Hong Kong Investment Firm Folds

HONG KONG, Jan. 12—Peregrine Investments Holdings Ltd., Asia's premier home-grown investment bank, announced today that it is filing for liquidation, marking another casualty of Southeast Asia's economic crisis and prompting a new plunge by Hong Kong's battered stock market.

Hong Kong stocks on the key Hang Seng Index dropped 8.7 percent on news of Peregrine's demise, which cost the jobs of 1,700 workers and put an end to one of the territory's most remarkable recent success stories. The Hang Seng has lost more than a quarter of its value since the beginning of the year and more than half its value since its peak last August.

Created just a decade ago as a brokerage house, Peregrine emerged as Asia's biggest and wealthiest investment bank outside Japan, riding on the region's economic boom and seeming to embody its dynamism. Its collapse, triggered by the failure of a single large loan to an Indonesian firm, struck many in the financial community here as emblematic of the financial crisis that has swept across East Asia over the past six months -- a crisis that has prompted international initiatives to bail out the economies of Indonesia, Thailand, South Korea and other nations.

Until hard times came, the success of Peregrine as the flagship of Hong Kong's investment banking groups mirrored in many ways that of the territory and, indeed, of East Asia -- new, nimble, brash and willing to challenge old business orthodoxies. Since the bank was the quintessential Hong Kong success story, Peregrine's collapse in a jittery market sent tremors throughout the local financial community, even though its problems were in many ways unique.

One stock trader, trying to explain the firm's impact on the market here, said: "People recognize that it was Indonesia's problems that brought Peregrine down, [but] the local investors have taken the Peregrine situation seriously." Another factor undermining general investor confidence here is that Peregrine's shareholders include Hong Kong's best-known tycoons, such as real estate magnate Li Ka-shing and mainland Chinese entrepreneur Larry Yung.

Analysts say they expect more market carnage this week as the fallout from the Peregrine debacle continues. Lower stock prices often encourage bargain shopping, but James Osborn, a trader at Barings Securities Ltd., said today that Peregrine's stock "may be just too low to sell."

At the center of the drama are Peregrine's two co-founders, Philip Tose, a former race car driver, and Francis Leung, who became known as "the father of red chips" after he floated mainland Chinese stocks on the Hong Kong market. The two established the firm in 1988 with just $38 million in seed money from some of the territory's most prominent tycoons; in the 10 months ending last October, Peregrine posted a pretax profit of $97 million.

The loan that crippled the firm went to an entrepreneur in Indonesia, where a dramatic decline of the currency, the rupiah, over the last several months has brought a wave of loan defaults and bankruptcies, crippled the economy and threatened the stability of the authoritarian government of President Suharto.

According to news reports here, Peregrine lent $260 million in cash -- in the form of an unsecured bridge loan -- to a colorful local taxicab company operator named Yopie Widjara. Widjara, who reportedly enlisted Suharto's eldest daughter as an equity investor, planned to create a system of car ferries linking the islands of Indonesia's sprawling archipelago. Peregrine intended to recoup the loan, which represented a third of its capital, through underwriting bonds issued by Widjara's company, Steady Safe.

For Peregrine, the trouble started when the value of Asian currencies and stocks began to tumble last summer. Peregrine was stuck with bonds no one wanted to buy, as their traditional Asian investors turned away. Then, in July, the Indonesian government lifted trading curbs on the rupiah -- an effective devaluation following a similar move by Thailand -- and the bottom immediately fell out of the currency.

From 2,400 to the dollar last summer, the rupiah exchange rate now stands at more than 8,000 to the dollar -- meaning that Steady Safe would never be able to repay its bridge loan to Peregrine. Steady Safe's stock is now virtually worthless, having plunged from a high of 3,000 rupiahs per share in July to about 300 per share last week. Peregrine's demise was assured after the collapse of a rescue bid involving a Swiss consortium and the First National Bank of Chicago -- Peregrine's biggest creditor -- a bid that was scrapped following another precipitous dip in the value of the rupiah.

Hong Kong government officials say they have studied the circumstances of Peregrine's collapse and believe thus far that no malfeasance or illegality was involved -- simply a case of a firm making a single bad bet that went bust. "There's no rogue trader," said Hong Kong Financial Secretary Donald Tsang.

Nevertheless, the Hong Kong Standard reported this morning that the territory's securities commission will be looking into whether Peregrine provided adequate public disclosure of the Indonesian loan. Moreover, analysts and brokers here say that several key questions remain unanswered -- among them, what happened to the $260 million the firm lent, and was the loan legal under Hong Kong law, which forbids commercial lending by brokerage houses.

Today, Hong Kong Chief Executive Tung Chee-hwa tried to calm fears that Peregrine's collapse could signal a meltdown of Hong Kong's banking industry, many of whose members have similar financial exposure in hard-hit Southeast Asia. "It's not a bank, per se," Tung told reporters. "It's a securities and investment firm . . . so what happened does not have much impact on Hong Kong's banking structure."