The deal was so full of firsts that the borrower’s name could not have been more appropriate. It was the first time the IFC had set up a US commercial paper programme for a client, the first private Thai company to tap that market and the first time IFC had syndicated a letter of credit. Capping that, the deal was the largest financing it had ever arranged for a financial institution, the World Bank’s commercial arm trumpeted in March 1995.
The company? Finance One – one of Thailand’s largest finance companies, and now on the brink of collapse with a mountain of non-performing loans to customers hard hit by the country’s economic crisis.
The 21 banks which participated in that irrevocable LC to back the pioneering CP programme are ruing the day they ever got seduced into IFC’s scheme, which established a $150 million CP programme for Finance One, along with a $30 million six-year loan from IFC direct. The three-year LC was syndicated by IFC and Credit Suisse, while Lehman Brothers arranged the CP programme and is a dealer, along with Citicorp Securities and Merrill Lynch.
The innovative deal doesn’t look so attractive now. The banks are hounding Finance One for their money back after it defaulted on some $2.4 million of CP repayable in June, which resulted in drawdown of a corresponding amount of the LC to repay investors. CP issuance was then halted, but a source close to the deal – who requested anonymity for fear of his bank never seeing its money again – reckons more CP due in July would take the LC calls closer to $10 million.
The credit-enhanced structure of the deal, with CP issued through a US-based special-purpose vehicle, Finance One Funding Corporation, means the paper still carries an A1+/P1 credit rating.
“CP investors cannot take any risk. You cannot disrupt the CP market so the banks will pay out. The structure is such that you earn LC fees and under certain circumstances you fund it,” says the banker.
IFC is still working on how to get back its $30 million loan, due in 2002. Already, one interest payment has been missed. Merrill Lynch says Finance One still has a “fully operational” CP programme, on which it is a dealer, but it declines to comment further to quantify the outstandings. Other participants are also cagey.
Since the pioneering Finance One deal, IFC has launched a number of similar CP transactions, mainly in Latin America and Europe, and they are “all fine”, says an IFC executive. “With Finance One it’s a systemic problem, a sector problem, a country problem and a regional problem. I don’t think anyone could have foreseen it… We have replicated the structure six or seven times now and it works fine.”
But in Thailand there are few signs of early relief. Already precarious financial positions, particularly in the property and finance sectors, have been exacerbated by the July 2 announcement that the baht would be freed under a “managed float” system. This resulted in a de facto devaluation by some 20% in the offshore market, while domestically the baht dropped around 12%, to bring both roughly into line at around Bt29 to the dollar. Since May the two markets had diverged considerably following government instructions to banks not to supply baht to offshore speculators.
Back in March 1995 things were looking pretty rosy for Thailand and its financial sector and the stock market was above 1200 for much of the year. Two years later, the SET index had halved, with exports slowing, a stagnant property market, high current account deficit and an overvalued currency. Finance One is not untypical of the sector’s problems. As of the end of March this year, Finance One said it had Bt430 million ($15 million) of borrowings from financial institutions, Bt42.4 billion of borrowings from banks, Bt17.6 billion of public debt and Bt10.3 billion of foreign debt. Consolidated borrowings were Bt102 billion.
Three loans, all to foreign lenders, were in default by the end of June, according to the company, which is in talks with the creditors. It owes $39 million to Westdeutsche Landesbank on a $53 million loan facility taken out in June 1995, Bt125 million to Banque Indosuez on floating-rate notes and $2.4 million on the IFC deal. In May Indosuez called off an attempt to auction Finance One shares held as collateral against the loan after receiving a single bid of Bt1 per share. Further Bank of Asia shares also pledged as capital were sold at Bt25 each, against an original valuation of Bt51. Among Finance One’s debt is a $120 million convertible Eurobond issued last year and due in 2001, on which the 2% interest has so far been met, and $75 million of 10-year subordinated convertible debentures issued in 1993 to foreign investors.
Earlier in the year Finance One was set to merge with Thai Danu Bank, but the bank pulled out when due diligence revealed the scale of the finance company’s problems. Since then it has been talking to Nava Finance and Securities and Sitca Finance and Securities about possible deals. At the insistence of the Bank of Thailand, Finance One launched a two-for-one rights issue in June, at the below-par price of Bt7.5 a share, in order to raise Bt6.2 billion to repay its debts. The rights issue price compares with a market share price of around Bt4.
Some 0.075%, or Bt4.6 million worth, was subscribed for by existing shareholders, although a cheque for Bt43,410 of that bounced. Under the terms of the original plan the central bank’s Financial Institutions Development Fund was to step in and take up the remainder, but a subsequent decree by the ministry of finance requiring Finance One to suspend operations for 30 days, from June 26, and submit a merger plan within 14 days, prompted the BOT to pull out of buying the remaining shares.
The finance company has also denied rumours that Banque Paribas, which had a 6.9% shareholding before dilution, would take a majority stake. It admitted, however, that it had been in talks with various foreign institutions over some form of rescue package. Gill Baker
