Giant helpless as 'quicksand' traps economy Thanong Khanthong chronicles the downfall of Finance One Plc.

Five or six months ago anybody suggesting that the Thai financial system would be in a big mess or that Finance One would go broke would have been considered crazy.

It was on May 17, 1996, that Pin Chakkaphak, the takeover king and president of Fin-One, participated in a Thai Bank CEO Conference held by Goldman Sachs, the US investment bank, in Bangkok. Along with Pornsanong Tuchinda, the president of the Thai Danu Bank, and other top Thai bankers, he was painting a bright outlook for a Thai Danu Bank/Fin-One tie-up and for the finance industry generally.

At the conference, Pornsanong pointed out that the tie-up would make Thai Danu Bank a bigger organisation, medium-sized, in the Bt200-Bt300 billion range. This would also benefit Thai Danu Bank's people, processes, technology and systems, he said.

In the meantime, Pin justified the strategic relationship as a good investment with a 12 to 15 per cent internal rate of return on investment, added distribution, potentially helpful on the funding side, greater critical mass, a more complete range of financial services, synergy and financial profits.

Then Fin-One was still at the pinnacle of its life, or so it seemed. The stock market was trading at around the 1200 level. The Banharn government, which had done incalculable damage to the country, still had four to five months to go before it collapsed in disgrace. The Fin-One stock was still trading at the Bt128 level.

Pin went on to share his outlook for the finance sector, where finance companies were considered second-class citizens to banks. Pin expected a more level playing field between the two in the future, with at least the top five finance companies operating like a bank.

Along the way, finance companies had been growing at 15 to 20 per cent over the last 15 years on the back of strong economic and capital market growth. Pin said Fin-One had a strong capital base (ranked 11th in asset terms among Thai banks), a good management team and business strategies to prepare it for further success.

Fin-One had prepared for this success by improving operational efficiencies and adopting a leaner organisational structure. The group was diversifying into a bank, and merger and acquisition activities, Pin said.

He added that Fin-One's strategies were to identify good investment opportunities, invest capital in companies with good growth potential, and let those companies be run by their own management teams. Since 1985 at least this strategy seemed to be working well. For instance, Fin-One bought Securities One for US$800,000 in cash in 1985 and that investment had grown to slightly less than US$1 billion and a 54 per cent stake in S-One.

Pin also said that ultimately Fin-One would become a broad-based financial services company and its shareholders would be able to participate in the good earnings growth stemming from the diversified sources.

Obviously, Pin left a good impression on Goldman Sachs, whose report said: ''Fin-One has management with a good track record. We would, at the end of the day, describe Mr Pin's operating system as sharp, creative, nimble and opportunistic. We also sense that Mr Pin makes it a point to hire capable, professional managers for day-to-day operations, and to reward and retain good people via share participations and performance-based compensation."

Toward the end of 1996, the outlook would reverse. It would become clear that the Thai economy has headed for a hard landing. Exports would be flat at zero per cent growth. Economic growth would fall from the range of 8 to 10 per cent over the past decade to 6.7 per cent. The real estate sector was already dead meat. The bearish stock market continued its three-year decline to end the year at 831.57 points.

In its December report, Goldman Sachs took a gloomy view of Thailand, saying it was no time to buy finance stocks due to the uncertain key issues emerging in the finance sector, ranging from funding risks, regulatory changes, asset quality risks to consolidation. ''Which finance companies will emerge sooner from the bad debt cycle?" it said.

From mid-May to the end of 1996, Fin-One stock was to plunge from Bt128 to Bt48, losing about 38 per cent along the way.

Like all other finance stocks, Fin-One was hard hit by the downturn in the economy and the capital market, to which it had tied almost all its fortune. Its aggressive expansion through active and ongoing acquisition programmes, built up over the years of the bubble economy, began to backfire.

Fin-One's leveraged strategy will only work in a bull market, while most of its executives, who were mostly graduates from the Bull Market Business School, did not have experience with the bear market. Fin-One's leveraged investment system made it highly sensitive to interest rate and stock market cycles and market sentiment.

By December, after a company visit, Goldman Sachs issued a report saying that Fin-One's management admitted to having problem loans, particularly in the hire purchase business. These problem loans were deteriorating with the economic slowdown.

Fin-One's non-performing loans also doubled to 5 per cent from 2.5 per cent at the end of 1995. The management told Goldman Sachs that its NPL ratio would peak at 7 to 8 per cent of total loans versus its accumulated loan-loss reserves of 2.25 per cent. Most of the company's non-performing loans were associated with car hire-purchase and property businesses, which accounted for 25 per cent of total loans.

Goldman also expressed its concern over Fin-One's Bt13-billion bond portfolio established since early 1996 in anticipation of declining interest rates.

''We are concerned about Fin-One's asset quality problems, particularly in the hire-purchase business, as this could lead to lower earning assets and the need for higher loan-loss provisions. The high bond portfolio also ties Fin-One's resources to lower yielding assets compared with the yield on commercial loans, and we do not expect a pronounced decline in interest rates in the near future," it said.

Earlier in September, a person familiar with the Fin-One affair noted that Pin had already sensed that cracks were starting to appear in his big empire because he began to see all the bad loans sprouting.

By early January this year the cross-border currency attack on the Thai baht worsened sentiment about Thailand and the capital market. Forced to the defend the baht, the Bank of Thailand could not lower interest rates as it desperately wanted to. The Chavalit government would also move to cut the 1997 fiscal budget by Bt99 billion, knowing that a current account deficit of 8 per cent of the gross domestic product was not sustainable in view of the zero per cent export growth.

The stock market kept diving. Melting with it were Fin-One's investments. By late January Fin-One began to sense a run on its deposits, which stood at Bt46 billion at the end of 1996. Daily News withdrew Bt1.8 billion from Fin-One in a single day and it took about five working days before it could cash the cheque.

Pin was scrambling for fresh liquidity to support Fin-One. A financial executive said Fin-One was forced to sell off its hire-purchase and loan assets to raise cash. Some were sold at a discount to the Industrial Finance Corporation of Thailand. Bonds were pledged at the Bank of Thailand to get the money to meet the outflow of cash. Fin-One literally sold anything it could lay its hand on.

On Feb 4, Fin-One held a news conference to defend its sagging position by assuring the public about its high net worth of Bt14 billion.

Among the key points were: Its capital adequacy ratio reached 19.9 per cent as at the end of 1996, higher than the central bank's standard of 7.5 per cent; its foreign debts amounted to US$622 million at December 1996; the company would not run into any problems in servicing its foreign debt; Banque Paribas, a major shareholder, would not leave Fin-One at a bad time.

Looking pale, Pin emphasised that from now on the company would focus on profitability rather than asset expansion. He let most of his lieutenants do the talking. On the SET board, the Fin-One stock continued to plunge.

In the back of his mind, Pin must have realised that it might already be too late to reverse Fin-One's fortunes. It was reported subsequently that he would ask for support from Fin-One's major shareholders with fresh funds and for Bt5 billion from Charoen Sirivadhanabhakdi, the liquor tycoon.

Pin's request was turned down. The shareholders knew that the money would quickly go down the drain. Along the way nobody knew exactly for sure how big Fin-One's debts were.

Last Thursday there were moves to rescue Fin-One, which agreed to throw in the towel after a fatal bout with the bear market. The banking regulators had been informed about Fin-One's trouble. Thai Danu Bank would be asked to acquire 100 per cent of Fin-One, hence raising the prospect of erasing the name of Fin-One from the Thai financial industry.

All of a sudden Fin-One would disappear, just like Barings, the British investment bank.

On Friday the rumours of a technical bankrupt by Thailand's largest finance company swirled around the market. Fin-One stock closed at Bt23.75, while the stock market inched up a bit, to 727.56 points.

Dr Amnuay Viravan, the finance minister, could subsequently confirm the impending merger between Thai Danu Bank and Finance One. Rerngchai Marakanond, the central bank governor, called the merger a model for other mergers to happen among the ninety-odd Thai finance companies.

For Pin and his 14-year-old empire, it was all over.