Northeast Asia Financial Hub: Niche Market

In Cheong-La, Incheon FEZ

Soo-Ryong Kim

CommissionerPresidential Committee on Northeast Asian Business Hub

Financial Hub in Northeast AsiaFinancial Hub in Northeast Asia

• Foster development and common prosperity of the region.

• Advanced financial services needed by MNC’s of the FEZ engaged in Transportation/Logistics, IT/BT, R&D, and other businesses.

• Competitive financial services industry further enhances competitiveness of Transportation/Logistics, IT/BT, and other businesses of the FEZ.

• Competitive financial services industry enhances South Korea’s ability to absorb exogenous shocks and minimizes the chance of another financial crisis.

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• Cost of building a financial hub is relatively small.

Returns are substantial due to the creation of high

value added.

• What it takes is not a huge magnitude of capital outlay

but the enhancement of regulatory environment and

supervisory system.

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Financial Hub in Northeast AsiaFinancial Hub in Northeast Asia

Needs for Northeast Asia Financial HubNeeds for Northeast Asia Financial Hub

• A financial hub necessary to support the robust growth expected for the economies of Northeast Asia.

• Majority of FX reserves of the three countries of Northeast Asia exceeding $1.2 trillion currently invested in New York market. Need to induce some of them back to where their owners live.

• Fund requirement for Russia’s vast natural resources development, China and North Korea’s infrastructural development, South Korea’s pursuit of Northeast Asia Business Hub, construction of the Trans-Siberia railway linking Europe and Northeast Asia, etc. Fund raising out of its own market is more effective.

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Northeast Asia Financial HubNortheast Asia Financial Hub

• Seoul (Myung-dong and Yoido) could become a hub through accelerated internationalization, liberalization of regulatory environment and enhancement of supervisory system for the following areas of business where it is gaining international competitiveness :

Stock Market, Local Currency Bond Market,

Options & Futures Market, FX Market,

Derivatives Market, Life Insurance Market,

Real Estates Finance and IT’s Consumer Finance

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Northeast Asia Financial HubNortheast Asia Financial Hub

• Propose to develop Cheong-La Area of Inchon FEZ as a world-class resort (a la Disney or MGM Entertainment) and a niche financial market specialized in the following high value added areas of financial services:

Project Finance(Infrastructural Finance, ABS)

Restructuring, Private Equity (IT/BT/M&A),

Asset Management, Properties Management,

Back-up Processing Center for financial institutions,

Consultancy, Legal Services, Accounting Firms

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Niche Finance MarketNiche Finance Market

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Benchmark Singapore, Zurich, Bahrain, and Hong Kong as successful niche markets

Offshore Finance

Induce foreign banks to Cheong-La by depositing a portion of Korea’s FX reserve with their new operations in Cheong-La

Tax incentivations such as exemption of corporate income tax,acquisition tax, and registration tax for dividends

No reserve requirement from the Bank of Korea

Portion of domestic liquidity, currently estimated at $350 billion,will be induced to the project bonds issued by the multiplicity of project consortia consisting of world-class MNC’s and SouthKorean conglomerates pursuing projects in and out of the FEZ’s

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Why Cheong-La?Why Cheong-La?

• More than $180 billion is expected to be invested in Cheong-La, New Songdo City and Yongjong-do to develop a hub for transportation and logistics, IT and BT, R&D centers, financial services, and tourism.

The Government’s plan is to induce regional headquaters or bridgeheads of hundreds of MNC’s to these FEZ areas.

This includes the plan of The NSC Development Company, a JV of POSCO and Gale Company, which has launched its effort to induce $20 billion into the development of the New Songdo City.

• These MNC’s regional HQ’s and bridgehead operations need high value added financial services as well as conventional banking services well suited for their expansions and ventures in Northeast Asia.

• Geographic distance away from the Seoul Market is not a matter of concern at all thanks to South Korea’s super speed IT infrastructural capacity.

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Project FinanceProject Finance

• In funding massive capital needs for the development of Northeast Asia Business Hub, the Korean Government plans to minimize the use of fiscal fund by maximizing inducement of FDI. • The Government plans to induce MNC’s to tap Korea’s abundant domestic liquidity (estimated at $350 billion) to partially finance their projects in this region.

• Liquidity in both the Korean and international markets need to be brought into participating in not only the project equity but also debt financing such as project bonds, ABS bonds or infrastructural bonds to be issued by project companies of both MNC’s and Korean businesses.

• The Government will want to balance the application of local capital and foreign capital on a 50:50 basis from the standpoint of her risk management.

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• PF bonds (both dollar and won denominated) need to be rated as investment grade securities by rating agencies such as S&P, Moody’s, etc.

• At the initial stage, the dollar-denominated PF bonds need to be funded via 144A private placement execution in the US market. Eventually, some of these bonds need to be funded partially by South Korea’s FX reserve and international liquidity induced on to Cheong-La market.

• The won-denominated PF bonds also need to be structured based on project cash flow and risk profile.

Project FinanceProject Finance

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• Investors in both dollar and won tranches need to feel comfortable with intercreditor agreements wrapping up the collateral packages designed to minimize incremental external debt of South Korea and to eliminate the need for financial guarantees of the central and municipal governments.

• Hundreds of PF bonds issued in both Korean and US markets issued this way will develop yield curves and derivatives originations, which in turn will help accelerate the development of a financial hub.

Project FinanceProject Finance

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• When rating new PF bonds, induce rating agencies such

as S&P and Moody’s to work with the Korean local credit

rating agencies in order to help upgrade the Korean credit

ratings industry.

• The multiplicity of PF bonds would induce law firms,

consultancy, and accounting firms to Cheong-La as well.

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Project FinanceProject Finance

• Korean banks have a total of 20 PF professionals and 64 supporting staffs. As PF receives attention of senior management as a focus area of business, capability upgradation of the Korean banks will be accelerated:

• A lot of foreign banks having presences in Korea have begun to recognize the strong potential of the Korean PF bonds origination and distribution markets and are expected to compete to take the lead:

Citigroup, Deutsche Bank, JP Morgan Chase, BoA,UBS, Mitsubishi Tokyo, HSBC, ABN AmRo,BNP Paribas, Morgan Stanley, Goldman Sachs,

Merrill Lynch, CSFB, etc.

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Project FinanceProject Finance

• As the entities issuing PF bonds and loans are the project companies established by consortia of the world class MNC’s and Korean businesses, investors at home and abroad would feel incentivated to be part of the action.

• A lot of foreign banks and institutional investors will be vying for opportunities to arrange attractive project finance packages for a number of projects such as Gales’ NSC, Cheong-La theme parks, Trans-Siberia Railway, toll bridges, ports, LNG Gas pipelines, etc.

• As activities increase in this area, foreign banks and institutional investors will be incentivated to consider the possibility of setting up their regional offices here.

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Project FinanceProject Finance

RestructuringRestructuring

• The financial crisis was a blessing is disguise in that it brought the level of knowledge and skills of the Koreans in a broad swath of sectors up to the level of advanced countries. The skill sets and know-how of professionals of many Korean institutions such as KAMCO have been greatly enhanced in the area of corporate restructuring advisory, mergers and acquisition advisory, asset backed securitization, etc.

• South Korea will be able to compete effectively with foreign investment banks on the looming business opportunities in the area of restructuring advisory and purchases of distressed assets.

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• Potential restructuring market in Northeast Asia

is substantial:

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RestructuringRestructuring

China 337.3

Japan 410.0

Taiwan 60.0

Size of NPL (in billion dollars estimated at end 2002)

• Higher yielding assets and securitized products repackaged out of restructuring opportunities would attract international liquidity and part of FX reserve of Northeast Asian countries.

Its capability is world class. Needs to be converted into an investment bank specialized in high value added business such as restructuring-oriented investment banking, purchases of distressed assets in foreign countries, underwriting and brokeraging ABS bonds, restructuring advisory, etc.

KAMCO

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RestructuringRestructuring

• As more Northeast Asian transactions are originated,

potential will increase for private equity firms,

vulture funds, real estate developers and investors

to move their regional offices to Cheong-La.

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RestructuringRestructuring

Asset ManagementAsset Management

• Asset management market needs not be in an urban center.

Rather, fund managers prefer to be located in or near

pristine resort areas remote from cities.

• In the case of New York, asset management firms, hedge

funds and asset management divisions of insurance

companies are located in the suburban New Jersey and

Greenwich, Connecticut.

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• Select three or four funds out of top 15 of the world.

Offer part of our National Pension Fund to be managed

by them in return for setting up their regional

headquarters here.

• Enhance regulatory environment and infrastructures

• Encourage local pension funds and insurance companies

to make strategic alliances with those select foreign asset

management funds in order to maximize learning

experiences.

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Asset ManagementAsset Management

• The sharply increasing number of wealthy individuals in China and Taiwan, continuously rising interest of Japanese and Korean individuals in making foreign investment: sufficient incentives to attract major investment funds of the world to this part of the world. Bold steps to take the initiative ahead of competition will pay off. • The Government plans to develop Cheong-La area as a world class resort complex a la Disney World, MGM Entertainment, or a combination of the likings of fund managers of the world.

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Asset ManagementAsset Management

• The second largest bond market in Asia

• The third largest stock market in Asia

• The most advanced IT infrastructure in the world

• Korea holds one of the largest FX reserves in the world, three times larger than Singapore’s

• Comparatively better climate than Hong Kong and Singapore due to four distinct seasons

Korea’s CompetitiveAdvantages

Korea’s CompetitiveAdvantages

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Asset ManagementAsset Management

Private EquityPrivate Equity

• Private Equity investors seek high returns on their investments similar to the PE funds hunting for bargains in the restructuring markets.

• PE funds undertake investments that are either in risky new Firms pursuing complex new technologies or in troubled mature companies with numerous organizational pathologies and potential legal liabilities.

• Many features of PE funds can be understood as responses to this uncertain environment, rife with many information gaps.

• Asset managers and pension funds hire only sophisticated PE funds with well-defined objectives as “gate-keepers” and invest their capital in those PE funds.

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• Global IT/BT industries established in the New Songdo City of the Inchon FEZ would bring about brisker recovery of venture firms.• Four critical factors prohibit venture firms from borrowing bank loans to meet their financing needs:

• Most pension funds and assest managers have very small staff. Meanwhile, PE funds undertake investments by analyzing responses to the four critical factors above in order to generate incremental returns independent of how the broader markets were performing.

① Uncertainty② Asymmetric Information(Information

Gaps)

③ Nature of Firm Assets④ Conditions in Product Markets

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Private EquityPrivate Equity

• Pension funds and asset managers have a “leap of faith’ in PE funds with strong track records and continue to invest their capital in those PE funds.

• Many PE funds are skeptical about sustainability of attractive returns in venture capital and LBO investments in many developed nations. They are looking for new areas of growth such as IT-oriented Korea.

• Thanks to innovations in information and communication technologies, investors in developed countries can better monitor their investments abroad.

• New Songdo City’s IT/BT hub would attract global PE funds.

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Private EquityPrivate Equity

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• Strategy to induce global PE funds. As a first step, offer a portion of Postal Bureau insurance assets and Korea’s FX reserve to be managed by five or six PE funds out of Top 30 of the world. In return, they shoud establish their presences in Cheong-La.

• Just like the Silicon Valley and Boston, the development of NSC and Cheong-La would bring about immediately related service industries such as local venture capital firms, law firms, industrial and financial consultancy firms, and accounting firms.

• PE fund’s eventual exit activities such as IPO’s and private divestitures woud help enhance the competitiveness and sophistication of the Korean financial industry in a global scale.

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Private EquityPrivate Equity

IssuesIssues

• Use of English as an official language in FEZ.

• Encourage local banks to hire professionals of global markets in the area of project finance, M&A advisory, asset management, derivatives structuring, and private equity. Addition of these professionals would help accelerate the growth of competitiveness of the Korean financial industry.

Positive System Negative System

Enhancement of Regulatory System

Converted into

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Northeast Asia Financial Hub:Niche Market

In Cheong-La, Incheon FEZ

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