News on 23 May

South China Morning Post May 23, 2000

SECTION: BUSINESS POST; Pg. 1

HEADLINE: Peregrine unit payouts in July

BYLINE: Karen Cooper

BODY:

Creditors of Peregrine Fixed Income - whose claims were subject to the outcome of a landmark court case over how they should be valued - are set to receive a first dividend payout in July after liquidators received a judgment in their favour.

The case, heard in England's High Court, centred on a dispute over how terminated swap contracts transacted under International Swaps & Derivatives Association (Isda) master agreements should be valued.

It was initiated by Peregrine group liquidators PricewaterhouseCoopers after certain counter-parties to the huge array of transactions struck by the group believed the amount they owed Peregrine should be scaled back due to their reduced credit standing after the Asian crisis.

The case, made against Thailand-based Robinson Department Stores and heard in an English court because most master agreements are subject to English law, was necessary to clarify how much was owed to the group and how much it should pay out.

When the group went into liquidation in January 1998, it had unsettled derivatives transactions comprising more than 2,000 swaps, forwards, options and other products involving almost 300 counter-parties.

These contracts had a notional value of more than US$ 15 billion and represented total debtor and creditor positions of about US$ 1.5 billion and US$ 1 billion, respectively.

Until the judgment, however, liquidators of Peregrine Fixed Income - the group's largest operating arm - had been unable to process claims made by about 83 Isda creditors for HK$ 6.5 billion.

At the heart of the case was whether the credit quality of a non-defaulting counter-party to a derivative contract should determine the settlement amount. PricewaterhouseCoopers said yesterday the 17-page judgment, which may still be appealed, rejected significant discounting of Isda claims for reasons of credit standing.

It said the Peregrine Fixed Income liquidators "currently consider that the judgment has satisfactorily resolved the Isda valuation issue and has vindicated the approach taken by the liquidators".

When the liquidators announced last August a first interim payout to creditors of 12.5 cents in the dollar, they said they had set aside about HK$ 850 million to cover potential payments to Isda creditors.

PricewaterhouseCoopers said yesterday the liquidators planned to start adjudicating on those creditors' claims as soon as practicable.

Simon Copley, lead liquidator for Peregrine Fixed Income, said he expected to be in a position to send out cheques for this "catch-up first interim dividend" in July.

The catch-up dividend will absorb most of the HK$ 850 million set aside, while the balance will be put towards a second interim payment to all creditors.

This is likely to be declared in September and is expected to be at least 8 cents in the dollar.

Isda master agreements are widely used in financial markets. Most Isda-related deals struck by the Peregrine group ended when it went into liquidation. Peregrine, once Asia's largest home-grown investment bank outside Japan, collapsed with liabilities of HK$ 35 billion.

Last month, liquidators revised upward their range of final dividend forecasts to all creditors after better than expected asset realisations. The estimated minimum return to creditors has been increased to 25 cents in the dollar from an original estimate of 19 cents.