Green Light At Last For Change In Korea

A banking deal may mean Korea Inc.'s barriers are falling

As his private jet touched down in Seoul on Sept. 13 after the long flight from San Francisco, Newbridge Asia Managing Director Daniel A. Carroll thought he could finally start to celebrate the closing of one of Asia's biggest deals of the year. Two days later, a disappointed Carroll left Seoul empty-handed. Once more, the on-again, off-again talks between Newbridge Capital and the Korean government to take over insolvent Korea First Bank had collapsed after the two sides bickered over final details, raising fresh doubts that Seoul was serious about following through with bold measures to reform its coddled financial sector.

But this time, the story didn't end with another jaded foreign investor sputtering about the futility of dealing with Korean bureaucrats. Just two days later, Newbridge finally signed a landmark deal that promises to change the face of Korean finance. Just as Newbridge was ready to call it quits, the talks were pulled back from the brink. Seoul signed a binding agreement to hand Newbridge 51%--and full control--of one of the country's largest financial institutions, for $417 million. And if Newbridge cannot recover Korea First's bad debts, the government will pay face value for the loans.

For investors jittery about reform, the deal is a godsend. "The sale will really help stabilize the local financial market," Korea First President Ryoo Shee Yul told reporters when the deal was announced. The deal, on the heels of the indictment of Hyundai Securities Co. executives and the announced breakup of once mighty Daewoo Group, is the most convincing evidence yet that the armor of Korea Inc. is buckling. By allowing a major bank to fall into foreign hands, the government intends to underscore that the old crony business culture is on the way out. Presidents and bureaucrats have long used banks to shovel funds to favored industries, undermining the health of the financial system.

A truly independent banking system is an indispensable building block for a market-friendly economy. Under San Francisco-based Newbridge, a major bank now will be run by managers trained in evaluating borrowers on the basis of risk rather than political connections. Korea First's new owners pledge to boost credit to consumers and to small and midsize businesses, a big departure from the old focus on chaebol, Korea's huge conglomerates. Newbridge has experience in workouts: One of its major investors, the Texas Pacific Group headed by David Bonderman, turned around a bankrupt thrift during America's savings-and-loan crisis. If it can succeed with Korea First, the firm could force other banks to reform.

TORTURED PROCESS. The sale never would have taken place had it not been for Korea's 1997 economic collapse. In return for a record $58 billion bailout, Seoul promised the International Monetary Fund it would close bad banks and let in foreigners. The sale of Korea First and Seoul Bank was part of the pact. But the tortured one-year process of closing the deal shows how reluctantly Korea Inc. has embraced reform.

Korea First certainly needed serious help. It was the largest lender to Hanbo, a steel and construction conglomerate that collapsed with $6 billion in debt in January, 1997. Its exposure to Hanbo alone equaled 86% of its capital base, enough to make it insolvent. Korea First also had lent to Kia Motors Corp., a bankrupt carmaker, and to Daewoo. In all, the government injected $5.8 billion to keep the bank afloat. Two former Korea First chiefs have been convicted of corruption.

At first, Seoul's financial mandarins appeared to move fast. They faced pressure to reach an agreement to sell the two banks by the end of 1998. Foreign investors were skeptical that Kim's government, which took office in February, 1998, was fixing the economy. The chaebol were resistant to restructuring. Seoul badly needed a victory to bolster confidence.

When the government opened bidding for Korea First last October, most analysts gave the edge to such banking giants as Citibank and ABN-Amro. But Newbridge--an investor in distressed assets--emerged as the surprise winner. Among other things, it vowed to give Seoul a bigger share of profits than rival bidders if the bank turns around. On Dec. 31, after three weeks of exhausting talks, top officials of Korea's Financial Supervisory Commission and Weijian Shan, Newbridge's Hong Kong-based managing director, celebrated with champagne a letter of understanding to sell Korea First.

It was the kind of Asian acquisition that Newbridge and Texas Pacific Group were looking for. Recent buyouts by Texas Pacific include Continental Airlines, Oxford Health Plans, while Newbridge has picked up a semiconductor-packaging unit of Indonesia's Astra International.

At first, the Korea First deal seemed unstoppable. Newbridge set up a war room occupying an entire floor in Korea Exchange Bank's headquarters. It brought an army of Western and Korean consultants, lawyers, accountants, and investment bankers for the complex due diligence needed to buy a bank with around 400,000 loans.

But as Newbridge learned, a signed agreement is just the beginning. Talks with the government slowed after HSBC Holdings agreed to buy Seoul Bank in late February on terms that were more favorable to the Koreans than what Newbridge was offering. A May deadline to sell Korea First came and went. Shortly afterward, Newbridge lost its exclusive rights to negotiate the deal. Rating agency Moody's Investors Service voiced its fears over Korea's faltering reform efforts. As the economy started recovering, talks stopped because top Korean officials began to reconsider the terms.

But Newbridge got a break when HSBC'S deal to buy Seoul Bank fell apart on Aug. 31. That focused attention on apparent backsliding on reform and put pressure on Seoul to restart talks over Korea First.

When the deal closes, probably by January, Newbridge plans to install its own top management. Key to its turnaround plan is GE Capital Corp., a Newbridge investor. GE will put money into Korea First and use its consumer-finance expertise in credit cards and auto loans, execs say. The government has already lopped about one-third of Korea First's staff. Now the focus is on growth. "We only make money if we grow the assets and put a lot of performing loans on the books," says Newbridge's Carroll. Korea's bureaucrats may wish they hadn't been forced to sell. But it will likely turn out to be a sweet deal indeed for Koreans.

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