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January 13, 1998

Hong Kong's Peregrine Soared Like a Falcon, Sank Like a

Reckless Bank

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

regional growth.

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

snowballed."

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."