January 13, 1998
Hong Kong's Peregrine Soared Like a Falcon, Sank Like a
By EDWARD A. GARGAN
ONG KONG -- With the collapse of Peregrine
Investments Holdings on Monday, Asia's biggest
underwriter of stocks has disappeared off the map of
Asian investment banking just one decade after it was
created by a swashbuckling former British racing driver
and his Hong Kong partner.
The factors behind Peregrine's downfall were many and
complex, and had much to do with its brash -- some would
say insolent -- culture. Yet some executives at
Peregrine, as well as financiers familiar with its final
days, said its demise became inevitable only after First
National Bank of Chicago, its lead banker and an
investor in the firm's putative restructuring, pulled
out of a proposed rescue effort and canceled a financing
for Peregrine at the last moment.
The flame-out of Peregrine, the largest investment bank
in Asia outside of Japan, spread panic through the Hong
Kong stock market and raised further questions about the
depth and duration of the economic crisis that is
ravaging the fruits of more than a decade of explosive
Yet, in many ways, Peregrine's downfall was emblematic
of the fault lines in the foundations of Asia's
once-vaunted economic miracle. Its headlong rush to do
deals, its reliance on connections in high places, and
its willingness to skim the edges of legality and
propriety mirrored the region's reckless economic growth
and its tolerance of widespread corruption and cronyism.
But even in a part of the world where risk-taking had
become the key to economic success, Peregrine stood out.
It largely pioneered the market for junk bonds in Asia.
After cozying up to the Chinese authorities in Beijing,
it became the powerhouse behind virtually every initial
listing by Chinese companies on Hong Kong's stock
exchange. And it foraged markets -- Vietnam and Myanmar,
for example -- that few others would go near because of
their horrendous human-rights records.
On Monday, as Peregrine filed for liquidation, Hong
Kong's stock market plummeted 8.6 percent, continuing a
meltdown that has stripped it of more than one-quarter
of its value so far this year. Even so, Hong Kong
monetary authorities played down the threat the bank's
collapse posed to the financial system. Donald Tsang,
Hong Kong's financial secretary, turned down Peregrine's
request for assistance over the weekend after a rescue
package with a Swiss financial group fell apart. Tsang
said a bailout would not be "in the public interest."
In the end, financial analysts here and elsewhere said,
it was arrogance that did Peregrine in -- an arrogance
that emanated from the personality of its founder,
51-year-old Philip Tose of Britain, and his Hong Kong
partner, Francis Pak To Leung, and that pervaded the
bank's culture. That arrogance, they said, led the
company to lend too much money for questionable projects
and to exercise too little high-level supervision over
managers, and especially over Andre Lee, who ran its
highly profitable and nearly autonomous bond department.
As a result, when Asia's financial crisis broke last
summer, Peregrine was ill-equipped to cope with the
fallout. Indeed, it was the failure of an Indonesian
taxi-cab company that fatally undermined Hong Kong's
premier investment bank.
Sometime last summer, when bullishness was still the
sentiment of the day, Peregrine made a bridge loan of
$260 million to Steady Safe, run by one of Indonesia's
flashiest wheeler-dealers, Jopie Widjaya. Widjaya's
dream was to move from his profitable but humdrum
Jakarta taxi business, with its fleet of 4,000 cabs, to
rail projects, ferries, and toll roads. Widjaya had the
right connections; he had even bought a stake in a toll
road owned by Siti Hardiyanti Rukmana, the eldest
daughter of President Suharto.
Steady Safe had all the elements of a Peregrine-style
deal: access to the corridors of power, seemingly
assured earnings, and sweeping opportunity. The problem
was that Peregrine lent the $260 million in American
dollars -- fully one-third of Peregrine's capital --
against Steady Safe's revenues in Indonesian rupiah. At
the time, Peregrine seemed convinced that the rupiah was
sound, and that it could soon resell the bonds backing
the loan. Moreover, the fixed-income team that cut the
deal had earned 38 percent of Peregrine's profits the
previous year; this was just one more deal.
Analysts say such confidence was misplaced. Any lender
entrusting the equivalent of one-third of its capital to
any borrower, much less a little-known company in a
country notorious for corruption, shows poor financial
judgment, they say.
But far from having second thoughts after the financial
turmoil that wracked Thailand last July spread
throughout Asia, Peregrine remained upbeat. In late
October, even though the rupiah had by then lost 30
percent of its value, Peregrine's own weekly analytical
reports, boldly titled Greed and Fear, argued that the
rupiah's collapse "certainly looks overdone and suggests
a countertrend rally may be overdue."
That same month, rumors began percolating in Hong Kong
that Peregrine had taken $1 billion in trading losses,
rumors vigorously denied by Tose. But even as he
insisted on the bank's solidity, the rupiah was slipping
and Peregrine's chairman was looking for an investor to
replenish the company's capital.
In November, Tose announced that he had struck a deal
with Zurich Center Investments Ltd., part of Zurich
Group, a Swiss financial-services company, to buy a
24.1-percent stake in Peregrine for $200 million.
Peregrine's chairman was ebullient.
But the deal never went through.
According to Zurich Group, the two companies planned to
set up an Asian investment fund, called the Peregrine
Direct Investment fund, with a commitment of $50 million
from each partner and an expected infusion of $350
million to $500 million from institutional investors.
But the continuing financial tumult in Asia apparently
made Zurich nervous. A spokesman declined to go into
details about the group's decision to back away, saying
only it was the "end result of the negotiations to
rework the conditions" of Zurich's participation.
Meanwhile, events in Indonesia tumbled out of control,
and its currency collapsed. Steady Safe, with its
earnings in rupiah, could no longer pay meet payments on
its dollar loans, particularly the huge loan from
Peregrine. The taxi company's stock sank to a sliver
over one penny and, last week, it locked its doors.
As Peregrine's stock continued to slide, trading in the
bank's stock was suspended. As Zurich Group was
preparing one final offer to Peregrine, there seemed
little hope of a deal. "When Zurich came back last
week," said a senior Peregrine official who only agreed
to speak anonymously, "they were going to buy our bond
portfolio for 16 cents on the dollar. The bond portfolio
was $600-million plus; there's a lot of good paper in
that portfolio. But when you have a situation where they
say you have $260-million, $270-million worth of bad
paper, they say: 'What else have you done?' It just
At the table with Zurich was First Chicago, one of
Peregrine's principal creditors. At about one o'clock in
the morning on Friday, First Chicago left the
negotiations. "Zurich walked away six hours later," said
the Peregrine official. "It just unraveled from there."
A spokesman for First Chicago declined to comment on the
matter. But executives at both Peregrine and Zurich said
on Monday that First Chicago had initially pledged $25
million for a small stake in Peregrine, then had a
change of heart. First Chicago's departure from the
negotiations on Friday morning prompted Zurich's
decision to throw in the towel, they said, in part
because it did not wish to raise its stake in the
company significantly beyond 24 percent.
"They did not want to go up to 35 percent and make a
general offer," as required by Hong Kong law whenever a
buyer's stake exceeds 30 percent, a Peregrine executive
in Hong Kong said.
Meanwhile, Peregrine executives desperately tried to
salvage something from the fiasco, maintaining that the
firm's brokerage and corporate-finance businesses would
make good acquisitions for the right buyer. "We still
have a first-class franchise and it would be highly
regrettable if that was not kept in tact," said Timothy
Voake, chief executive officer of Peregrine Brokerage
Inc., which has headquarters in New York. "The level of
support from the client base has been remarkable."
After the collapse of negotiations in Hong Kong, a press
conference announcing a deal was abandoned. Swiftly, the
Securities and Futures Commission ordered Peregrine to
stop all trading activities. Peregrine's seat on the
stock exchange was also suspended.
Peregrine was bust. Scarcely six months ago, Peregrine
was the enfant terrible of Asian banking, a champion of
"buccaneering" in the words of Tose.
"One of Peregrine's great advantages in its heyday was
to commit its own capital rapidly to transactions, with
bridge loans for example," said Richard Margolis, a
senior vice president at Merrill Lynch (Asia Pacific)
Ltd. "It could take decisions quickly."
Peregrine was created in 1988 on $38 million raised by
Mssrs. Tose and Leung -- both refugees from Citibank's
foundering investment banking venture -- from some of
Hong Kong's tycoons, including Li Ka-shing, a leading
property and infrastructure developer, Gordon Wu, an
Asian infrastructure developer, and Larry Yung, China's
principal investment banker here. Peregrine grew
exponentially, with Tose and Leung capitalizing on
personal contacts cultivated over the previous decade.
Both men enjoyed lavish life styles, including buzzing
around Hong Kong in Rolls-Royces.
Connections, combined with speedy decision-making and a
penchant for risk, catapulted the bank forward. And it
rushed in where others hesitated to tread. Typical was
Peregrine's response to China's massacre of civilians in
Tiananmen Square in June 1989. "These events were just a
hiccup," Leung said in an interview two years ago. "We
decided we wanted to take advantage of depressed market
conditions at the time."
Quickly, Peregrine emerged as one of the largest
underwriters in Hong Kong. And while China and Hong Kong
remained the core of the bank's business, it spread its
wings and splashed offices across 14 countries.
Even Asia's widespread culture of corruption did not
seem to trouble Tose. After all, he said in an interview
with The South China Morning Post last year, it is
"quite an open form of corruption."
"It is not stalling advances in Asia," he added, "but is
an accepted way of life in many ways."
Unfortunately for Peregrine, though, it ruffled the
feathers of local authorities in many of its forays. In
Vietnam, it formed Peregrine Capital Vietnam with a
fast-talking nightclub owner and car dealer named Nguyen
Trung Truc, for example. Shortly afterward, Truc's other
businesses were raided by tax authorities, and he wound
up spending most of the year in jail for tax evasion.
Peregrine itself was fined for operating a business
without proper licenses.
Last June, although storm clouds were rapidly gathering
on Asia's economic horizons, Peregrine was buoyant. It
reported hefty profits for the first six months of $82.5
million on revenues of $19.6 billion.
When the end came this past weekend, however, many
people were asking why Peregrine's vaunted connections
with some of Hong Kong's wealthiest and most powerful
people did not result in the firm's rescue.
As Monday wore on, hundreds of brokerage customers
shuttled in and out of Peregrine's brokerage operations
to close their accounts.
"I was very surprised," said K. Chan, a 60-year-old
retiree. "I've been with Peregrine for six or seven
years. I'm going to transfer my stocks to another
company." But, Chan continued, Hong Kong was not to
blame. "What happened to Peregrine was caused by
external forces, the Southeast Asian currencies. It's
not because of Hong Kong itself."
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