The troubled Korea First Bank, which had encountered tough sledding in its attempts to find a foreign buyer, was finally sold in January to a consortium led by Newbridge Capital, a United States-based direct investment firm. In the process, Newbridge, by taking over one of Korea's premier banks, has become the first foreign owner of a domestic bank in an environment marked by intense market liberalization in the wake of the economic crisis. Amid the gloomy atmosphere of Christmas Eve 1997, the government announced it would sell two debt-ridden domestic banks deeply hit by the financial crisis, Korea First Bank and Seoul Bank, to foreign interests. The move came in response to demands by the International Monetary Fund (IMF) as part of a package of requirements in exchange for providing standby economic assistance to Korea's crisis-hit economy and as a way of enhancing the country's credibility in external capital markets. As negotiations for Korea First's sell-off neared their conclusion toward the end of 1998, the government was able to claim significant progress in its plans to restructure the financial sector. Despite several successful mergers of domestic banks including that between Hanil Bank and Commercial Bank, Kookmin Bank and Long-term Credit Bank, and Hana Bank and Boram Bank, the government's restructuring effort was evaluated as only half-successful due to the delay in selling off Korea First and Seoul Banks to foreign investors.
The hive-off of Korea First was followed Feb. 21st by the sale of Seoul Bank to the British-based Hongkong Shanghai Bank. Under the deal, HSBC agreed to acquire 70 percent of Seoul Bank for $700 million with the government retaining the other 30 percent, while holding warrants to purchase an additional 19 percent of outstanding shares, giving it in effect a 49-percent interest. HSBC also agreed to pay a "facilitating fee" of $200 million on top of the purchase price. The British bank has the right to acquire the 30 percent government stake by 2003 under a call option. The Financial Supervisory Commi-ssion (FSC) has agreed to compensate HSBC arising from all non-performing loans under the first year of its ownership. Epoch-making Observers may look askance at the government's deliberations over the sale of Korea, First as if it were a matter of great national concern, and why it is receiving so much attention. However, a closer look at the matter indicates it is an epoch-making event in over a century of Korean financial history. Korea First Bank, established in 1929, was a major force within the Korean financial industry and a byword for solid and sound management until the early 1990s. However, by the late 1990s, a string of bankruptcies of major clients shook the foundations of the bank. Finally, the collapse of Hanbo Steel in early 1997 to which the bank had funneled more than 80 percent of its capital dealt it fatal blow, triggering shockwaves throughout the industry and society as a whole. Korea First was subsequently kept alive by a government makeshift measure under which a deposit was made at the bank under the International Monetary Fund's assistance package. After consultation with the fund, the government made its 1997 Christmas Eve announcement it would sell the bank to overseas investors, stipulating a deadline of Nov. 15th 1998, a move which would determine Korea First's destiny. The rationale in deciding to sell the bank to overseas investors was simple. Such an approach would attract foreign capital, boost the nation's credit ratings, and serve to introduce internationally-recognized financial standards into an industry badly corrupted by cronyism and political manipulation. The Financial Supervisory Commission which was officially inaugurated April 1st 1998 immediately endorsed the policy of selling Seoul Bank and Korea First Bank to overseas investors, and Morgan Stanley was selected as the lead agency to undertake the sales. Pains-taking efforts by Korea First were required to secure an edge in the terms under which it would be sold. It undertook a two-phase restructuring program involving the reduction of employees as well as the number of its branches. In the meantime, the government set out to find the right buyer together with the FSC. At the end of November 1998, the negotiations were shaping up to indicate that Citibank of United States would take over Korea First Bank, while Hongkong Shanghai Bank of the United Kingdom would takeover Seoul Bank. Since Citibank has long maintained a business alliance with Korea First and has a solid operating base in Korea, the prevailing view was that it was the most appropriate buyer. However, Citibank abandoned its efforts due to an internal management situation, after which it was agreed the deadline by which the banks would be sold would be extended by two months to the end of January 1999. Establishing a Clean Bank At the close of 1998, Hongkong Shanghai emerged as the most likely buyer of Korea First Bank after Citibank stepped out of the picture. This attempt also was foiled. During what were the final stage of the negotiations, an unfamiliar figure in international banking, one Newbridge Capital of the U.S., suddenly appeared on the scene and quite unexpectedly, rapid progress to closure was made within a relatively short period. A major stumbling block for the government over Hongkong Shanghai's bid was that the British bank had demanded 80 percent of the bank's equity, whereas Newbridge was willing to settle for 51 percent. Furthermore, the American company indicated its willingness to keep the Korea First Bank name which must have exerted a strong appeal to the government.
The insolvent capital will be separated from the bank and transferred to the yet-to-be established Clearance Financial Institution (CFI), known in the parlance of the financial industry and press the "Bad Bank." The loss resulting from the separation of the insolvent capital will be replenished by the government. The resultant "Clean Bank" will be 51 percent owned by Newbridge and 49 percent owned by the Korean government. FSC senior consultant Jin, Dong-soo disclosed that the Newbridge stake would represent 51 percent of the bank's net worth value, equivalent to around 610 billion won in order to achieve the capital adequacy ratio of 8 percent as demanded by the Bank of International Settlements. Building a Framework On top of this, the deal involves a "Put Back Option", which allows the buyer to transfer insolvent capital to CFI over the course of one year. In the second year, only a designated amount can be transferred. Specific terms and conditions will be implemented in the future. The government plans to turn over the voting rights of the equity it owns in Korea First to Newbridge to allow it self-regulation in its management of the bank. However, the government reserves the right to exercise its voting rights in proportion to its equity in those cases when either: Newbridge disposes of the bulk of its holdings; applies for bankruptcy; issues new stock; conducts a capital decrease; or does anything detrimental to the interests of the government. Under the terms of the deal the government secured the right to purchase new Korea First stock in an amount equivalent to 11 percent of the government's current 49 percent holding, or 5.39 percent of the total new stock so issued beginning the third year after the takeover. Furthermore, the government will be able to purchase such stock at a premium of 30 percent on the price per share at the time of the takeover, and at an additional premium of 10 percent per year, thereafter, regardless of the going rate at the time. Newbridge is prohibited from disposing of any Korea First shares for two years without government approval. On completion of that period, though, the government can also sell shares on the open market under the same terms and conditions as Newbridge. The sell-off was concluded by exchanging a memorandum of understanding (MOU) between Korea First Bank and the Newbridge consortium, as was the intention of the government. However, the agreement reached was only a basic framework, thus requiring the discussion and settlement of further issues. Firstly, both parties have yet to agree on how much of Korea First's insolvent capital can be transferred to the Bad Bank, a likely source of future contention. The government pointed out that since the insolvent capital actually constitutes an important operating base for the bank, neither party wants its total transfer to the Bad Bank. In particular, the manner in which loans extended by Korea First Bank to the Daewoo and SK Groups, amounting to 3.6 trillion won, will be dealt with is crucial. In this regard the government disclosed that "only those loans to the large conglomerates that are categorized as insolvent capital shall be transferred, and by no means will Korea First's loans be transferred [to the Bad Bank] en masse." However, Newbridge has yet to voice its opinion on this issue. Internal Revolution Two issues are expected to trigger significant controversy. One is the liquidation of the equity of minority shareholders, and the other is the proposed cuts in Korea First's staff and number of branches. The government is proceeding on the premise that the "issue of the liquidation of minority shareholders' equity is not included in the MOU," and that further discussion will focus on compensation for such liquidation, hinting at a provisional agreement with Newbridge. However, it is anticipated the minority shareholders will strongly resist the move, thus fuelling further controversy over the liquidation price for their equity and the method of purchase. Nothing has been settled regarding the number of projected lay-offs, but it is sure to be a key part of the Newbridge management improvement plan and generate a hostile response from Korea First's labor union. The government is aiming to recover its investment by selling its Korea First shares when the share price increases, in anticipation of a time when the operation of the bank will normalize. However, it is difficult to predict at what point this normalization will occur, or in what way the share price will change. Following the sale of Korea First Bank to overseas investors, the government anticipates further foreign investment in Korean financial institutions and enterprises. Moreover, it expects the sale of the bank to foreign investors will act as a catalyst in bringing about innovation in domestic financial practices. However, restructuring of the banking sectors, in the truest sense, will only come from within following a change in mindset by management and each individual employee, not by imposing a set of strictures from the outside. In addition, the success of this kind of internal revolution can not be assured without the support of and continuing efforts of the FSC. The government, for its part, has set out to revolutionize the entire financial sector. Without hesitation it cast itself in the role of the villain during the restructuring process last year, forcing lay-offs, exiting management married to outdated practices, and strongly encouraging the use of outside professionals. The time is now ripe to conclude the restructuring process, now in its final stage, with bold and decisive moves, while the supervisory body creates an environment in which the banks can pursue their own internal revolutions to secure their survival by their own efforts. by Woo-Che Suh |
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The sale of Korea First Bank, along with
the completion of the first-phase
restructuring plan focusing on the top
five conglomerates, is expected to
significantly enhance Korea's standing in
the world's financial markets. The Asian
Wall Street Journal forecasted in a Jan.
6th editorial entitled, "Korea, the Victory
of Pragmatism," that the sell-off of
Korea First, the first of its kind involving
a domestic bank to a foreign investor, was a development which will contribute to
reinforcing foreign investors' confidence in the Korean market, and serve to accelerate
the national restructuring effort. In addition, the sale prompted a sharp rise of Korean
security prices on the London and New York stock markets. 
The basic framework of the sell-off of
Korea First involves first, the reduction of
its insolvent capital to make it a "Clean
Bank" followed by the handover of 51
percent of its equity to Newbridge Capital.
The government is expected to provide
public funding of between 4 trillion won and
5 trillion won to effect its recapitalization.
FSC chief Lee, Hun-jae, said the contract
to sell the bank will be signed "after
conducting due diligence on the bank by
the purchaser, after which the handover
process is expected to be completed in April or May."