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TFB, govt compromise needed


August 31, 1999 -- SHORT of a public condemnation, Bank of Thailand Governor M R Chatu Mongol Sonakul signalled yesterday that it was politically, morally, financially and humanly unacceptable for Thai Farmers Bank (TFB) to try to pass on the burden of ailing Phatra Thanakit Plc to the government.

It remains ambiguous what steps the authorities will undertake next after TFB made a shock announcement over the weekend that it would surrender Phatra Thanakit without any conditions. The impending collapse of Phatra Thanakit, once the crown jewel of the Lamsam family and the bluest of the blue-chip finance companies, reinforces the damage still being incurred from the bursting of the financial bubbles that have yet to die out easily.

It was reported over the weekend that TFB would dump Phatra Thanakit for it no longer has the financial resources to bear the burden of the finance company, 70-80 per cent of whose loan portfolio of more than Bt50 billion has gone sour. On Sunday, TFB president Banthoon Lamsam also told The Nation that the bank intended to part with Phatra Thanakit once and for all. It had been rumoured over the past two weeks that TFB would part with Phatra Thanakit, yet nobody was sure how TFB would handle the situation when it was forced to admit so publicly.

Politically and morally, Finance Minister Tarrin Nimmanahaeminda and Chatu Mongol could not allow TFB to walk away from the deal it had committed itself to and pass the buck to the government. The two met Prime Minister Chuan Leekpai yesterday in yet another crisis situation and told him that TFB still had the financial resources to bear the brunt of Phatra Thanakit, otherwise the Financial Institutions Development Fund (FIDF) would have to assume 100 per cent responsibility for damage at the finance company.

Subsequently, Chuan echoed the view of his economic czars, emphasising the government's position that it was not ready to assume damage arising from Phatra Thanakit to the benefit of TFB. ''We have to think about it hard because we really don't want to bear all the responsibility. If the government has to take all the responsibility, it amounts to passing all the burden to the public. The public have already complained that the situation now is more than enough,'' he said.

On Sunday, Banthoon discussed the Phatra Thanakit debacle with his board at an emergency meeting following the reports of the bank's decision to dump the finance company, which has more than Bt50 billion in deposits. The very next day, the bank informed the Stock Exchange of Thailand that it ''is no longer in the position to financially support Phatra Thanakit Plc in any form.''

The following reasons were given. First, the bank could not afford to continue to bail out Phatra Thanakit at the expense of the bank's interests. Second, TFB was about to embark on a Bt24-billion recapitalisation through a 1-to-1 rights issue. If the recapitalisation is successful, the bank will be using the proceeds to make 100 per cent provision for loan losses as required by the authorities, set up an asset management corporation to handle debt restructuring, and further expand its credit portfolio.

''If TFB lends additional financial support to Phatra Thanakit, such action may negatively impact investors' confidence, possibly leading to an unsuccessful capital-raising exercise,'' the bank said.

TFB added that deposits at Phatra Thanakit would not be affected since they were in any case guaranteed by the FIDF.

Phatra Thanakit proves to be another large bomb in the backyard of the Thai banking authorities because the sheer size of its problems is even greater than that of the recently nationalised Nakornthon Bank. Furthermore, the news broke while the Krung Thai Bank was still embroiled in a political intrigue, and the public has yet to be fully informed about the exact financial burden involved in filling up that institution's black hole -- the bank being saddled by more than Bt630 billion in bad loans.

Banthoon decided in the middle of last year to bail out Phatra Thanakit, although in 1997, at the height of the financial crisis, he had displayed his steely emotion toward the finance affiliates of the bank. When Pin Chakkaphak of Finance One came to him for help, he ignored the plea. Nor did he show any sympathy in helping out CMIC Finance and Securities Plc. Both finance companies were closed down in June 1997. If TFB had take over both companies, it would have been dragged under the water.

But there was a public understanding that TFB would not act indifferently toward Phatra Thanakit, in which the Lamsam family alone held a 11 per cent stake and the bank about 8 per cent with an initial investment of Bt1 billion. Phatra Thanakit had been recognised as a blue-chip subsidiary, with close ties to the inner circle of the Lamsam family's sprawling business empire. It ranked in the same league as Union Asia Finance of Bangkok Bank, or Dhana Siam Finance and Securities Plc of Siam Commercial Bank. Both banks subsequently let their subsidiaries go.

Banthoon's decision to swallow Phatra Thanakit took place in mid-1998. Conflict among the Lamsam clan led to some businesses in the group rushing to withdraw their money from Phatra Thanakit. The run led other depositors to follow suit because in those frantic times, everybody was playing it safe. Phatra Thanakit ended up losing some Bt1.5-Bt2 billion in deposits in the space of a few days, and it had no money to honour the massive withdrawal of funds. So it had to turn to the FIDF for the money, which enraged Chatu Mongol.

It was reported then that the central bank governor had told Banthoon that he should try to settle the conflict within the clan, rather than passing the burden to the authorities. It was as a result of that incident that Banthoon softened his stance. He later agreed to take care of Phatra Thanakit by using the bank to buy it out. The bank also availed itself of Phatra Thanakit's deposits of Bt29 billion. Shortly after he made the bail-out announcement, Banthoon received dozens of angry calls from overseas since it was only in March 1998 that TFB had raised Bt33 billion via a global offering from institutional investors, who held a combined 49 per cent stake in the bank. The foreign shareholders did not like what they heard about Phatra Thanakit at all.

However, Banthoon was able to get away with it. TFB agreed to spend Bt4.8 billion to buy out Phatra Thanakit and in doing so gave the shareholders, including the Lamsams, a way out to release their holdings. Otherwise, the authorities would intervene in Phatra Thanakit and its stocks would be written down to one satang. Some shareholders unwittingly complained that they did not get a fair deal from the bank, since it was offering them Bt4.50 a share when Phatra Thanakit was trading at more than Bt11 in early June last year.

The finance side of Phatra Thanakit was delisted from the stock exchange, while the securities licences were sold off to Merrill Lynch for about Bt1.3 billion. The deal was done in a big-lot crossing, saving the shareholders Bt400 million in tax that would otherwise have had to be paid. The US investment bank is now holding 49 per cent in the securities company, which has been renamed Merrill Lynch Phatra Securities Co Ltd.

Banthoon then concentrated on trying to save TFB, in which the Lamsam family now holds only a 7 per cent stake. With some dynamic innovations, TFB issued the high-cost SLIPS (preferred stocks and debentures) in the region of Bt30 billion to ensure its capital adequacy. Still, it proved to be inadequate to cope with the 42 per cent, or Bt240 billion, of the bank's non-performing loans.

Since the beginning of this year, Banthoon has been in talks with the regulators over how to deal with Phatra Thanakit. The authorities would like Phatra Thanakit to enter the tier-1 capital support scheme and find a joint venture partner to get it going again. Other details of the talks have not been disclosed, but since the takeover, the bank has done little to improve the finance company's performance, save for some debt-restructuring work.

In the end, Banthoon decided not to have anything to do with Phatra Thanakit any longer, for it was not known how much more capital the bank would have to commit to shore up the finance company's sagging financial position. A week before he was scheduled to go on a TFB road-show, he had to make the matter clear to the bank's institutional investors, from whom he planned to raise Bt24 billion, that the survival of TFB -- and not Phatra Thanakit -- was his top priority.

It is indeed another bomb. At this point, the authorities still hope to coerce TFB into continuing to support Phatra Thanakit. Taxpayers' money should not shoulder any further burden. Banthoon is expected to hold firmly to his position of no more bail-out of Phatra Thanakit, arguing that Bt7 billion was all the bank was willing to write off from its investment in the finance company. A compromise has to be found before another big casualty unfolds.




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