Peregrine's still flying

"The last time I saw something like that," commented one wry old hand, swigging a gin and tonic, "was when Drexel Burnham Lambert issued advertisements three days running denying they were insolvent. Of course, on the third day they went under..."

Hong Kong's business and banking elite were stunned by Peregrine's rearguard press action on October 27. Rumours about the firm were very bad indeed. But no-one expected the full-page advertisement in major newspapers denying them.

The ad, issued by order of the board, had a last paragraph printed entirely in capital letters. It stated: "Rumours of losses by Peregrine running into hundreds of millions of us dollars and of Peregrine's financial demise are completely false."

The advertisement included near-up-to-the-minute figures for the firm's performance. It stated that its (unaudited) net profits in equity trading and derivatives were $16 million in the year to October 24 - a fall of $23 million from the first-half figure. In fixed income the profits were $19 million - a fall of $14 million. It added that its financial year would be brought forward by a month to November.

Then it stated: "All major banking relationships and credit lines remain in place." This is perhaps tempting fate. Not surprisingly, Peregrine's troubles did not end with the advertisement. And so it took the even more unusual step of publicly announcing that it had hired a private investigator to trace the source of the scurrilous rumours.

How had the once-proud Peregrine been reduced to such gauche initiatives? The firm - which founder and chairman Philip Tose had wanted to call Falcon (he settled on Peregrine because that bird was "fast and agile") - had once again topped the league table for international equity issues for Asian issuers between January and September, having raised nearly $1.5 billion in 19 issues. It had announced record results for the first half of this year.

But a string of bad news in its regional operations and, worse still, the onset of the regional crisis that began in Thailand in July and cut the Hong Kong stock market in two in October, made Peregrine look vulnerable.

The firm - which was founded in 1988 and produced 160% annual compound growth in turnover between 1991 and 1995 - was the child of the Asian economic miracle. So when Asia went sour it was clear Peregrine was the investment bank likely to suffer most. Unlike some of its rivals, it could not hide its Asian losses in European or us gains. It is a regional firm, not a global one.

Peregrine began life as a Hong Kong brokerage, and many of its 1,700-strong staff must have wished it had not strayed so far from its equity roots. The feeling inside the equity camp at the firm was that the rumours were killing its ability to do business and that they were generated solely by the problems of the fixed-income division.

Peregrine chairman Philip Tose had decided in 1994 that for the firm to become a full-service investment bank it would need to be able to launch bonds for its clients. So he hired 34-year-old Andre Lee from Lehman Brothers to build a business from scratch. By 1997 Lee had expanded his original team of 25 to around 250 and operated the biggest fixed-income desk in the Asia-Pacific region. In 1996 he raised $22 billion for Asian corporates, compared with $9 billion in 1995.

This all looked great until this July. Every investment banker in Asia grudgingly praised Lee's strategy of doing grass-roots business in local Asian currencies. Then those currencies went to the wall, the markets crashed and default risks escalated.

Suddenly the strategy of holding a large portfolio of local-currency bonds and commercial paper began to look a poor one. Bids in the market went from wide to non-existent. The phrase "toxic waste" began to be used with increasing frequency to describe the sort of paper that Peregrine had pioneered. Additionally, the Korean merchant banks that had been the mainstay buyers of its product suddenly had a few problems of their own. They wanted to sell. Hence the rumours. Could Peregrine, with its $900 million of capital, take the pain?

Tose was on the backfoot. So long a fierce defender of his independence, he didn't want to be bought out by the sort of firm that would interfere with his buccaneering style. After all, he had founded the firm to avoid that fate - to escape the shackles of Citicorp, which having acquired Vickers da Costa, un-buccaneered the operation he ran there.

So it came as a surprise on November 17 when Tose announced a new shareholder. It is the Switzerland-based Zurich Centre Investments, the private-equity arm of insurer Zurich Group, which had a 1996 premium income of $23.7 billion. It bought $200 million of Peregrine equity-linked bonds convertible in January 2001 with a 7.5% coupon. This effectively gives Zurich 24.1% of Peregrine, three of the nine board seats, and the right to block major decisions on budgets, business plans and "certain material capital transactions".

In the process, Zurich became the firm's biggest single shareholder, supplanting Peregrine International Holdings. That is the shareholding structure in which Peregrine founders Tose and Francis Leung hold their stock. Peregrine's other major shareholders, Hong Kong entrepreneurs Li Ka Shing and Gordon Wu, and Larry Yung's Citic Pacific, were also overtaken in size by the European group.

In the interview with Euromoney that follows, Tose speaks of the Swiss investment, how it changes the nature of the firm, and why it was necessary.

Euromoney: Does the recent Asian crisis underline the strategic danger of being a regional investment bank, not a global player? After all, you had nowhere to hide once Asia went sour.