the end consumer. In early July, with the share price at S$2.30, Macquarie continued to hold an outperform recommendation on the stock, with a price target of S$3.82.

It’s this ability to be in every bit of the process that tends to appeal to analysts and fund managers, because it removes exposure to things beyond the company’s own control. It is also, arguably, a beneficiary of rising food inflation – the subject on everyone’s mind in Asia at the moment along with oil. Despite the problems other companies have had with slowing earnings, Olam’s third quarter results in May boasted a net profit up 38% year on year, with broad-based growth and improved gearing ratios (net debt to equity at 2.7 times). Recent rights issues have added more than S$700 million to the balance sheet, increasing speculation that it will take advantage of low valuations to acquire.

In July, it announced a joint venture with another stock much beloved of Asian analysts at the moment – Wilmar, the palm oil group. The venture brings Olam into a new commodity, stevia, used in the creation of sweeteners.

VIETNAM

 There was a time when Vietnam was something of a darling of the global credit markets. No more: worries about the state of its economy have sent investors elsewhere.

In the debt markets, the starkest confirmation of this change in attitude came in June when the sovereign, the Socialist Republic of Vietnam, officially ended plans for a G3 currency issue this year. Last year Barclays Capital, Citi and Deutsche Bank were mandated on a US$750 million global bond, but it had been clear for months that the deal was not going to make it across the line. Vietnam’s finance ministry has indicated that the deal will come back at some stage. But both because of the state of the global credit markets, and Vietnam’s own problems, nobody is expecting that to be any time soon.

Corporate issuance has gone the same way. Rumoured deals from Vietnam National Textile and Garment (US$500 million, through Deutsche), Vinashin Petroleum Investment and Transport (US$200 million) and PetroVietnam have come to nothing.

It’s a far cry from 2005, when a $750 million 10-year bond flew out the door, with orders of more than $4.5 billion. That bond paid a yield of just 7.125% for a new emerging market issuer.

The biggest problem has been the headlong arrival of inflation into what had otherwise been a vibrant economy, which had grown at 8.48% in 2007. Inflation figures for April were 25.2%, a 10-year high. On the back of that data, the currency has been badly hit and spreads have widened dramatically. The trade deficit is growing (although it did narrow in May on the back of a tighter monetary stance) and there are problems in the property market. Some consider the situation to be so bad that a localised version of the Asian financial crisis, with currency devaluation and a painful period of write-offs and recovery, may be on the cards; a Morgan Stanley report outlined exactly this vision in May, causing some alarm among domestic banks and fund managers. Against all this the stock exchange halved in value in the first half of the year.

The domestic bond markets don’t look much better either. In April, the government failed in a fourth consecutive domestic bond auction, with the coupon said to be as much as 100 basis points below the level investors think is fair.

Domestically at least, there are still plenty of borrowers ready to launch when things improve.  Vietnam International Commercial Bank (VIB) got a Moody’s rating, from B1 to Ba2 depending on the structure and term of the issue, in July, having gained approval to sell D3trillion of bonds this year the previous month. Techcombank has also been given approval to sell D5 trillion of bonds this year. And Sacombank has also received approval for domestic borrowing.

And, despite Vietnam’s absence from the international debt markets, domestic deals have got away even in the current environment. Vinpearl Tourism and Trading sold D1 trillion of privately placed three year and five year bonds through Bank for Investment and Development of Vietnam in May; the same month, Vincom Joint Stock Co sold D2 trillion through Vietnam Bank for Agriculture and Rural Development (Agribank).

The big question now is what happens to Vietnam’s economy. While the Morgan Stanley crisis theory remains an outlier view, there is still widespread expectation of devaluation in the currency, although the improvement of the balance of payments position in May does suggest that Vietnam has a good chance of bringing inflation under control. The State Bank of Vietnam raised its base rate by 200 basis points on June 11.

A typical strategist view is to say that things can be fixed, but that investors should still be wary. “Although in our view the authorities are moving more forcefully against inflationary pressures, and we believe we have seen the worst in terms of the deterioration in the trade deficit and rising inflation, the country is not yet out of the woods,” said Nicholas Biddy at Barclays Capital in a June study of the country’s position. He expects at least another 200 basis points of hikes in coming months. “We currently recommend investors err on the side of caution in the case of Vietnamese financial assets.” The state of bank asset quality is a particular concern, which in turn is likely to have an impact on their funding programs and use of the local and international debt markets.

KEXIM

Kexim Bank has been a stunningly active borrower in the capital markets this year. It has been everywhere, from the major currencies to Asian and Latin American local capital markets.

“Kexim is one of the savviest borrowers in the region,” says Sean Henderson, head of debt syndicate Asia-Pacific at HSBC. “They’ve proven again this year they have significant flexibility to consider almost every global market – and that is a lot more complicated than it looks.

“It requires a degree of internal sophistication in understanding a number of different market practises across documentation and execution, as well as an ability to accurately time each currency as opportunities arise.”

Kexim’s most recent adventures have been global. In May it raised a Eu750 million SEC-registered five-year bond through Citi, Deutsche Bank, Depfa, RBS and HSBC – the first euro-denominated deal from Asia in a year. It is understood to be planning a dollar deal, with the five banks to handle it (Barclays Capital, Deutsche Bank, Depfa, Merrill Lynch and Morgan Stanley) already agreed although no firm mandate has been given. Market rumour is for a US$1 billion 10-year global.

It has also issued twice in the Swiss markets, most recently with a Sfr350 million two-tranche fixed and floating rate senior bond in April, led by ABN Amro. It had already issued a five-year in January and has voiced an intention to return regularly. Kexim said at the time that the deal achieved funding around 20bp inside what it would have managed in dollars. Elsewhere, a five-year Y1billion deal went through in February via HSBC, and a seven year HK$375 million trade through Citi the same month.

It has also been active in less obvious funding markets. In April it launched a S$50 million one-year deal through HSBC, increased to S$70 million on demand. In March, it went for the ringgit markets, raising M$1 billion in five and 10-year bonds, placing to 40 local accounts. This was the first issuance by a South Korean borrower in ringgit; RHB led the deal with CIMB and OCBC as joint lead arrangers and Merrill Lynch as global financial advisor. Kexim has a M$3 billion MTN funding programme in Malaysia, so is likely to be back in that market before long.

And it’s not just in Asia that Kexim has been busy. In January it launched a Ps1.2 billion five-year floating rate bond issue in Mexican pesos through Merrill Lynch. This followed a 10-year Ps750 million global last October, again led by Merrill, which was tapped for a further Ps800 million in April this year. Earlier, the bank had taken a foray into Brazilian reals with a series of MTN deals in August 2007. It has even been active in Turkish lira.

This diversity looks set to continue, with the bank approved the right to sell up to Bt3.5 billion of local currency debentures in Thailand in the second half of this year. Once again, it will be a trend-setter: the first Korean financial institution to borrow in the baht market. Also looking ahead, Kexim has filed updates for Y200 billion of issuance between the end of June 2008 and 2010.

“It’s difficult to overstate the value of diversification in the current market,” Henderson says. “Global liquidity is shrinking, and various currencies can open at different times; often a borrower’s ability to lower cost will depend on being able to access the most appropriate market at any one time.”

He adds: “It pays not to overload one particular funding source. If you are too reliant on one market, it increases the risk you’ll eventually get backed into a corner either on a challenging market environment or investor capacity issues, and this adds up to more expensive funding.”

It hasn’t all been plain sailing, though. In April it cancelled a three and five-year Samurai issue two days before it was due to price, after failing to reach the Y50 billion the bank was hoping to achieve. Leads on the planned trade were Daiwa SMBC, Nikko Citi and Nomura. On April 23 the bank put out a statement blaming unfavourable markets, meaning it could not achieve the size or the pricing it wanted, although it is understood that there was demand for at least Y22.5 billion. There has been some conjecture in the markets that part of the problem was the fact that Kookmin Bank had launched a bigger deal, worth Y24.4 billion, just a week earlier in its inaugural Samurai issue, and that Kexim couldn’t countenance a smaller deal than its Korean contemporary. It remains to be seen whether the late pulling of the deal damages Kexim’s ability to return to Japanese investors.

This remarkable activity is to help get through a US$ 5 billion funding requirement for this year, spurred by an announcement in January that Kexim plans to lend W40 trillion this year, the largest amount since the bank’s foundation. There’s more to do, but Kexim has already got much of the hard work behind it.

ANZ

ANZ has demonstrated its strength and sophistication as a borrower consistently through the credit crunch. It says something that, despite ambitious capital raising requirements, it has almost completed its 2008 funding program already without having to pay through the nose for any of it.

So far this year ANZ has raised the equivalent of around A$32 billion. It has been active in euros, dollars, yen, Australian and New Zealand dollars, Swiss francs and Singapore dollars; increasing the period under review to the last 12 months adds several sterling deals to the mix as well.

“Since the onset of the global credit crisis our approach to funding has been to maintain an evenly balanced strategy much as we would do within normal market conditions,” says Rick Moscati, group treasurer at ANZ. “We set a strategy at the commencement of the year, we articulate that strategy to the market, and try to stick to that strategy.” That means not surprising investors with unexpected volumes. “If we say we’re going to do $25 billion of term debt issuance we don’t then do $40 billion or $15 billion. Transparency is very important for investors.”

It seems to have worked. Moscati says that since the credit crisis began, “we have had the opportunity to issue in all major global debt markets. By and large it has continued to be an issue of price.”

Perhaps the most significant was a domestic deal in April. The bank initially raised A$1.35 billion in senior five year fixed and floating rate transferable deposits, in a self-led deal; a day later it increased it by another A$150 million. Pricing, at 128 basis points over the three month bank bill swaps rate for the floaters, and an 8.5% coupon yielding 8.615% with a 128bp spread over A$ mid swaps for the fixed, was not especially cheap but did demonstrate the viability of a market that had been largely inactive for months. A month later, ANZ tapped the bonds again, bringing the total outstanding on them to A$1.75 billion.

It was a very closely watched deal. “There had not been a lot of issuance at the longer end of the domestic curve prior to this transaction,” Moscati recalls. “I think that deal gave the market some confidence: it was at the upper end of our volume expectations and it confirmed the Australian market was working well for domestic issuers.”

Another striking transaction was ANZ’s samurai debut in March. This deal raised Y135.8 billion, or US$1.3 billion, in a three-tranche issue that represented the largest ever yen-denominated bond from Australia. Daiwa SMBC, Mizuho and Nikko Citi were joint leads. “That’s been an important new market for borrowers this year,” says Moscati. “It brings with it some increased diversification, which is always attractive for us.”

This deal was actually cheaper than the Aussie dollar bonds that followed it. A Y37.1 billion three-year fixed rate note had a 1.77% coupon, making 80 basis points over Libor; A five year fixed rate deal raised Y27 billion at 2.07%, or Libor plus 95; and a Y71.7 billion five-year floating rate note was priced at 95 basis points over three-month yen Libor. The five year pricing was equivalent to around BBSW plus 110 basis points, making it 18 basis points cheaper than the Australian trades of the same tenor.

Recent months have also brought benchmarks in euros and dollars. Barclays Bank and Credit Suisse led a Eu2 billion bond for ANZ in May, followed in July by a US$2 billion raising through JP Morgan, Citigroup and Goldman Sachs. “Part of our strategy  is based around executing at least one benchmark bond transaction annually in each of our core strategic markets,” Moscati says. “Traditionally these markets have included the Australian domestic, euro and to a lesser extent the US markets. We have already initiated a strategy to expand this to include all major currencies, including yen, sterling and a greater focus on distribution into Asia.”

ANZ is likely to be quieter in the second half of the year, having already done almost all it needs to for 2008. “We’ve largely completed our 2008 funding task,” says Moscati. “To the extent we issue any larger public deals for the remaining part of this year it will be mainly about pre-funding 2009 requirements, which we expect to be similar to what we’ve done in 2008.”

THE PHILIPPINES

Some decent-sized deals are getting away in the Philippine peso bond market. There’s not much going right in the country’s stock market or economy, but at least it’s clear the local debt markets are maturing.

For example, in May Banco de Oro Universal Bank raised P10 billion, the equivalent of US$235 million, in a bond through HSBC, ING and Standard Chartered. The deal, a public offering of lower tier 2 notes, was originally planned as a Ps5 billion offer but was doubled in size after applications reached five times the initial amount. It flew out the door so fast that the public offer on the bond was ended a week early.

The coupon attracted investors – at 8.5% on the unsecured subordinated notes, it was higher than some other lower tier notes sold this year – but it was not widely priced. Instead, it reflects the growing liquidity in the peso market.

Another example came with a lower tier 2 deal for Philippine National Bank, which raised P6 billion in June in a deal led by Deutsche Bank. This deal, a 10-year non-call five subordinated bond, had drawn Ps8 billion of demand by a week before the scheduled close so, just like BDO, closed a week early. Again, the notes were priced at 8.5%. And while BDO had priced at a zero spread over the benchmark, PNB actually came inside it, pricing at 40 basis points below the Philippine Dealing System Treasury rates.

Other deals, if not quite as tightly priced, have found an enthusiastic following. Rizal Commercial Banking Corp raised Ps7 billion in February, through HSBC and ING, even after lowering its price guidance on the 10 year non-call five issue.

Seeing this, other banks are likely to follow. Metropolitan Bank & Trust is expected to launch a Ps10 billion lower tier two issue in the fourth quarter of this year; it has previously raised Ps8.5 billion in a sub debt issue through ING and Standard Chartered last October. This next one, however, may be partly in US dollars. Additionally, Allied Banking Corp has approved from Bangko Sentral Ng Pilipinas, the Philippine central bank, to go ahead with a Ps5 billion lower tier two offering, with ING understood to be mandated.

An upper tier two deal is also believed to be in the works for Philippine Export-Import Credit Agency – the first major such deal in pesos by a Philippine financial institution. (An upper tier two deal did get away last October, for GM Bank, but at Ps75 million it was not considered particularly significant.) The issue, understood to be slated for the end of the third quarter, is expected to raise up to Ps3 billion.

Aside from the banks, some other groups have been active in the market. National Food Authority raised Ps8 billion in a corporate bond in February, with AB Capital & Investment, Philippine Commercial Capital, Deutsche Bank, United Coconut Planters Bank, Multinational Investment Bancorp and SB Capital Investment lead managing it. Ayala Corp raised Ps6 billion in November, and its affiliate Ayala Land has mandated BPI Capital, HSBC and Land Bank of the Philippines to lead and underwrite a Ps4 billion five year-bond, expected to be launched in August (and, unusually, to list them on the Philippines Dealing & Exchange, as Ayala Corp has also done).

And among foreign issuers, something of a landmark was launched by European Investment Bank, the supranational, in January. It raised a Ps2 billion five-year bond with settlement in US dollars. While not especially large, the deal – led by HSBC – was seen as heralding the start of a synthetic peso market, allowing offshore investors to get exposure to the peso. The issue was mainly taken up by Asian investors but European and American buyers participated too. EIB has previously used a similar model in Indonesian rupiah.

The activity reflects greater local liquidity, a more established benchmark along the curve which makes it easier for other issuers to price off, and also favourable interest rate policy. But it’s really one of the few areas of optimism in the Philippines today. HSBC noted in a recent bond market report: “The Philippines’ unpopular Arroyo administration and the central bank will face an extremely difficult time ahead trying to strike a balance between inflation containment and sustaining economic activity.” Noting high inflation, political uncertainty, poor tax collection and potential revenue shortfalls, HSBC says: “Clearly, the sovereign credit metrics will stay under pressure and investors will be disappointed that the government will have to tap the offshore market to finance its growing budget deficit.”

 One Asian nation is, as usual, an absentee from the ADB’s meetings despite a key role in world political debate: North Korea, which lacks even observer status at the bank meetings. Following links with nuclear development in Syria, the country is once again in the headlines for the wrong reasons.

 But that hasn’t stopped the emergence of an infant fund management industry which believes it can make money from it.

 An example is the Chosun Development & Investment Fund, a UK-incorporated, privately structured, limited partnership fund founded by Colin McAskill, a businessman active with North Korea since the 1980s. The idea of this fund dates back to a Honolulu conference in 2000, when he was encouraged by the US state department to set up an investment fund to help western engagement with North Korea; since then the focus has shifted from US to East Asian backers, and the fund’s manager, Anglo-Sino Capital Partners, was finally authorised by the UK’s Financial Services Authority in May 2006.

 The fund, which is trying to raise EU50 million, has yet to take in money, much less make an investment, but its formal incorporation indicates willingness among entrepreneurs to give it a try. “We have seen considerable evidence of the reform process which was originally initiated by the DPRK leader, Kim Jong-il,” says McAskill, who is a partner in the fund, a director of the fund manager, and senior partner of Koryo Asia Limited, the fund’s sole and exclusive investment advisor. Internal reforms were introduced in North Korea in 2002 with the intention of ushering in a more market oriented economy, although not everyone shares McAskill’s view about the level of progress that has been made since then.

 Since North Korea lacks a stock market and a legal infrastructure to protect investors, the fund won’t invest directly in North Korean companies, but will be “a transaction based fund concentrating initially on the DPRK’s substantial mineral resources,” which he says have “a proven past history of foreign currency earning potential to provide valuable, much needed, cash flow for the country.” Later, “especially after the resolution of the nuclear issue”, the fund will focus on a wider spectrum of economic activity.

 And that’s the point. Six party talks continue to aim at ending North Korea’s nuclear programme, but progress is slow and the Syria situation has not helped. Additionally South Korea’s new president, Lee Myung-bak, was elected on a conservative agenda including a tougher negotiating style with Pyongyang. Without resolution of these points, opportunities are likely to remain elusive.

 Nevertheless Chosun is not the only place to see a bright future. Fabien Pictet & Partners, another London-based manager, has been reported as planning a fund to invest in joint ventures in North Korea, and already has a hedge fund that invests in South Korean companies that do business with the north (though not as the main focus of the fund). Another company, Phoenix Commercial Ventures, has several joint ventures with the country. Neither company responded to written interview requests from Emerging Markets.

 These managers believe in the prospects of a new market of 24 million people, with a desperate need to modernise, substantial natural resources, and prosperous trading neighbours.

Author’s note: this story was amended from a feature which did not run but is appended below for reference

When it comes to inaccessible markets, it’s tough to top North Korea. It has no stock market, nor any sovereign debt. It has no legal code worth the name to protect investors. And it remains deadlocked in a dispute with much of the world over its nuclear programme.

But there are tentative signs of investors trying to move into the Democratic People’s Republic of Korea, as the nation calls itself.

Any such venture takes time. Take the Chosun Development & Investment Fund, a UK-incorporated, privately structured limited partnership fund designed for investment in North Korea. This fund’s manager, Anglo-Sino Capital Partners, was authorised by the UK’s Financial Services Authority in May 2006, but in fact the idea behind it goes back to a conference in Honolulu six years earlier.

At this conference Colin McAskill, a businessman who had been dealing with North Korea since the 1980s, was encouraged by the US State Department to set up an investment fund to help western engagement with the country. He go to work and the fund was ready to go in 2002, before political relations deteriorated and several US partners pulled back. Over subsequent years the backer focus has shifted to East Asia and the fund’s  investment advisor is now in Hong Kong; its most recent shift in approach was to change its target capital raising from US$50 million to Eu50 million, with an option to increase to Eu100 million.

Even now, eight years after the Honolulu meetings, the fund has not yet taken in any money, much less made an investment. But its formal incorporation is a sign that there is a willingness among entrepreneurs to give it a try. “We have seen considerable evidence of the reform process which was originally initiated by the DPRK leader, Kim Jong-il,” says McAskill, who is a partner in the fund, a director of its FSA London-registered fund manager, and senior partner or Koryo Asia Limited, the fund’s sole and exclusive investment advisor. Internal reforms were introduced in North Korea in 2002 with the intention of ushering in a more market oriented economy, although not everyone shares McAskill’s view about the level of progress that has been made since then.

But how do you run a fund in such trying circumstances? “ChosunFund is not a private equity fund and will not be making equity investments in DPRK companies or institutions,” he says. “It is a transaction based fund concentrating initially on the DPRK’s substantial mineral resources,” which he says have “a proven past history of foreign currency earning potential to provide valuable, much needed, cash flow for the country.” Later, “especially after the resolution of the nuclear issue”, the fund will focus on a wider spectrum of economic activity.

This last remark is perhaps the most important point: the idea that if the nuclear dispute can be resolved, real opportunities will become a lot more easy to address. Chosun is not the only place to see a bright future. Fabien Pictet & Partners, another London-based manager, has been reported as planning a fund to invest in joint ventures in North Korea, and already has a hedge fund that invests in South Korean companies that do business with the north (though not as the main focus of the fund). Another company, Phoenix Commercial Ventures, has several joint ventures with the country. Neither company responded to written interview requests from Emerging Markets.

Earlier this decade there was a flurry of interest from foreign brokers who sensed the country beginning to open up. HSBC, for example, put out detailed analyst reports on North Korea through its currency strategist Mike Newton; CLSA’s founder and then chief executive, Gary Coull, led an exploratory team to Pyongyang in 2002 and returned enthused about the parallels he could see with pre-open era China and Vietnam. CLSA’s strategist Andy Rothman went on to publish comprehensive reports as recently as 2006, but interest appears to have waned since then.

Partly this is because of the nuclear issue. Six-party talks continue aimed at ending North Korea’s nuclear programme, but in April senior negotiators said no major progress was expected before the autumn. Additionally, South Korea’s new president, Lee Myung-bak, was elected on a conservative agenda including a tougher negotiating style with Pyongyang. His hand was strengthened when members of his party were elected to a majority of National Assembly seats in April. North Korea has issued statements through its state media stridently criticising the new president; generally, a more peaceful and progressive relationship between North and South Korea is seen as a prerequisite to North Korea opening up to the rest of the world.                                                                                                       

Set against that are the prospects of a new market of 24 million people, with a desperate need to modernise, substantial natural resources, and prosperous trading neighbours. The idea of an open China looked absurd once. The early movers into that market are laughing now – all the way to the bank.

In the flurry of east-west role-reversal commentary prompted by Asian and Middle Eastern sovereign wealth funds buying into Citi and Merrill Lynch, an interesting sub-plot has been missed. What is a Korean state agency doing buying into a global Wall Street investment bank?

It is perhaps the strangest contribution of the lot. The Gulf’s sovereign funds have been investing internationally for decades, Singapore’s funds have been shifting their portfolios to a more global mix for almost as long, and even Mizuho’s involvement at Merrill, while interesting, is still simply a cashed-up private sector enterprise taking a tilt at a good valuation opportunity.

But the Korea Investment Corp? Well, this just isn’t how Korea behaves. Even its corporations rarely acquire overseas. Its stock market heavyweights, like Samsung Electronics and POSCO, certainly have international operations but they rarely acquire (in Samsung’s case because they’re still hurting from the last time they tried in the 1990s). Any cross-border acquisition between any two countries involves cultural and language barriers, but fears of such a clash seem to have been particularly intense for Korean acquirers.

The first signs that this might be changing began last year, and in particular with Doosan Infracore’s $4.9 billion purchase of Bobcat, the loader and excavator manufacturer, from US company Ingersoll-Rand. The Bobcat deal was the landmark but there have been others, too, such as STX, a Korean shipyard, buying Norwegian company Akey Yards for $800 million. Even a pension fund for Korea’s military turned up, via Macquarie, in a consortium to buy the largest stake in Thames Water.

But even with that trend line, the KIC’s $2 billion investment in Merrill is really something. A recent invention, KIC was launched in July 2005 to invest some of the nation’s forex reserves and to date manages $20 billion. But until recently, almost all the investments it had made were in corporate and treasury bonds. The expectation had always been that it would pursue a bolder allocation, but until the Merrill deal there had been no sign of it appearing.

One could argue that these acquisitive steps come in tandem with Seoul’s intention to be seen as a regional financial centre. Today, this seems an awfully long shot: the region is full of established and aspiring financial centres already, most of them without the language barriers that Korea has. But whether or not it succeeds in that grand design, there is a definite mood of trying to improve the standing of the country’s financial industry, with the asset management industry in particular in a good position for growth.

It’s a bit of a leap for a new investment agency to go from government bonds to 3% of an American investment bank in one hit, but it would appear this is the start of a bolder approach by Korea to managing its reserves, and that other international purchases will follow. Whether that turns out to be a smart move remains to be seen.

Asiamoney cover story, May 2002

 The decision of Hynix’s board to reject a deal with Micron, just a day after its creditor committee had approved it, has the international markets doubting that the Korean chip manufacturer can survive. They may be right. But those who believe the decision is a blow to Korean corporate reform miss the intricacies of the deal, and ignore an important point: the right of a board to make an independent decision, even if it turns out to be the wrong one. By Chris Wright.

 There were fireworks, of the literal and the metaphorical variety, all over Seoul on April 30. In several parts of the city, Hynix workers set off firecrackers in celebration. But at the Hilton Hotel, the mood was angrier, as 60 protestors from Daewoo Motor clashed with security officials and occupied a conference hall while two hundred riot police took up positions outside.

Nothing new there, on either count. But in a typically Korean reversal, the more cheerful pyrotechnics were to celebrate the failure of a deal; the angrier scuffles were to protest at the success of another. Hynix’s workers were expressing their delight at their board’s decision to veto a plan by Micron to take over Hynix’s memory businesses. It would have been the largest ever foreign acquisition in Korea, worth over US$3 billion. The protestors at the Hilton, on the other hand, were trying to stop a signing ceremony for what was seen elsewhere in the world as a triumph: General Motors’ US$1.2 billion acquisition of parts of Daewoo Motor. The protestors succeeded, and the high-rolling would-be signatories – GM chairman John F Smith Jr, Daewoo president chairman Lee Jong-dae and Korea Development Bank head Jung Keun-young – had to relocate to the KDB’s head office instead, where the deal was duly signed.

Thus were the topsy-turvey politics of foreign investment into Korea neatly illustrated in a single day. The GM-Daewoo deal, hailed in international circles as a model for Korean corporate reform, took fully four years to conclude and faces many challenges still. The Micron-Hynix deal, which was meant to be the centerpiece of Korea’s restructuring efforts, a landmark remedy to a public and powerful headache, fell apart despite the best efforts of the most senior of Korean financial officials and the willingness of the company’s indebted creditors to lend yet again.

Hynix has put its very survival at stake by rejecting the deal, and the board may soon find itself removed by Hynix’s own creditors. One analyst calls it a “Quixotic gesture,” akin to “the captain of the Titanic refusing to abandon ship”. So why did the board do what it did? And what does it mean for Korea?

 What was on the table?

Micron’s negotiations with Hynix had been underway for five months. The two companies had been acrimonious competitors in the past: when creditor banks set about bailing out Hynix last year, Micron was riled. The Boise, Idaho-based company contacted the state’s senator, Mike Crapo, who lobbied vigorously that support of Hynix contravened South Korea’s obligations under WTO. The dispute even reached the desk of US treasury secretary Paul O’Neill. But on December 3,  Hynix made a formal announcement that the companies were discussing “a possible strategic alliance or other transaction”.

Negotiations were difficult, but well-represented. Goldman Sachs advised Micron, and Salomon Smith Barney continued its long-standing affiliation with Hynix – a link made stronger still by the fact that Citigroup has undisclosed exposure to the company thought to be as much as US$100 million. Those close to negotiations say that Micron sometimes had trouble adapting to the peculiar circumstances, in which creditors were at least as important counterparties as Hynix itself. Untimely resignations didn’t help. First Kim Kyung-Lim, CEO of Hynix’s biggest single creditor, Korea Exchange Bank (KEB), resigned in March. Then the Korean minister of finance and economy, Jin Nyum, stepped down in order to run for election as governor of Kyonggi province. Jin had been an important figurehead pushing for reform in corporate Korea, and his influence had been vital.

Still, neither resignation derailed negotiations for too long – perhaps the reverse. With Kim’s departure, Hanvit CEO Lee Duk-hoon became point man for the creditors in negotiations, and joined Hynix CEO Park Chong-Sup in the final leg of discussions in the US. Hanvit, like all four of Hynix’s major financial creditors (Korea Development Bank (KDB), KEB, Hanvit and Cho Hung) is majority government-owned, but it may be significant that things seemed to move forward when KEB was no longer so significantly involved in discussions. Although the government is the largest single shareholder in KEB, German bank Commerzbank holds 35% and two seats on the bank’s seven-seat board, and it has been speculated that this led to internal friction about how to proceed. Meanwhile on the political side, Jin’s successor, Jeon Yun Churl, immediately started calling for the same corporate reforms as his predecessor.

On April 22, the two companies announced a non-binding memorandum of understanding for the sale of Hynix’s memory businesses to Micron. The terms, expressed simply, were these: Micron would give 108.6 million shares to Hynix for the memory business, which accounts for 75-80% of the company’s total sales, and would invest US$200 million in what was left of Hynix in exchange for a 15% stake. Hynix’s creditors agreed to extend US$1.5 billion of new, long-term loans to the company. The statements put out by both companies that day set a deadline of April 30 for approvals from Hynix, Micron, and Hynix’s creditor committee.

There was outrage among many groups at the announcement: Hynix employees, who feared for their jobs and felt the company could survive independently (an internal survey, disclosed by Hynix itself, found that 93% of employees were against the deal); the small non-financial creditors whose lending to Hynix was unsecured, and who expected to see what little stake they had in the business disappear; and unions across the country, including the powerful 956,000-member umbrella group, the Federation of Korean Trade Unions, which pledged to strike if the deal went through. But ministers, and senior regulatory figures like FSC chairman Lee Keun Young, involved themselves personally in persuading the relevant people to support the deal. On April 29, after four hours of meetings, 77.73% of Hynix’s creditors voted in favour of the sale, just passing the 75% threshold necessary for it to go through. Hynix’s board meeting was set for the following day, and seemed a formality. Only six members of the 10-man board, of which seven were outside directors, needed to vote in favour for the deal to go through, due diligence and regulatory approvals notwithstanding.

But they didn’t. On April 30 Hynix released a short statement rejecting the deal. Micron has since pulled out of negotiations.

So why did it fail?

 Creditor issues

In one respect, it was remarkable that the deal got as far as it did. Creditors to Hynix were already owed over US$6 billion by the company; wasn’t it a bit rich to expect them to extend a further US$1.5 billion? What’s more, sources who have seen the MoU report that the additional US$1.5 billion the creditors were being asked to put into the company would be unsecured, for seven years, with levels of interest capped at 5% and 6% depending on the tranche.

The overall value of the deal, which Korean observers had expected in advance to be around the US$4 billion mark, turned out to be considerably less, since it was calculated assuming a US$35 per share value of Micron – much higher than the share price ever reached while the bid was in play. The most it was ever truly worth, based on the Micron closing price on April 22, was US$3.4 billion; by the time it was rejected on April 30, it was worth US$3.07 billion. Those proceeds would have been split between the creditors, but only after the deduction of various other expenditures, including all debts incurred by a Hynix plant in Eugene, Oregon. True, if Micron shares increased in value – as well they might have done in what would have been the world’s biggest D-RAM manufacturer – then this could well have proved to be a lucrative return for creditors, but that was by no means certain.

In particular, the small, non-financial creditors with unsecured sums caught up in Hynix stood to lose almost everything, and it was these who were particularly targeted by the government in trying to get the necessary 75% creditor approval on April 29. KEB, KDB, Hanvit and Cho Hung, who between them accounted for 65% of the voting representation at the meeting, were clearly always going to vote along government lines, being government-owned. But the various investment trust corporations, insurers, leasing companies and securities institutions required a lot of convincing, and only a third of them were persuaded to vote for the merger. Quite how is unclear. “It’s possible some concessions will be made to provide some sort of sop to the unsecured creditors,” said an analyst in Seoul, speaking before the creditor’s meeting, and correctly predicting the outcome. “The key problem is them: they are getting nothing from this deal. Their recovery rate is zero. It’s possible the authorities may come up with some saving measure that gives them some prospect of loan recovery.”

Sources also tell us that the creditors would have been required to observe a two-year lock-up on their Micron shares, and in some cases could only ever dispose of them through what is described as an “underwriting mechanism” rather than straight into the market. “The final proceeds wouldn’t be received until two to three years after the deal was signed,” says someone who has seen the MoU.

Was any of this fair? It depends how you look at it. “This isn’t really about what is right and fair,” says Jonathan Dutton, an analyst at UBS Warburg in Seoul. “Banks have made a decision to lend money to a capital intensive and volatile business. It should have been clear years ago that the debt levels the company was carrying were driving it towards bankruptcy. You can’t really talk about fairness: creditor banks have to live with the consequences.”

And those close to Micron object strongly to suggestions that this was a deal that screwed Korean creditors and employees just because it could. “The point is that what is on the table is, simply, a future,” says one.

 What the board thought

But, in the end, the creditors proved not to be the problem. The board did, and this stunned the market. “They think it’s all over – it isn’t now,” said one analyst research note sent out the following day.

Why isn’t it over now? Well, the official reasons are there for all to see. Hynix spelt them out in a prepared statement. We’ll quote it in some length.

“We have reached the conclusion that there are too many problems with the creditors’ post-merger restructuring plan for the remaining company. The plan overestimates the value of the Micron stock to be paid for the sale of Hynix’s memory business; unrealistically presumes the size and timing of contingent liabilities; and is too optimistic in its estimate of the cash flow of the remaining company.” It goes on to note that the restructuring plan for what would remain of the company is flawed, “based on the restructuring plan placing too much liability onto the remaining company; restricting the sales of the stock of the remaining company as a collateral security; and overestimating the revenue and cash flow of the remaining company.”

And then, the real killer punch: “We are confident that with the upturn in the semiconductor industry and new developments in our technology… it is possible for Hynix to successfully exist as an independent entity.”

Several points there, but first it’s worth taking a look at the people who made the vote. Hynix championed its own corporate governance when it set up a board containing three of its own people and seven outside directors. The media championed it too: this was a sign of a new Korea, free of the vested interests that had dogged the chaebol. But it seems to have scuppered the deal. The board members were:

•           Chong-sup Park, chairman and CEO of Hynix;

•           Sang-ho Park, COO and president of Hynix;

•           In-baik Jeon, executive vice president and CRO of Hynix

•           James Guzy, president and CEO of Arber Investment Company, and a founder and board member of Intel;

•           Chul-hee Kang, in the engineering department of Korea University;

•           Yong-wook Jun, Professor of business administration at Chungang University;

•           Chang-rok Woo, managing director of Yulchon law firm;

•           Yong-kwon Sohn, president and CEO of Oak Technology, and a senior executive of Intel;

•           Yong-sung Lee, chairman of the Banking Supervision Authority at the Ministry of Finance and the Economy;

•           Eui-Je Woo, former acting president, Korea Exchange Bank.

So who, in that crowd, would have been expected to vote for it? Surely CS Park, among the most proactive of corporate reformers in the country? Certainly Woo from KEB must have been in favour too, given that KEB approved the deal as a creditor the previous day? Lee had seen and approved consolidation in another sector, banking, so would have been expected to rally for this; and Guzy and Sohn, both linked to Intel, might have been expected to support consolidation in technology if they believed it was good for the industry. That’s half the board right there. But the decision was unanimously against it – despite the fact that it was followed by CS Park’s resignation, and despite the presence of a former senior member of the company’s biggest creditor bank on the board.

Oh to have been a fly on the wall of that meeting. The exact discussions will doubtless never be made public, but at least one analyst pondered: “Perhaps the interests of the board members did not ally with those of the creditors.”

Responding to Asiamoney questions, Hynix’s spokesman Chan Jong Park says: “It is true that Mr CS Park initiated these talks with Micron. But at some point, the negotiation proceeded in favour of Micron and our suggestions were not reflected.” Park returns to the issue of whether the leftovers of Hynix could survive, and adds: “I think all of the BOD members couldn’t vote for a deal that would not secure the viability of the remaining Hynix.”

Were they also swayed by the emotions of staff resentment and union pressure? Doubtless it played a part, but if one looks to history, the very vocal nature of Korean employee movements rarely has a long-term effect if the government’s will is strong, as it appears to be with corporate reform. When Kookmin announced its proposed merger with Housing & Commercial Bank, senior executives were barricaded into their offices for days while disgruntled employees vetted their mail and on one occasion threatened to set themselves on fire. The deal still went through. An economist in Seoul once told Asiamoney that a useful economic barometer was the consumption and use of tear gas in any given period: protests in Seoul are very physical and very emotional. But do they derail deals? Probably not.

And so to the reasons the board actually gave. Their concerns about the restructuring plan for what would remain of Hynix are difficult to assess, given that the restructuring plan has never been made public, but enough has made its way out to the media for us to make some educated guesses about what it proposed. With the memory business gone, 75-80% of the company’s sales would have gone with it, leaving a foundry business. As we understand it, the restructuring plan called for creditors to write off W1.78 trillion in debts, followed by a capital write-down in a ratio of 13.5 to one, reducing the capital from W19.8 trillion (dizzyingly high given its assets) to W1.7 trillion. Under an agreement forged last October, W3 trillion of debts held by creditor banks will be swapped into equity in May, and at the end of it all, with the debts from the Eugene, Oregon plant paid off, the remaining Hynix would have had about W3 trillion in remaining debt. Korean creditors would own 69.3% of the company.

Was the board correct to question this? Perhaps so, although it was hardly arguing from a position of strength. “We have our doubts,” says Dutton, asked if he thought the proposed new Hynix could survive (and speaking before the board rejected the deal). “It doesn’t have leading edge process technology, it doesn’t appear to have any track record of strong customer relationships, and its cash flow per wafer – one of the key metrics to look for – is one of the lowest among major players. It would be a new company starting off in life with W3 trillion of debt, paying interest on it, with a 120% debt equity ratio. The theory is that the bulk of its assets would be Micron shares, and that when the time comes the creditor banks can sell them down and retire the debt. But the key question then is what the value of Micron shares is at the time.” Another commentator puts the matter more bluntly. “The bit of Hynix that would be left over is the bit Micron didn’t want. Draw your own conclusions.”

Hynix clearly agreed: CJ Park says the board wanted the remaining company to be left with less than W1 trillion of debt but was overruled by the creditors. “It was obvious that the remaining Hynix cannot survive with interests that were three times of its profit,” he says. And even at one of the creditors that approved the deal, there is a dissenting voice. Manfred Drost is deputy president at KEB. He says: “This is a point that has been neglected in the public discussion: the viability of the remaining company. It’s questionable, even on legal terms, whether you can strike a deal where you buy 80% of the core business and structure it as an asset deal – it is essential to prove the viability of what’s left.”

As for the assertion that Hynix can survive anyway, analysts have their doubts about that too. Many quickly put out sell recommendations, either formally or in private notes to clients. The company will surely lack the internal cashflow to finance upgrades in its manufacturing facilities. Yes, there has been something of a turnaround in the market – the DRAM spot price was US$1.50 when the companies opened negotiations in December, but reached US$4.50 in March before dropping back towards US$3 more recently – but this is a notoriously volatile sector with an oversupply problem. Hynix’s share price jumped on the news of the board’s rejection of the deal, but as Merrill Lynch analyst Sun Chung notes: “We believe that the trend [in the share price] could continue for little longer if, and only if, the creditors are willing to provide the same financing, debt forgiveness and other concessions that they were offering to Micron.”

Much depends on that question: whether Korean creditor banks would be prepared to lend anything else to Hynix. Well, in the circumstances, would you? “I’m not in a position to make a judgement on this deal, but I do know that most of the banks have provisioned about 70% of their existing loans to Hynix,” says David Coe, formerly the senior resident representative for the IMF in Korea, and now responsible for the country in Washington DC. “If I was a banker and I was already provisioned to take a 70% hit on those loans, I wouldn’t be lending more.”

The creditors themselves were non-committal when Asiamoney asked them if they would lend again. “It’s a very complicated problem and very early to say about Hynix,” said an investor relations spokesperson at Hanvit on May 2. “We have a special task force team set up for Hynix but we cannot talk about details because they are very secret.” Asked if the bank would lend to Hynix again, a Cho Hung Bank spokesperson would only say: “At this moment, in this situation, no.” Drost at KEB declined to comment, as did KDB’s investor relations team, and Hynix declined to comment on conversations with its creditors.

 What next?

Although Micron has officially pulled out of negotiations, the deal may not be dead in the water, because Hynix’s board is not as all-powerful as one might think. This is where the debt-equity swap for W3 trillion of debt owed to Hynix’s creditor banks, hammered out last October and due at the end of May, becomes all-important. Why? Because if that debt converts, it will give the creditors majority control of Hynix, potentially even over 75% – which means they could sack the board and appoint a new one with the task of reconsidering the Micron offer, if the Idaho company was prepared to return to the table. A representative of one of the creditor banks, asking not to be named, goes so far as to tell Asiamoney that he “presumes this will happen”.

“We think that the board’s decision may be more of a Quixotic gesture than a substantive act which will scupper the Hynix/Micron merger,” says Dutton. “Compare it to the captain of the Titanic refusing to abandon ship. The creditor banks ultimately control the fate of Hynix.” Even if the creditors did not behave so drastically, they could refuse Hynix fresh loans and push it into receivership, or indeed just threaten to do either of these things in order to get the board to think again.

Court receivership, under which the creditor banks would get whatever a firesale of Hynix assets would provide them with, would have its own political problems in Korea. But the government appears to have worried quite enough about that. Asked for a comment, a Ministry of Finance and Economy spokesperson referred us to Minister Jeon’s remark on May 1 that “the government is taken aback and finds it [the veto] regrettable”. He added: “It is up to the creditors to determine the fate of Hynix. The government will urge creditors to reach a decision at an earliest possible date so as to clear the uncertainties over the Korean market.”

Not everyone is convinced this is the right idea, though. “Great, we’ll push out the board, replace the lot of them,” says someone close to the situation. “Replace them with whom, exactly? We need experts, not retired bank directors and civil servants. It’s not that easy.”

And for Korea? There were plenty of people around the world offering glib “that’s Korea” responses to the news of Hynix’s refusal. But they miss the point. Because the fact is, a board has a right to refuse a deal that it doesn’t think represents its best interests; it has a right, frankly, to be wrong, if that’s how it turns out. “If nothing else,” says one observer, tongue in cheek, “you have to say Hynix’s board certainly demonstrated its independence. To everybody’s surprise.” Whatever else the Hynix situation may represent – and stubbornness may well be a part of it – it is not a government bailout, nor really a step backward in Korean reform.

Although the December election brings with it uncertainty, there is a will at the highest level to see through corporate reform in Korea, and the Daewoo sale to General Motors will doubtless and rightly be promoted by the government as a symbol of Korea’s willingness to move forward. “In terms of the overall progress of corporate restructuring, you have to say this is a bit of a setback, but on the same day it happened the GM deal was signed, and an MoU was signed between Lehman and Woori [Financial Holdings, for a US$1 billion investment],” says Coe. “I think the trend is clearly in the right direction; progress is being made.”

Asiamoney cover story, February 2001

 Korea’s government has announced the “second stage” of its financial restructuring programme, starting with the creation of two “super-banks”. The merger of Kookmin and H&CB, apparently through the choice of its own CEOs, makes sense. But the creation of a holding company including Hanvit and a group of regional banks seems, at best, eccentric. But what seems practical elsewhere in the world doesn’t necessarily work in Korea. By Chris Wright.

 You know you’ve made an unpopular decision as a manager when your own staff barricade you into your office for two nights, vetting your mail and occasionally threatening to set themselves on fire. Such was the reception Kookmin Bank chairman Kim Sang-hoon got when he announced his intention to merge his bank with fellow Korean retail leader H&CB.

The incident was resolved quickly enough, and in any event was hardly unusual by local standards. (“Oh, that was mild!” remarks one western banker who has lived in Seoul for eight years. “They didn’t beat him up. There wasn’t even any tear gas used!”) And the merger, by most measurements a sensible one, will almost certainly go ahead. But as a harbinger of the difficulties involved in the restructuring of Korea’s banking sector, it could hardly have been clearer.

Korea faces a still unstable corporate sector that has already unleashed a series of damaging and unprecedented failures, leading in turn to the collapse or near-bankruptcy of several of its leading banks. And it has to resolve these problems while being confronted by some of the most militant labour unions in the world. But the government steadfastly believes banking consolidation will help it out of this mess, and it isn’t going to be deterred by unpopularity. In December, as the showpiece of what it calls the “second stage” of financial restructuring, the government announced its blueprint for the future of its banking sector: the creation of two “super-banks”.

Kookmin/H&CB will be one of these superbanks and – despite Kim’s unhappy incarceration – is much the less baffling of the two mergers. The second involves an association of four near-bankrupt banks having their shares cancelled, being pumped with public cash from the Korea Deposit Insurance Corporation (KDIC) and being stuffed into a government-owned holding company, in which they may shortly be joined by another ailing institution, Seoul Bank. This one requires thoughtful analysis. But the handling and progress of these two mergers will be absolutely key to the future of Korean banking and the success, now and in the future, of the reform of the country’s financial system. This is a great opportunity and a potential disaster; a time to hold one’s breath.

 Kookmin and H&CB

The merger of Kookmin and H&CB is the sort of transaction we have become familiar with in global banking, and most people believe it makes sense. Both banks are leaders in the retail market, and partly as a consequence of that specialization, are among the healthiest in the country. That’s because they did not have corporate exposure to anything like the same degree as other banks, such as Hanvit, when the economic crisis hit Korea in late 1997. In fact non-performing loans after the merger will be around 6%.

The merger has caused some to comment that it pushes together two similar institutions when it would be more useful to combine institutions with different skills in the style that has become common in international mergers: Citibank, the commercial bank, merging with Salomon, the investment bank, for example. But although there are overlaps between Kookmin and H&CB, particularly in their branch network, the two do have different strengths. H&CB is a leader in mortgages, Kookmin in consumer banking and credit cards. (Kookmin Credit Card is actually a separate stock to Kookmin Bank.) The new bank will also have strength in corporate lending towards small and medium enterprises, FX dealing and swaps, and derivatives.

“Neither Kookmin nor H&CB has a fully-fledged retail franchise,” says H&CB’s chairman, president and CEO, Jung Tae Kim. “One to one, there is a lot of synergy between the two banks. This is not simply an upsizing of the retail banking side.”

Analysts tend to be positive. “If the potential merger between Kookmin and H&CB materializes they will have about a 28% market share of deposits,” says Sunmok Ha, an analyst at Credit Suisse First Boston in Seoul – and a former bank restructuring head at the Financial Supervisory Commission (FSC). “We expect the combined bank to have unrivalled pricing power.” CSFB has an overweight rating on the stocks in light of the merger, Deutsche is positive about it, and so is Samsung Securities, for example. CSFB predicts total incremental net profit will reach W325 billion (US$260 million) by 2003, with net profit figures over the next three years of W1.2 trillion, W1.9 trillion and W2.4 trillion. It expects a combined market cap of W24.5 trillion by 2003, which would make it one of the three largest stocks on the Kospi.

It is slightly more problematic to establish how the merger came together in the first place. Four senior, well-placed sources told Asiamoney that: 1) it was all Kookmin’s idea, starting with the CEO; 2) it was all H&CB’s idea, starting with the CEO; 3) it was more or less a mutual decision between the banks, and the government pushed for it to be accelerated as a useful source of momentum for its next phase of banking restructuring; and 4) it was the government’s idea from the outset, and a senior FSC official phoned both CEOs during the Kookmin incident to demand that they proceed with the merger. Clearly, they’re not all correct.

The probable truth is that this merger came together through both CEOs, and that the government – having pushed the country’s banks to consider mergers for so long – was so pleased with this development that it became deeply involved in the merger’s publicity, trumpeting it as part of a government restructuring plan and probably urging the two banks to announce the merger at a time that suited it. But the government should be wary of trying to credit itself with any part in the merger, because from an international standpoint, the transaction looks altogether more healthy if it appears that the government had nothing to do with it. International institutions such as the IMF have always held that although banking consolidation is a good thing, it must be done on a purely commercial basis – not just because a government or regulator thinks it should happen.

In fact, the government will be a major shareholder in the merged institution, holding around 10% of the company. But that’s not enough for real leverage and it seems unlikely that the government will attempt to shape the bank’s policies – besides which, shareholders with similar stakes include Goldman Sachs and ING Barings.

So if the merger makes sense, why the complaints from the union? Well, inevitably, the merger will involve some job cuts, and the fact is that Korea’s banking employees have already seen as much redundancy as they can tolerate. Many Korean banks cut as much as 35% of their staff through the financial crisis, and the mergers that have taken place – notably Hanil Bank and Commercial Bank of Korea to create Hanvit 18 months ago – have involved huge lay-offs and closures. This time Kookmin’s union heard the word merger, pictured vast redundancy, and the result was an extended stint in the office for Kim Sang-hoon.

But the reason they let him out again is partly because the scale of redundancy being talked about in this merger is not the same as in other Korean mergers to date. Both sides are at pains to explain that, this time, blood-letting will be minimal. Duk-Hyun Kim, executive vice president at Kookmin, believes this softer approach is good business sense. “We recognize the failure of other mergers… where they automatically reduced their branch network by more than 50%,” he says. “The result was terrible. They lost their customer base – almost 30-40% of customers went to other banks. We don’t want to follow such a case. There is no need to reduce significantly the number of branches or people at this time.” (It’s only fair to let Hanvit put its own point of view across here, since Hanvit’s creation from Hanil Bank and Commercial Bank of Korea is the sort of transaction Kim is referring to in that remark. Investor relations general manager, Kil Seok Suh, says: “Some people say the merger process was not well done, but I don’t agree. It was actually very successful when we consider the Korean culture. There had never been a bank merger before in Korea.”)

H&CB’s president, Jung Tae Kim, makes the same point as his namesake at Kookmin. “Look at the failed cases of Korean bank mergers in the past. Why did they fail? Because they tried to cut drastically the organization’s branch network and staff without taking into consideration a customer retention programme. A shrewd early retirement programme will size down the staff members as much as we need to, and even then we should do so gradually – we need to create value, not destroy value, and think about retention of our customers.”

Exact numbers are difficult to come by, but a likely figure is a 10% staff reduction this year and then 5% annually through 2002 through natural attrition, with the majority of that number being removed through early retirement. Instead the banks point to IT as a less sensitive area for significant cost savings. “Both banks spend about W200 billion on IT each year,” says Kim at Kookmin.

That should appease the unions – who, in fairness, have generally understood the need for reform in recent years. But is it the most sensible approach for the bank? CSFB’s report speaks of two scenarios, one titled “likely” – using the numbers above – and the other “optimistic”, calling for 10% reductions annually. Using this and other data, the difference to forecasted profit within three years is over W300 billion, according to the report – so clearly the analysts believe the bank would be better off laying off more staff. Both Kookmin and H&CB insist the activities of labour unions made no difference whatsoever to the merger, but these numbers do give pause for thought.

Then again, the banks may genuinely feel that provided they are able to generate strong profits, they have a social responsibility to look after as many of their staff as they can. Although that loyalty does not translate into the best figures, it is difficult to argue with. And many believe that the unions themselves are losing strength and public support – although it is interesting to wonder what would have happened if the strike had not happened in winter, when daytime temperatures in Seoul routinely drop below freezing, and before Christmas, when people have a more pressing need for cash than usual.

The merger should be completed in the first half of this year, and a memorandum of understanding was signed on December 22. The only aspect of the merger that might take time to resolve is that H&CB is listed on the New York Stock Exchange, which brings in to play the notoriously ponderous US SEC. In the meantime a six-man merger committee, with two people from each bank and two independents, is trying to decide who will be the CEO. Both are respected individuals but the most common prediction among observers Asiamoney spoke to was that Kim Jung Tae, H&CB’s president, would get the top job.

 The Hanvit “holding company”

When you look through the pages of this magazine, you will see Hanvit features prominently elsewhere – in Deals of the Year 2000. The JP Morgan-led subordinated bond deal for Hanvit in early 2000 is our bond of the year, a seminal and influential piece of financing that suggested the opening of a whole new market.

It was good for the capital markets, but it wasn’t enough for Hanvit. Shattered by its exposure to ailing Korean corporates, particularly Daewoo, the bank simply ran out of capital. It wasn’t alone – plenty of other national and regional banks found themselves in the same sorry position.

The government’s solution to this problem is certainly innovative, but also perplexing. In December it announced the creation of a holding company to contain Hanvit, Peace Bank of Korea, Kyongnam Bank, Kwangju Bank, Cheju Bank and Seoul Bank. (Subsequently Cheju Bank was taken out of the grouping and will instead be merged with Shinhan Bank; meanwhile Seoul Bank will only join the holding company if it is not sold – see below.) Each of the banks immediately became state-owned, and was ordered to write down the value of its shareholders’ capital. Then Korea Deposit Insurance Corporation injected around W7 trillion  into the banks.

The government is at pains to refer to this as a holding company, not a full merger, but given that its exit strategy is to privatize its holdings in the banking sector, it must be fair to assume that the institutions will eventually be merged. Anything else would be difficult to explain or sell to investors. This matter of semantics probably also has a lot to do with the spectre of union pressure – every bank in the holding company either had to withdraw from its banking union or make sure that the union would support the restructuring process, otherwise no funds would be released.

There are several questions about how this will work. David Coe, the IMF’s senior resident representative in Seoul, has these concerns. “Hanvit, which is itself a bank created out of the merger of two other banks, has an important job to do to improve its own management, to install new systems, and basically get its act together,” he says. “This is a big job and requires lots of management resources. We would not want to see that work fail or be postponed because of a forced merger requiring management to devote resources to it. Secondly, we don’t understand how one solves the problem of weak banks by lumping them all together.”

He says the IMF had been particularly concerned about the possibility of a forced merger of several large banks – there was talk of Hanvit being merged with Korea Exchange Bank, for example, a proposal which fell down when KEB’s major shareholder, Commerzbank, refused to allow it to be a part of a holding company. Coe says he is pleased that didn’t happen. But he adds: “We have no objection in principle to the creation of financial holding companies, and there is no reason for the government to try to prevent agglomeration – indeed, we can see reasons why the government should try to encourage it. But it should be on commercial terms. There is no reason for the government to be pushing it.”

The clearest statement of government intent on these pages comes in the interview with Kap Soo Oh, the assistant governor of the FSS (the arm of the FSC that implements its policy) – see page 56. But in essence, the government’s view is that after the difficult mergers that gave birth to Hanvit, the idea of integrating three small regional banks with the bigger institution should be a doddle – not that this is technically a merger (yet). And the reason for forcing banks to merge is because market forces take far too long to bring results, and Korea’s financial system needs to be reformed now. As Michael Hellbeck, a Seoul-based director in Deutsche Bank’s global banking division, says: “If you want to achieve something fast there is no alternative to this policy. If you want the market mechanism to conduct it you have to wait 10 years. And you can’t ask for market-driven reforms right now because the whole market is dysfunctional.”

On the issue of combining bad banks, KDIC’s executive director, Seung Hee Park, admits: “On the surface it may appear that four bad banks into one creates a super-bad bank. But closer analysis shows they are configured of banking operations which, if reconfigured to amalgamate these operations, may improve the competitiveness of the new holding company.”

The use of public funds itself has actually come in for very little criticism. “When you have the type of banking crisis Korea has, you really don’t have any choice,” says Coe. “Every country that is faced with this kind of crisis ends up putting public money in – including the USA and Sweden. A lot of the money has gone to stand behind the deposits of the Korean depositors. You have this image of money being poured down a black hole but it’s not like that at all. We don’t have any illusions that there was a painless way of doing this without using hard money.”

Hanvit spokesmen are limited in what they can say about the holding company, not because of any restrictions, but because they don’t really know how this is all going to work out. Kil Seok Suh, general manager in the investor relations department, suggests: “Making a holding company together with other banks makes sense when you think about the overbanking problem – there are so many banks compared with the size of the market. I’m not sure if there will be any synergy effects. It is too early to say. But we can save costs in computer systems, and by reducing our number of branches.”

By March, the management of this holding company should have been appointed – and the name at the top will tell us a lot about what happens next. Regulators say they want somebody with experience of banking, which isn’t as obvious a criterion as it sounds – many have complained that people with government backgrounds have too frequently been put into management positions in Korea. Certainly, a proven commercial banker at the head of the group would be a much better sign than a government figure, and one name does suggest itself right away: whichever CEO does not get the top job at the merged Kookmin/H&CB bank. We asked Park at KDIC about that. Predictably he declined to comment in detail, but did say this much: “It does not appear that the future CEO will be from KDIC. KDIC has its eyes open for somebody the market would recognize as being capable of leading. That means experience of the finance industry is mandatory.”

Analyst opinion on this merged entity is harder to find because basically there is no point in analysts covering it – it is no longer a stock that you can buy, at least for the moment, because the government owns the lot. But some are prepared to comment. “Hanvit Bank has been in trouble for a long time, three or four years, and I expect it will take a while for it to restore its power and market influence,” says Sunmok Ha at CSFB. “But with the additional government funds they can gradually improve their market share. I don’t think the small banks in the holding company will have a significant impact on Hanvit’s management because they have a very small presence.” He does not expect Hanvit to incur further significant losses from the bank’s loan book.

At Samsung Securities, senior analyst H Jin Lee says: “The holding company structure is somewhat modelled after the one in Japan, where the ultimate purpose would be a merger of those banks, and to that extent I think it is a move in the right direction. But if it is not, and is a way to bundle these banks together, then we will have some problems in terms of unfair competition for the private, quality banks.” But he adds: “The government in its policy statements until now has given strong indications that that is the ultimate goal of the holding company – to merge the banks together.”

Seoul Bank’s future is unclear. Reports in Seoul speak of a deadline of the middle of this year for the bank to be sold, otherwise Seoul Bank will be put in the holding company too. That would be a shame. David Coe at the IMF says: “Our view is that the management of SeoulBank is making a lot of progress. This very important work, to clean up the balance sheet and change management practices, takes time. But really the new management only started in July – so that’s not giving them much time. We don’t understand the rush to push Seoul Bank into the financial holding company if they have not been privatized.” Deutsche Bank has an advisory mandate to prepare the bank for sale, and is also mandated for the eventual equity offering: 24 Deutsche bankers presently reside within Seoul Bank. Michael Hellbeck at Deutsche also notes a tight deadline makes it harder to sell at a good price, but insists that morale within Seoul Bank is actually very high as organization continues apace. Interestingly, when we raised the issue with the FSS, they said there was no such deadline and that they would be prepared to give Seoul Bank time to turn itself around (see interview).

It would be good for all parties if Seoul Bank was sold in its present form, not just for the sake of Seoul Bank itself. It it does end up being pushed into the holding company with Hanvit, then there really are some integration issues to deal with. Hanvit absorbing three small regional banks is one thing; merging with another large institution is quite another.

Elsewhere, the future of KEB and Cho Hung Bank, which are both in the middle of government-imposed restructuring, is open to conjecture. Some still predict a merger between KEB and the Hanvit group. And the well-publicised merger negotiations between Hana Bank and Koram Bank are off again at the time of writing, but most observers believe the deal will still go ahead.

That being the case, it is possible to picture a landscape of less than 10 Korean banks within a few years. The real question is what they will look like. If the Hanvit group can deal with the combined challenges of a four-way merger, government ownership, projected sale and a loan book that is still exposed to the rigours of corporate Korea, then perhaps the government’s policy will be vindicated and we could see a domestic Korean powerhouse rise up. If not, and if all this does not come together, it will be a serious blow to the progress of financial restructuring in the country. The next six months will be key.