dogs and bottom-dwelling, scum-sucking creatures of-and that's just what they call themselves. But don't

unkind to the vulture funds hunting for deals in Asia,playing a useful role in bringing value back to a1 continent. And they are not the only ones doing

Conglomerates are restructuring and western financialare looking for partners. We profile a mixed bunch

top deal makers. Some are ex-soldiers, some areconsultants and analysts. One is even a leading Asianbanker

Tellin2 the good from the badAs one banker says: "The key to what they'redoing is knowing which managements are thecrooks and which have a genuine interest intrying to repay, and buying into the latter."

Cerberus looks for a 20% to 25% returnfrom its investments and most of Cohen andKrishna's time is spent in the most troubledcountries: Indonesia, Korea and Thailand,where they have most of their investments. ..

Euromoney I September 1998 115

CERBERUS

In Greek mythology, Cerberus was a three-headed dog with a mane and a tail of snakesthat guarded the gates ofHades. One of the 12labours of Hercules was to capture him.

It's an appropriate name for a vulture fundthat's reckoned by some to have been the mostactive player in the Asian distressed debtmarket in the first six months of 1998.

"There is no doubt that Cerberus can movethe market," says one rival. "These guys are

big players."

Looking eastThe New York-based hedge fund has almost$4 billion under management globally andwas founded nine years ago to look intodistressed debt opportunities in the US. Thefirm began looking at Asia earlier this year andopened offices in Hong Kong and Japan.

With its Asian expansion in mind, it hiredVictor Khosla from Mertill Lynch. Hebrought with him a team of people includingScott Cohen who ran Mertill's non-Japan Asiadistressed asset business.

Cohen is part of a small team of three inHong Kong and is one of two managing direc-tors along with J~-deep ~~. Krishnacertainly knows a lot about Asian debt, givenhe was a former head of credit research at thefirm that issued most of it -die now bankrupt

Peregrine.Krishna's old firm -the issuer of the only

samurai bond ever to default -is one of thebuying opportunities that hits Cerberus'sdistressed debt radar screens today. The bank-rupt investment bank's paper has varied invalue over the course of the year from a stillsolvent 80 cents in the dollar to seven cents.

Krishna's skills also comprise corporaterestructuring -a job he did for Peregrine inKorea.

Cohen and Krishna make the buy recom-mendations to head office in New York, and

I then manage the asset if it is bought. They arebuy-and-hold investors whose aim is to helpthe management of the distressed corporaterestructure, and thus increase the number ofcents in the dollar they can get back for theirpaper. Sometimes it even involves taking anequity stake and selling out of this at a laterdate.

ASIAN DEAL MAKERS

headcount by almost half following

emerging market rout in early.more than vindicated.

What a difference three years makes -, .

Gems

Simon Murray arrived in Hong Kong in themid-I96os, long before there was talk of mira-des and meltdowns. Having seen the region

bagger image and become onecitizens. Indeed, around Asia theseGoldman is held up as a paragonment.

Send in dIe Green BeretsMuch of the credit for this turnroundHenry Cornell, who runs the firm'sdirect-investment operation, based inKong. Cornell, a 4I-year-old Goldmanner renowned for his no-nonsensecommands the kind of loyalty mostKong executives can only dream about.team, knownBerets, consists of over amost of them Asian-born

way of }ife, Cornell's division,

Gems, which was launched in March and isnow a 10-man operation, has raised $150million so far, and Murray expects to doublethat by the end of November. As yet, the fundhas made no investments, but Murray andcompany are scouring Japan and the rest ofAsia for worthwhile bargains.

The fund has no interest in the financialservices sector and is instead focusing onmanufacturing, marketing, and telecommuni-cations businesses. The emphasis is on well-established companies, with recognized brandnames, that now, as a result of the financialtumult throughout the region, find themselvesunable to raise as much capital as they need.

Murray says there are plenty of deals to befound; the trick is to unearth good ones. "Theopportunities are absolutely multiple," hesays. "Most companies in Asia have liquidityproblems. However, there is a lot of garbagefloating around. The analysis of deals is criti-cal, but there is also a certain element ofbaccarat involved," he says.

At a time when "vulture" is a particularlydirty word in Asia, Murray thinks Gemsbenefits from the fact that it will only takeminority stakes in firms, and will only keep itsshare for, at most, ~ight years.

"It is critical to have an exit strategy," hesays. On the other hand, he believes Asia isstill a superb long-term investment. While thepast year's turmoil has been far worse thananyone predicted, Murray points out that thefactors that gave rise to Asia's emergence -anincreasingly educated workforce, for instance-remain very much in place. "The conditionsthat made Asia tick have not gone away," hesays. Mike Steinberger

atttition

matter).Without doubt.

.direct-investment

ities post-crash

.bureaucrats and business

its name, Goldmancollar in itsmenvkind of companies it chooses to bet on.

Henry CornellGOLDMAN SACHS

When American invesrment banks beganpouring into east Asia back in the early 199os,they were greeted with considerable scepticism-for good reason. After all, Wall Street'spowerhouses had turned bullish about Asia'sprospects several times in the past, only to cutand run when the region failed to live up totheir exaggerated expectations. And when thatdoyen of Wall Street firms, Goldman Sachs,which had doubled the size of its Hong Kongheadquarters between 1993 and 1994, pared its

become dominant players in theirsectors.

Goldman has certainly spread itsfar and wide. Among other things,stakes in China Southern Airlines,Ping-An Insurance Company, HongHung Hing Printing, .

and Resorts, and Pou Chen, afootwear maker. Certainly, the

In the case of Ping-An, fot instance,ment was given a crash course bytroops in state-of-the-art actuarial

Murray: looking for jewels

transformed from a sleepy backwater to aneconomic dynamo, Murray is perhaps betterable than most investors to keep Asia's currentwoes in perspective;

As the quintessential old Asia hand, he isalso in a position to take advantage of thosewoes without arousing charges of carpet-bagging and ambulance-chasing -at leastthat's what he hopes. Murray stepped downearlier this year as chairman of Deutsche BankAsia-Pacific to set up Gems, a general invest-ment fund focusing exclusively on privateequity opportunities in post-crash Asia.

Colourful characterA former member of the French ForeignLegion, Murray, 57, is unquestionably one ofthe corporate world's more colourful charac-ters. Like many of the young Brits who madetheir way east at the time, he spent the earlypart of his career with Jardine Matheson,quickly rising to the post of director.

When legendary Hong Kong tycoon Li Ka-shing took control of the British HongHutchison Whampoa in 1984, he hiredMurray to serve as his right-hand man. Overthe next decade, the two men forged a closerelationship and built a fabulously successfulbusiness. Though they parted company in1994 -among other things, they fell out overthe political reforms pursued by Chris Pat ten,then Hong Kong's governor -they remaingood friends. In fact, Li is an investor inMurray's new venture (so, too, is DeutscheBank; apparently, they don't have hard feelingsin Hong Kong).

is a major player in the Chinesemarket. Mike Steinberger

The Asian DebtRecoveryCompanyMYfILUS

Their mini resolurion trusr is named after

bottom-dwelling, scum-sucking shellfish

118 Euromoney I September 1998

ASIAN DEAL MAKERS

commit to transfet their bonds based on themarket value determined on the day of thetransfer which they and we will not know inadvance."

A pair of bottom-fishersIn Septembet ARDC is launching a secondvehicle, the Galleus fund, which will have thesame investment mandate but issue units fotcash to institutional investors.

The combination should leave ARDC ingood shape for effective bottom-fishing. "Wedefinitely anticipate bidding for whole portfo-lios of distressed securities on a block-tradebasis," says Long. "We have already taken inportfolios of distressed securities and antici-pate doing more of this in the future, perhapson a very large scale." Jack Lowenstein

Hyundai chairman Chung Mong-hun, Roth-schild was immediately attracted by theunderlying strength of its remaining assets.These included Mando Machinery, HallaCement, Halla Heavy {including what Rosscalls its "wonderful shipyard") and Halla Engi-neering and Construction. "The companieshad all the normal Korean problems, butunderneath it all we thought they were worldclass," says Ross.

He immediately decided against overseeingHalla's break-up while it was being conveyed

RO111SCHILD

When Rothschild Inc says it is married to its"work in Korea it's more than a figurativeclaim. After a solid five months in Seoul, ChinPak, one of a three-member team posted fromNew York for a long-term work-out at theHalla group, finally got a break, for a honey-moon with a Korean woman he met on the

job.Rothschild's hands-on approach from

within Halla's own head office is gettingnoticed in Korea among clients and govern-ment officials increasingly contemptuous ofthe suitcase-banking approach of many of itscompetitors. It is also getting results, claimsRothschild Recovery Fund LLP (RRF) chair-man Wilbur Ross, overseeing activities fromNew York.

Friends in high placesWhen Rothschild established the RRF as aglobal sovereign bond vulture fund in late1997, one of its first investments was paperissued by the parastatal Korean DevelopmentBank. As KDB bonds rebounded when Koreastaved off default in Jate December, the fundmade plenty of money and Rothschild foundit had plenty of friends at government level,who in turn gave it useful contacts at the high-est level to the private sector, says Ross.

Introduced to Chung Mong-won, chair-man of already bankrupt Halla, by his brother,

the promoters of the Mytilus fund indeedexpect to playa very useful role extractingvalue from the sunken casualties that lurk inAsia's distressed-debt securities markets.

Mytilus, managed by the Asian DebtRecovery Company (ARDC), differs fromother Asian impaired-value funds in offeringvendors a share in the upside of any recoveriesmade on their assets. That is because vendorsget units in the fund, not cash for assets theyvend in.

Since its establishment in June, Mytilus hasgarnered 10 investors, exchanging assets with amarket value of $25 million and an averagediscount to face value of around 60%.Mytilus holds paper from 25 names fromIndonesia, Thailand, Korea, Hong Kong andMalaysia. The dishonour roll includes Pere-grine Investment Holdings, Thailand'sAlphatec and Sonprasong Land, and convert-ible bonds from high-profile Korean failuresKia and Jinro.

Key players in the fund-management teaminclude George Long of Hong Kong hedge-fund operator Long Investment Mangement,who will act as chief investment officer;Robert Appleby, previously managing directorof Asian fixed income at Credit Agricole Indo-suez; Christopher Botsford, managing direc-tor of debt-structuring firm Asia FinancialProducts; Phillip Gray, former executive chair-man of HSBC James Capel; and DavidBrougham, just retired as executive director ofStandard Chartered, Hong Kong and China.

The value of using a proxyLong says the fund's aim is simple: "We wantto get the highest possible value by anymeans." That may range from secondary-market trading to being an activist on creditorcommittees, a role that institutional investorsor market-makers caught short with damagedpaper often have no interest in.

"For some issues we see ourselves as havinga coordinating role and we are already gettingother creditors asking us to act for them," says

Long.For many investors the advantage of using

Mytilus as a proxy is that it allows them tomaintain relationships with borrowers whilehaving someone anonymous apply the hardword. And because it is offering a way out tounhappy investors and reducing the numberof creditors at meetings, Long says Mytilus isalso getting a good reception from borrowersseeking to restructure.

The tough question for investors is whetherthey believe they will be at least maintainingthe value of the paper when they swap it for ashare of the Mytilus portfolio. Both the port-folio and incoming assets are valued at anaverage of five published sources, with theprocess administered by the Hongkong &Shanghai Bank.

"We will let potential investors know thegeneral shape of the portfolio but not neces-sarily an updated list of holdings," says Long."They will know the approximate appraisalvalue before they commit but they have to

Ross: not just parachuting in

through Korea's crowded and largely untestedbankruptcy courts. Instead he proposed abridge financing chat would simultaneouslyallow all the creditors to be paid out at adiscount and remove all the cross-guarantees,leaving the bridge financiers free to maximizevalue from selling the fully unencumbered anddisentangled assets in a manner that wouldgive potential buyers more confidence.

To see the process through, associates ChinPak, and Stephen Toy, and more recendyanalyst Adam Bergman, have been told to stayin Seoul for as long as it takes. "I have been toKorea 12 times in the last eight months, but wedecided it was very important not to just para-chute in and out. To get it done right andquickly you had to have people there all thetime," says Ross.

Besides negotiating with 100 lenders andmore than 200 trade creditors and preparingsales memoranda, they have had to find waysto preserve asset values by keeping the compa-nies trading. A key problem was lack of work-

ing capital.The answer was what Ross claims is a first

in Korea, a form of debtor-in-possessionfinancing through hypothecation of thecompanies' receivables, carryjng the Koreanname yangdo tambo. A first $20 million facilityhas already been set up for Mando, using RRFfunds.

To make the bridge financing work, whichis expected by the end of September, Roth~

122 Euromoney I September 1998

AS IAN D EAt MAKE RS

schild's team has had an even toughet taskthan persuading angry lenders to cede repay-ment priority: get Korean tax officials to backlegislation waiving taxation on corporateprofits gained through debt forgiveness.

Ross believes this has only been possiblebecause of the full-time commitment of Roth-schild's staff to the ~o~k-out process. "It is notreasonable to march into a country, spend tWohours there and demand everybody rolls over,"says Ross.

Rothschild is now so sold on its approach itplans to replicate it at another troubledconglomerate, Hyosun. It also hopes to winone or both of tWo advisory mandates beingfunded by the World Bank: joining largeKorean banks to assist with their in-housework out processes, and running part of aproposed W1.6 trillion ($1.2 billion) domesticcorporate restructuring fund.

"We will be having people on the groundfor many years to come," predicts Ross.

Jack LowensteinYam: Hong Kong's biggest punter

one resounding answer came back: "JosephYarn, of course."

His price-keeping operation, designed tohurt those who were speculating against theHong Kong dollar, saw a massive accumula-tion of local stock in a 10-day blitz in August.

When the central banker entered themarket, the Hang Seng index was almostdown to 6,500. As his buying spree wound up

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I at the end of the month it was over 7,800. Bythat measure, the authority made a marked-to-market return over 10 days of 20%.

But of course, that's on paper only. Most ofthat gain was on the last day when the HKMApumped HK$70 billion (US$9 billion} into amarket where it was the only buyer. But at thebeginning of September the Hong Konggovernment -which is the beneficial owner -could congratulate itself on having boughtsome very good assets at what looked like

cheap prices.Whether it will be able to off-Ioad them for

a profit is quite a different matter.

Mass nationalizationThe only holding disclosed -for UK regula-tory reasons -is that in HSBC. The HKMA,acting through the resources of the HK$659billion Exchange Fund, purchased 8.91% ofthe world's most profitable banking group.

Other big holdings probably include SwirePacific -which owns Cathay Pacific -Hongkong Telecom and Li Ka Shing'sCheung Kong. In an era of privatization itamounts to the biggest mass nationalization ofprivate assets this decade.

"The government intends to disclose itsholding~ of individual stocks in the future,"says HKMA spokesperson, Thomas Chan,"but it is undesirable at this stage. It wouldimpair the HKMKs operational capability todeal with speculators."

An arrns-Iength company is to be estab-lished to manage the government's holdings. Aname has not yet been decided on, but wagsaround town have quite a few ideas such as theWounded Tiger Fund.

On a more serious level, the arms-Iengthcompany needs to be set up as soon as possi-ble to clarify an obvious conflict of interest.How can the HKMA regulate a bank ofwhich it is one of the biggest shareholders?And other market participants are concernedthat the HKMA, as regulator, knows toomuch market-sensitive information about thebank.

Chan of the HKMA says of the ,

tion that yes, the HKMA has become aof fund manager and yes, Yam became a .

like a chief investment officer during the inter-vention but "it was an exceptional case".

True enough. But this ismanager. On August 28 the

I stopped buying for just 10 minutes,

II market immediately dipped 150 points,impact on the index of seriousselling can only be guessed at.

But, just maybe,very wise investment. Given a

of its positions and~ins. And why stop a:t

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ued assets elsewhere. Indonesian.: remain dirt cheap and, further afield,

beckons.Is this the mother of all vultute funds?

.124 Euromoney I September 1998

HONG KONG MONETARYAUTHORITY

When Euromoney asked Hong Kong's brokerswho is the most active fund manager in town,

DAI-ICHI HarEL ToKYO

A-of"11rLe;kiint1fotels of tMWorki.