NEWS
News ----------------------------------------------------------------------------------------------------------- 1
FITCH RECEIVES BRANCH
LICENCE IN TAIWAN
Roxanne Liu
Fitch Ratings has received final approval
from Taiwan's Securities and Futures
Commission to operate a branch office in
Taipei.
Following the receipt of its branch
licence, Fitch will be the first rating
agency in the Taiwan market to be fully
controlled by a major international rating
agency and will be one of just two ratings
agencies operating in Taiwan. Fitch
expects to assign National ratings
(denoted by a "twn" suffix) to Taiwan's
financial institutions, corporates and
securitisation transactions issued in the
domestic market.
Fitch currently covers close to 40
financial institutions in Taiwan. The
agency expects to build on its strength in
the financial sector and expand into
ratings for Taiwanese corporate and
structured finance transactions. Fitch will
initially add two local analysts to its team
in Taiwan and this team will continue to
work closely with the agency's analytical
team in Hong Kong in order to ensure the
ratings assigned in Taiwan are in
compliance with Fitch's global standards.
Roxanne Liu, branch head for Fitch in
Taiwan, stated: "We are very excited to
be opening a branch in Taiwan. We
believe that the disciplines and
methodologies developed by Fitch in its
business in other parts of the world in the
areas of financial institutions, structured
finance, insurance and corporate ratings
are directly applicable to the Taiwan
market and should assist the development
of the financial markets here." 
INSIDE THIS ISSUE
Fitch Receives Branch Licence in Taiwan 1
Special Report ----------------------------------------------------------------------------------------------- 2
Korean Consumer Finance Sector: Current Problems and Implications for Banks 2
Sovereigns ---------------------------------------------------------------------------------------------------- 6
Fitch Unimpressed With Indian Budget for 2003/04
Fitch Rates Republic of Philippines’ EUR300m Bond Issue ‘BB+’; Outlook Negative
6
6
Fitch Comments on Risks From North Korea 7
Fitch Affirms India’s Sovereign Ratings 7
Fitch Affirms Hong Kong’s Ratings 8
Fitch Rates Republic of Philippines’ USD500m Global Bond Issue ‘BB+’ Outlook Negative 9
Asian Sovereigns Coverage March 2003 9
Banks / Financial Institutions ---------------------------------------------------------------------------11
Fitch: Basel II Changes to Enhance High-Yield Capital Market Activity 11
Fitch Assigns ‘F2’ Short-Term Rating to Korea First Bank 11
Fitch Affirms Far Eastern International Bank at ‘BBB-’; Outlook Moved to Stable 11
Fitch Places AIG Finance (Hong Kong) Ltd’s Long-Term Local Currency Rating on Watch
Negative 12
Fitch Assigns ‘B-’ Subordinated Debt Rating to Indonesia’s Bank NISP 12
Fitch Affirms Korea Development Bank’s Global Notes Rating on Tap Issue 13
Fitch Assigns Rating of ‘A’ With a Stable Outlook to OCBC Bank’s Preference Shares 13
Philippine Banks: Asset Quality Situation and Solutions 14
Singapore Banks’ 2002 Results: Sound Banks, Weak Operating Performance 16
Thai Banks’ 2003 Outlook Stronger but Risks Remain 20
SK Global Not Another Daewoo for Korea’s Banks 22
Corporates---------------------------------------------------------------------------------------------------26
Fitch Upgrades Rating of Korea Electric Power Corporation to ‘A-’ 26
Fitch Maintains Telstra Ratings Following Write-Off of Reach Investment 26
Fitch Affirms New World Infrastructure ‘BB-’ Rating; Withdraws on Restructuring
Completion 27
Fitch Assigns ‘BBB+’ Rating to Huaneng Power International 27
Telstra Dividends, Investments Could Pressure Ratings 28
Fitch Assigns ‘AA+’ Rating to Singapore Power 29
Structured Finance ----------------------------------------------------------------------------------------31
Fitch Assigns Ratings to Artemus Strategic Asian Credit Fund Limited CDO 31
Fitch Assigns ‘A+’ Rating to Cobalt Asset Management’s Notes 31
Fitch Affirms Ratings of Notes Issued by ALCO 1 Ltd 32
Fitch Assigns Rating to ABN AMRO ABCP Conduit – Orchid Funding Corporation 32
Credit Market Research----------------------------------------------------------------------------------35
Fitch Ratings: Investors Lose USD80bn Par Value on 2002 Defaults 35
National Ratings--------------------------------------------------------------------------------------------36
Fitch Affirms Thailand’s National Petrochemical at ‘A+(tha)/F1(tha)’ 36
Fitch Assigns ‘A-tha’ to Thailand's National Finance Bonds 36
Fitch Assigns Siam Cement’s Bonds National Rating of ‘A-(tha)’ 37
Fitch Assigns National Ratings of ‘A-(tha)/F2(tha)’ Outlook Stable to Thailand’s Siam
Cement 38
Fitch Lowers Ratings of Thailand’s Siam Pulp and Paper to Parent’s Level 39
Fitch Assigns ‘A(tha)’ National Rating to Unsecured Debentures of MBK Development 39
Osprey Series I Company Limited 40
Fitch assigns in-principle ‘AAA(ind)(SO)’ rating to secured Non Convertible Debentures
(NCD) of Tata Teleservices Limited, fully guaranteed by Dutch financial institution FMO 41
Fitch assigns in-principle ‘AAA(ind)(SO)’ rating to the Secured Non-Convertible Debenture
(NCD) programme of Tamil Nadu Road Development Company Limited (TNRDC), credit
enhanced by guarantee from IL&FS 41
Fitch Strengthens Marketing Team in Asia
Fitch Ratings has announced the appointment of Larry Lee as Director – Business
Development, Hong Kong. Larry joins Fitch from Citicorp, Hong Kong, where he
was a senior member of the debt origination team covering China/Hong Kong SAR.
Larry will report to Vivek Goyal in Singapore for Capital Markets and Issuer
Marketing and Ian Rothery in London for Products Sales.
1
SPECIAL REPORT

KOREAN CONSUMER FINANCE SECTOR: CURRENT PROBLEMS AND IMPLICATIONS

FOR BANKS
Paul Grela

Introduction
Concerns about the health of consumer
FSS Bank Lending Data
Nov Jun Dec
lending in Korea have been growing for
(%) 2002 2002 2001
several months and have recently started
Delinquency Rate on
to cause serious problems for the credit
- Household Loans 1.60 1.29 1.30
card companies there. The immediate - Credit Cards (Banks) > 1 Day 12.2 9.26 7.31
trigger was the scandal at SK Global, - Credit Cards (Card Companies) > 1 Day 11.7 7.9 5.8
which caused investors – notably - Credit Cards (Card Companies) > 30 Days 6.7* 5.2 3.8
investment trusts – to sell bonds to meet * As of end-September 2002
redemptions from their own funds. The
SK scandal raised concerns about the
health of other Korean companies and Delinquency Ratios by Product Type
attention inevitably focused on the credit Balance Delinquency Rate
card companies, whose bonds have also (KRWbn) > 30 days (%)
been sold. (For details of the direct Dec 02 Jun 02 Dec 01 Dec 02 Jun 02 Dec 01
ramifications of the problems at SK Credit Card Receivables 18,158 18,228 16,005 4.1 2.7 1.8
Global, please see Fitch Ratings’ recent Card Loans 8,306 7,579 5,793 10.2 5.5 4.3
comment entitled ‘SK Global Not Total Receivables 33,543 31,222 26,847 6.3 3.7 2.6
Another Daewoo for Korea’s Banks”,
published on 28 March 2003, available on
the agency’s website, substantial element of residential Delinquencies are Understated
www.fitchresearch.com). This has led to mortgage lending. Even the ratio on credit due to Rapid Growth in
liquidity problems for the credit card cards does not appear to have reached a
level that would be considered alarming, Receivables
company sector, which was already facing However, the apparently modest level of
mounting pressure. Fitch does not cover given the high profitability of the card
companies and their ability to absorb delinquencies is seriously affected by the
any of the Korean card companies and so rapid growth in receivables, which
does not have access to detailed, charge-offs. More comprehensive data on
the over 30-day overdue figures would be understates the real delinquency ratio. If
comprehensive company data. This report the ratio is recalculated based on lagged
analyses selected public data and sets out useful in assessing the trend; in the past,
more attention has been focused on the receivables, the delinquencies are
Fitch’s observations and opinions on considerably higher. In the case of LG
major issues. one-day overdue figures, which have been
more readily available. Card, for example, the end-2002
delinquency ratio of 6.3% rises to 6.8%
Delinquencies Concentrated in on a six-month lagged basis, and to 7.9%
As Fitch does not have comparable
Credit Card Lending breakdowns for the system, it has referred on a 12-month lagged basis.
As Fitch has frequently noted, while to the figures for LG Card – one of the
credit quality problems in personal largest credit card issuers, with almost 12 Extensive “Re-Ageing”
lending have grown over the past year, million card members and a market share It is common practice among Korean
delinquencies have been largely of over 20%. This discloses that credit card companies to reschedule loans
concentrated within credit card lending. delinquencies are lower for cash advances that become overdue. A third-party
The “household lending” of the banks has and instalment credit, which are short- guarantor with a verifiable income is
remained relatively good, according to term loan products, and higher for “card often required, though this may be a
Financial Supervisory Service (FSS) loans”, which are medium-term loans family member. Although all the
statistics. repaid over one or two years (see table companies engage in this practice, the
above). A significant reason for this is the extent of rescheduling varies, making it
Delinquency Ratios Appear inclusion in Card Loans of “re-aged” difficult to compare the asset quality
Modest loans – see below. numbers of the various card companies.
As the table shows, the ratio of delinquent In the case of LG Card, the numbers are
loans in the household loans portfolio large: it reported “refinanced” loans of
remains very low, thanks to the KRW3,874 billion at end-2002, a
remarkable 11.6% of its managed
receivables. As of the same date, LG

2
KOREAN CONSUMER FINANCE SECTOR: CURRENT PROBLEMS AND IMPLICATIONS FOR
BANKS (CONT.)
Continued from page 2

reported that 22% of its refinanced loans

were overdue by more than 30 days. LG Card Capital Ratios 2002 Credit Card Company
(%) 2002 2001 Results
Funding is Heavily Reliant on Equity / Assets – Reported 9.14 9.48 (KRWbn) LG Kookmin Woori KEB
Accessing Capital Markets Equity / Managed Assets 5.25 5.48 Net Income 350.4 (260.9) (648.5) (52.4)
CAR as per FSS Guidelines 9.1 9.5 ROE (%) 22.5 (16.8) (55.8) (6.8)
The credit card companies have been very CAR as per FSS Guidelines 15.7 12.4
active in securitising their receivables in (Adjusted)
recent years, with the result that ABS The large loss at Kookmin Card
issuance typically accounts for 30%-40% represented efforts by the company to
of their total funding; a similar amount is Strong Reported Profitability clean up its portfolio, while the loss at
corporate bond issues in the domestic Thanks to strong revenue growth and, Woori Card reflected one-off costs
bond markets and the remainder is short- until very recently, low levels of associated with intra-group restructuring,
term funding such as CP. The ABS and delinquencies and charge-offs, the under which Woori Card bought Woori
corporate bonds normally have a maturity performance of the card companies has Bank’s credit card business. Heavy losses
of three years – the norm for Korean been exceptionally strong in recent years. at Kookmin Card have continued into
corporate debt, but rather short by LG Card’s ROE was 60.8% in 2001; this 2003 and most other companies have also
international standards. Back-up facilities fell to 22.5% in 2002 as provisions fallen into loss.
are limited, as it has not been normal surged. A simplified P&L for LG Card
practice in Korea to keep in place summarises the key features of the card How Adequate are Loan Loss
companies’ profitability: Reserves?
extensive committed liquidity facilities, At end-2002 LG Card’s impaired assets
especially for those entities that rely on LG Card were as follows:
their name, i.e. those associated with
(%) 2002 2001
banks and with the large chaebol. LG is
unusual in having a high proportion of Yield on Loans 20.7 23.3 LG Card
Funding Costs 6.5 7.8 (KRWbn)
securitisation in its funding. NIS 14.2 15.6
Overdue Receivables 748
Cost / Income 33.0 36.9 Overdue Card Loans 848
LG Card Funding Sources Pre-prov Profit / Managed 10.9 9.8 Total Overdues 2,121
As % Managed Receivables (%) 6.3
End-2001 Assets
Provisions / Managed 9.24 4.95 Refinanced Loans 3,002
(%) Total Impaired 5,123
Assets
Short-term Borrowings 34 Provisions / Pre-prov Profits 84.5 50.3 As % Managed Assets (%) 15.3
Long-term Borrowings 17
Securitisation 49 Net Income / Managed 1.1 3.1
Total 100 Against which it had loan loss reserves of:
Assets
Net Income / Equity 22.5 60.8
LG Card
Capital Ratios are Generally (KRWbn)
Low Growth in equity has not matched the
Loan Loss Reserves – Opening 792
The average capital ratio for the credit increase in assets in recent years, resulting Balance
card companies – as per the guidelines set in declining equity/assets ratios. The Provisions (Gross) 2,697
by the FSS – was 12.4% at end- “adjusted” regulatory CAR has improved; Charge-offs (Gross) 1,305
September 2002. From Fitch’s viewpoint, in calculating this ratio, low-risk assets Closing Balance 2,278
however, this is overstated not only are excluded and supplementary capital is
because of potential charge-offs, but also included, notably subordinated debt and
This resulted in LLR coverage and net
because the assets in question are on a loan loss reserves against Normal and
charge-off ratios of:
reported, not managed, basis. The Precautionary exposures. The minimum
companies normally use securitisation as CAR is 7%, based on the adjusted figure,
with a rise to 8% planned for 2003. LG Card
a funding source, not as a means of
(%)
transferring risks; they usually keep the
LG’s performance in 2002 was in fact Net Charge-offs / Managed Assets 3.6
junior tranches of their own ABS and it is
better than the sector average since, LLR / Managed Assets 6.8
understood that they take action to LLR / Overdue Loans 107.0
according to the FSS, the nine credit card
maintain the quality of their assets in their LLR / Overdue + Refinanced Loans 44.0
companies reported an aggregate net loss
ABS pools. As a result, on a managed
of KRW262bn in 2002, compared with a
basis capital ratios are much weaker than
profit of KRW2,487bn in 2001. Net
reported.
income and ROEs for the major
companies were as follows for 2002:

3
KOREAN CONSUMER FINANCE SECTOR: CURRENT PROBLEMS AND IMPLICATIONS FOR
BANKS (CONT.)
Continued from page 3
The coverage of receivables overdue by
30 days appears comfortable, but the
question of the appropriate coverage of
refinanced loans is more problematic.
These could be vulnerable in the event of
further pressure on consumer credit
quality – see below.
Incidence of New
Delinquencies
While the year-end position appeared
adequate in terms of reserve coverage,
this simply shows the stock position –
there is an ongoing flow of new
delinquencies. Fitch estimates, based on
year-end delinquencies and the amount of
charge-offs, that the incidence of new
delinquencies in 2002 was running at just
under 10% of managed receivables as of
the start of the year. Available data
suggest that delinquencies have continued
to grow rapidly in 2003: LG card’s 30-
day overdues had reached 9.4% by end-
February, up from 6.3% at the end of
2002 – suggesting a near-50% increase in
overdues. The card companies are
expecting delinquencies to peak in the
first half of 2003, but at a manageable
level. Whether this still holds good
depends on the extent to which the
problems in the credit card/consumer
finance industry deepen in coming weeks.
What Could Go Wrong?
1. A Credit Crunch for Credit
Card and Consumer Finance
Companies
Rapid growth in recent years has led the
card companies to rely heavily on capital
markets for financing and the relatively
short-term nature of their “long-term
borrowings” (typically three years for
corporate loans and ABS) means that their
rollover requirements are large. More
restricted access to domestic and
international capital markets would cause
growth in receivables to slow and
possibly to reverse, which would in turn
lead the companies to call in loans and
reduce credit lines. This would have
adverse effects on the economy as
consumer spending became dampened,
and on the asset quality of card companies
as moves to call in loans triggered more
defaults.
Problems for Banks
A deterioration in the quality of credit
card companies’ assets would also spill
over into the quality of the banks’ credit
card lending and to that of the consumer
finance companies, as borrowers from
multiple sources defaulted. Fitch takes the
view that the banks should be able to ride
out such losses in their credit card
portfolios, thanks to their more diversified
asset mixes and revenue streams
compared with the card and consumer
finance companies. The consumer finance
companies are somewhat more diversified
than the card companies, having more
secured lending and asset finance, for
example, but are still vulnerable to rising
defaults in their increasingly important
unsecured personal loan products.
This is a likely scenario. Its implications
are a hit to banks’ earnings from higher
consumer defaults, but not a crisis for the
banking sector. The adverse effects on the
card companies would be more severe,
with net losses for many companies and
serious financial problems for some,
leading either to shareholder support or
some forced mergers.
2. A Possible Implosion in the
Credit Card/ Consumer Finance
Sector
A more worrying scenario would be the
implosion of the credit card and consumer
finance companies arising from not
merely a credit crunch that limited access
to new funding, but a rapid loss of
existing funding. How could this come
about? The main concern is the
securitisations; these often incorporate
“triggers” which, if breached, could lead
to the unwinding of the securitisations.
These triggers include:
• Capital ratios falling below the
regulatory minimums;
• The excess spread falling below a
specified level;
• The delinquency ratio rising above a
specified level; and
• The default rate rising above a
specified level.
Given the importance of securitisation as
a funding source, any such unwinding of
4
existing ABS issues would force
companies to channel repayments into
paying out ABS investors; if this occurred
on a sufficiently large scale, it would
result in a dramatic shrinking and/or
reversal in consumer financing, as the
sector imploded.
Where Do We Go From Here?
The implications of the worst case
scenario are clearly so severe that action
will be taken to prevent it from being
realised. Companies that issue ABS and
see access to this source of funding as
important to their future may choose to
support their securitisations by, for
example, removing delinquent
receivables. Since most credit card
companies hold the first loss tranches of
their securitisations, they are exposed to
the initial losses. So long as they see
remaining value in their holdings of the
junior tranches, it is likely that they will
continue, as far as they are able, to
support their securitisations. Should they
choose to provide such support, the losses
arising on their own balance sheet may
push capital ratios down below regulatory
minimums, requiring them to raise new
capital. Similarly, delinquency rates can
be held down by charging off delinquent
loans, but capital will be hit by the
resulting losses if profits are not sufficient
to absorb them.
The card companies are already taking
action to strengthen their regulatory
capital ratios; reports indicate plans to
raise a total of KRW2trn of additional
capital, in the form of shares and
subordinated debt (although company-
specific details are not yet available). In
addition, recent reports indicate that
Korean credit card companies are moving
to increase interest rates charged on cash
advances by 1%-4%, raising these to
25%-28% on average, as early as May, in
order to improve cash flows and their
underlying profitability. The adequate
risk-pricing of credit card loans remains a
contentious problem for Korean credit
card firms due to heated competition in
the sector, which has tended to limit
companies’ capacity to price risk
appropriately – along with some
KOREAN CONSUMER FINANCE SECTOR: CURRENT PROBLEMS AND IMPLICATIONS FOR
BANKS (CONT.)
Continued from page 4
‘Substandard and Below’ Loans at End-2002
Non-
Banks banks Insurance
A. Total Loans 648.2 112.1
B. Substandard 15.1 12.0
B/A (%) 2.3 10.7
‘unofficial’ guidance that has attempted to
reduce the interest burden of cardholders
(and therefore to contain delinquency
rates). New shares are mostly being
issued to shareholders by those companies
with large institutional shareholders.
While any such capital increase is helpful,
capital ratios will be boosted only
modestly, from levels that Fitch considers
to be generally too low.
If the companies are not able to improve
their financial strength and thereby regain
the confidence of investors, the
government has indicated that it stands
ready to assist them. Possible support
measures include buying bad loans via the
state-owned Korea Asset Management
Company (KAMCO), and buying bonds
issued by the companies. The effect of the
first measure would be limited if the
purchases were at market value. Given
that the market value of the loans is
unlikely to exceed 25% of face value, the
cost for KAMCO of buying even loans
with a face value of KRW5trn would be
relatively limited – as would the
assistance to the card companies, which
may have to absorb large losses on the
sales. (They would have to recognise the
losses in any case after loans became
overdue for more than 180 days). The
second measure – buying their bonds –
would provide more direct and useful
support, given that the immediate problem
is the reluctance of domestic investors to
buy these bonds. However, there are as
yet no plans for the government to do this.
Securities
& ITCS Total
50.7 6.8 817.8
2.1 2.6 31.8
4.1 38.2 3.9
Summary
Although it has no direct impact on the
consumer finance sector, the SK Global
scandal has brought to a head long-
standing concerns about the health of
Korean credit card and consumer finance
companies, to the extent that investors are
reluctant to buy their bonds. As these
companies are heavily reliant on issuing
corporate bonds and ABS, this lack of
access to funding threatens at best a sharp
slowdown in consumer loan growth and at
worst an implosion in consumer credit as
companies are forced to call in loans to
repay debts. This would indirectly affect
banks, as some of their customers may
face difficulties if forced to pay loans to
other lenders.
Fitch considers the worst case scenario to
be unlikely, given the serious
consequences for the economy and for the
entire financial system. The credit card
companies are already taking action to
raise capital in order to avoid falling
below regulatory capital requirements. If
this is not sufficient, some can turn to
shareholders and related companies for
additional capital. If this is not sufficient
or not available, the government is likely
– as it has stated – to provide some form
of assistance, by helping to reduce
delinquency ratios by buying bad loans,
or by providing direct funding assistance
to the companies by buying bonds.
Fitch expects that the position of the card
and consumer finance companies should
5
stabilise thanks to these efforts and other
measures, albeit with some cost to their
shareholders and with some institutions
exiting the market (expected to take place
through forced mergers and acquisitions).
Given their more diversified lending mix
and revenue streams, banks should be
able to deal with consumer lending losses,
provided that their mortgage loans and
corporate lending remain sound. This
appears likely, as long as Fitch’s central
expectations for the Korean economy are
not blown off-course by external events.
So far, there has been little sign of any
spillover effect from credit cards into
other consumer loan products, as the still
low delinquency rate for Household
Loans shows. Uncertainties remain,
however, as to the ultimate level of
delinquencies, given the prevalence of
very short-term mortgage loans in Korea
(typically three years) and of bullet
repayments for most consumer loan
products.
Fitch therefore takes the view that the
health of the banking system should
remain adequate, as indicated by its
average Individual rating for Korean
banks of just below ‘C’ and average
Long-term rating for the commercial
banks of ‘BBB’.
According to the FSS data, the
improvement in Korean banks’ asset
quality improved during 2002, with the
proportion of loans classified as
‘substandard & below (SBL)’ at year-end
being 3.9% (see table above).
Fitch will issue a more detailed comment
on the performance and asset quality of
the Korean banks following its rating
review meetings with the banks. 
SOVEREIGNS
FITCH UNIMPRESSED WITH INDIAN BUDGET FOR 2003/04
Paul Rawkins
The 2003-04 Indian budget speech made
on 28 February 2003 has confirmed Fitch
Ratings’ expectations that the Indian
government is still not ready to grasp the
nettle and implement the fiscal
consolidation so essential to open the way
to sustained economic growth.
A combination of slow growth (4.4% for
2002/03), drought and a significant
shortfall in privatisation receipts
conspired to produce an estimated central
government budget deficit of 5.9% of
GDP in 2002/03, compared with an
original budget estimate of 5.3% of GDP,
thereby perpetuating a familiar trend of
budget overshooting. Fitch says that once
revenue items are adjusted for
privatisation receipts, which the agency
treats as a financing item, the 2002/03
deficit was virtually unchanged from the
previous year at 6% of GDP and points to
a continuing general government deficit
in excess of 10% of GDP, among the
worst of any Fitch-rated sovereign.
For 2003/04, the government is looking to
higher economic growth (projected at 6%-
6.5%) and enhanced privatisation receipts
to trim the deficit to 5.6% of GDP. While
this in itself is an undemanding target,
Fitch estimates that, excluding
FITCH RATES REPUBLIC OF PHILIPPINES’ EUR300M BOND ISSUE ‘BB+’; OUTLOOK
NEGATIVE
Paul Rawkins, Brian Coulton
On 14 February 2003, Fitch Ratings
assigned a Long-term foreign currency
rating of 'BB+' to a Republic of
Philippines' EUR300 million bond issue.
This issue, the first seven-year offering by
any Asian borrower in the euro-
denominated sector, means that the
government has now raised almost two
thirds of its gross external capital market
borrowing requirement of USD2.4 billion
for 2003. However, the agency points out
privatisation receipts, the deficit will
remain unchanged at 6% of GDP,
underlining the lack of political will to
address fiscal consolidation. Indeed, with
growth slowing and a general election due
by September 2004, the government faces
a difficult dilemma: on the one hand, it
would like to pump-prime the economy,
but on the other, the parlous state of
public finances means that it has virtually
no room to do so.
Fitch is disappointed that although the
government paid tribute to the recent
Kelkar Committee on tax reform, the
budget made little attempt to implement
any of the committee's recommendations,
beyond some improvements in the
efficiency of tax collection and the
introduction of a Treasury cash
management system. The agency
recognises the government's intention to
prepay some expensive external debt and
conduct public debt swaps with banks and
state governments as a valid debt
management strategy, but argues that this
fails to address the underlying malaise of
rising public consumption expenditure
and a narrow tax base.
In the absence of fiscal consolidation,
Fitch says public indebtedness will
that this figure excludes USD700m that
the Central Bank will need to borrow this
year, plus USD1.5bn-USD2bn for
Napocor, the state power company,
depending on how successful the
government is in privatising the
company's transmission assets.
Fitch says the rating Outlook remains
Negative, in line with the rating action it
took in November 2002, triggered by the
Philippines' deteriorating fiscal accounts
6
continue to climb: interest payments
currently absorb 50% of central
government revenue receipts and general
government indebtedness stands at an
estimated 77% of GDP, up from 66% in
1997/98. Privatisation receipts have the
capacity to pay down debt, yet the
government attained barely one quarter of
its target of INR120 billion in 2002/03
and Fitch sets little store by the higher
target of INR132bn for 2003/04.
The external sector has rarely looked
stronger. Further measures to liberalise
the capital account of the balance of
payments should play to India's new-
found attraction to foreign investors,
while international reserves of some
USD70bn represent a significant cushion
against external shocks such as a sharp
rise in oil prices. Fitch recently affirmed
its foreign and local currency sovereign
ratings of 'BB' and 'BB+' respectively
with a Stable Outlook. However, the
agency reiterates the point that external
strengths will weigh increasingly lightly
in the ratings' balance if the government
continues to overshoot its budget targets
and sidestep broader reforms, including
tax reform and privatisation. 
and rising public indebtedness. The
consolidated public sector borrowing
requirement rose to 7.3% of GNP in 2002
from 4.3% in 2001 and is set to rise
further to 7.6% in 2003. National
government debt rose to 71% of GNP at
end-2002 compared with 50% of GNP at
the end of 1998, around half of which is
denominated in foreign currency. 
FITCH COMMENTS ON RISKS FROM NORTH KOREA
Paul Rawkins, Brian Coulton
In commenting on the implications of
rising tensions on the Korean peninsula
for the sovereign creditworthiness of
South Korea, Fitch Ratings said on 13
February 2003 that recent developments
remained consistent with risk levels
already factored into South Korea's Long-
term foreign currency rating of 'A', noting
that on a number of occasions in the past
tensions have been very high, yet still
culminated in peaceful resolution. Fitch
expects a diplomatic resolution to the
current crisis to emerge and continues to
view war as an extreme scenario. South
Korea's economic fundamentals are
strong enough to absorb a period of
heightened tension without seriously
threatening its sovereign creditworthiness.
Only if the agency judged there to be a
material increase in war risk would it
review the ratings.
It is Fitch's opinion that alarming
statements made by North Korea in recent
weeks do not reflect an increased
compulsion to initiate a military attack on
South Korea or any other nation, but
rather that they represent strategic
behaviour on the part of the North
Koreans. Such rhetoric is a frequent
feature of politics on the Korean
FITCH AFFIRMS INDIA’S SOVEREIGN RATINGS
Shelly Shetty, Paul Rawkins, Brian Coulton
On 11 February 2003, Fitch Ratings
affirmed India’s Long-term foreign
currency and local currency ratings at
‘BB’ and ‘BB+’ respectively. The Short-
term foreign currency rating is ‘B’. The
affirmation and Stable rating Outlook
balance sharp improvements in India’s
external accounts during the past two
years with an ongoing deterioration in the
health of the public finances that shows
little sign of being addressed in the near
future.
Divergent trends between the fiscal and
external accounts have been accentuated
within the past year. India’s external
accounts have been bolstered by the
country’s current account surplus, steady
growth in software and merchandise
exports, rising Non-resident Indian (NRI)
peninsula. South Korea's economic
fundamentals – including its net external
creditor status, strong international
liquidity position, fiscal and current
account surpluses and post-crisis growth
performance – leave it well placed to
withstand even a prolonged period of
heightened tension without damaging its
creditworthiness. Its vulnerability to
swings in international investor sentiment
is low.
A diplomatic resolution to the current
North Korean crisis remains the most
likely outcome. For its part, North Korea
is fully aware that any military
confrontation with the South would be
impossible to win and would entail
potentially devastating consequences for
both countries. Likewise, with the stakes
for regional and global security extremely
high, the international community would
be likely to find it hard to countenance
outright military confrontation. As such,
Fitch’s view is that, despite the stepped-
up rhetoric, the risk of war remains low
and consistent with that already factored
into South Korea's credit rating. Any
diplomatic resolution to the current crisis
would require North Korea to end its
nuclear activities and accommodate
deposits and a pick-up in non-debt
creating foreign investment flows. As a
result, India’s international liquidity
position has strengthened, with
international reserves (excluding gold)
rising by USD18 billion between March
2002 and January 2003. The rise in
foreign exchange reserves has also
reduced India’s net external debt burden
from 300% of current external receipts in
1990/1991 to an estimated 38% in
2002/2003, which compares favourably
with the ‘BB’ median. However, growing
prospects of a conflict with Iraq could
expose India’s dependence on oil imports
and overseas workers’ remittances from
the Middle East.
In the light of India’s strengthening
external position, the government has
7
weapons inspectors in return for the
resumption of limited economic
assistance. With North Korea having
violated the 1994 Agreed Framework
through its failure to cease its nuclear
programme, this would be likely to
require a new multilateral framework.
This may emerge following the
International Atomic Energy Agency's
referral of North Korea to the United
Nations Security Council.
Nevertheless, the risk of a further
escalation in tension cannot be ruled out
and it is possible that certain events could
result in a material increase in the
probability of war. In past episodes, North
Korea has engaged in demonstrations of
its military capabilities, including missile
testing. It may well perceive that these
previous actions have wrought positive
results in terms of securing strategic
goals. But in the current geopolitical
environment such actions would represent
a significant increase in the level of
tension and, if judged to materially
increase the risk of war, would have
negative implications for South Korea's
creditworthiness and sovereign
ratings. 
begun to liberalise capital controls further.
Fitch expresses some concern that this
sequence of events could expose India to
greater shocks in the future, given the
urgent need to implement fiscal
consolidation and improve the health of
the banking system. India’s public
finances continue to deteriorate. At 10%
of GDP, the general government deficit is
more representative of a ‘B’ than a ‘BB’-
rated credit and is among the worst in the
realm of Fitch-rated sovereigns. With
high debt and a narrow tax base, interest
payments represent 50% of revenues,
amongst the highest ratio seen in
emerging markets. This prevents the
government from undertaking adequate
capital expenditure, thereby holding down
the potential growth rate of the economy.
Sizeable primary fiscal deficits and a
FITCH AFFIRMS INDIA’S SOVEREIGN RATINGS (CONT.)
Continued from page 7
narrowing gap between GDP growth and
interest rates on government debt have
seen general government debt continue to
climb – it is expected to reach nearly 80%
of GDP by end 2002/03.
The affirmation of India’s sovereign
ratings recognises that the government
still has room to manoeuvre: a large
domestic capital market allows it to
finance most of its deficit domestically.
Revenues could be increased by
expanding the tax base, minimising tax
exemptions and improving tax
FITCH AFFIRMS HONG KONG’S RATINGS
Brian Coulton, Chris Pryce, Paul Rawkins, Therese Feng
On 16 January 2003, Fitch Ratings
affirmed the Long-term foreign and local
currency ratings of Hong Kong, Special
Administrative Region, People’s Republic
of China at ‘AA–’ (AA minus) and ‘AA+’
respectively. The Short-term foreign
currency rating was affirmed at ‘F1+’.
The Outlook is Stable. While there has
been a significant deterioration in
economic and fiscal performance in
recent years, reflected in the emergence of
large fiscal deficits, persistent deflation
and historically high levels of
unemployment, Hong Kong’s
creditworthiness remains supported by
still sizeable fiscal reserves, healthy
external accounts, a strong banking
system and a robust legal and regulatory
framework. These strengths afford the
economy considerable latitude in
absorbing short-term difficulties.
Nevertheless, there is a need to develop a
coherent and credible medium-term fiscal
strategy to underpin confidence in the
currency board arrangement.
Hong Kong has suffered a harsh
economic and financial climate since
1997-1998 as growth has slowed to an
annual average rate of 2.25% from 5% in
the preceding 10 years, unemployment
has risen to over 7% and consumer prices
have fallen by around 12% from their
peak. Most dramatically, Hong Kong’s
historically enviable fiscal accounts have
swung into a large deficit that is likely to
exceed 6% of GDP in the current fiscal
year, following a 5% shortfall in 2001.
The property market slump – which has
administration, all of which have been
outlined in the recent Kelkar
recommendations to reform India’s tax
system. In addition, if the country were to
embark on an aggressive privatisation
drive, it could apply these proceeds to
retire public debt. Recent positive
statements regarding the sale of the two
state oil companies – which had
previously been stymied by political
intervention – are encouraging. However,
political compulsions could make
privatisation and implementation of the
politically sensitive tax measures difficult,
seen residential prices decline by around
60% from their late-1997 peaks – has
reduced land-related tax revenues,
including profits tax. Meanwhile,
government expenditure has risen as a
share of GDP, reflecting real increases in
civil service salaries and rising social
security payments.
Despite these problems, Hong Kong still
exhibits major credit strengths. Even after
financing this year’s deficit, the
government will have no debt and fiscal
reserves of over 20% of GDP, more than
sufficient to cover a full year of
government spending. While the
narrowing of the tax base in recent years
needs to be reversed over the medium
term, there is plenty of scope for raising
additional revenues without jeopardising
Hong Kong’s status as a low-tax
economy. External indicators also remain
extremely robust. The current account
surplus was likely to have been over 8%
of GDP in 2002, boosted by rising
services exports to Mainland China and a
restoration of price competitiveness to
1995 levels. Hong Kong’s net external
assets are equivalent to 90% of GDP,
while official foreign exchange reserves
have risen to around USD112 billion,
representing 3.7 times the monetary base
and supporting the currency board. The
banking system remains strong, with
improving asset quality, robust capital
adequacy and healthy profitability, in
spite of the deflationary environment.
In the light of its status as a Special
Administrative Region, Hong Kong’s
8
given the upcoming elections in a number
of states in 2003 and national elections in
2004. Fitch warns that continued back-
pedalling on economic reforms and fiscal
profligacy, resulting in sub-optimal
growth and rising government debt, could
lead to a downward adjustment of the
local currency rating. Moreover, unless
the government begins to address fiscal
problems soon, external improvements
could weigh increasingly lightly in the
rating balance. 
creditworthiness is inevitably linked to
that of Mainland China. However Fitch
judges that the “one country two systems”
principle is being adhered to in the sphere
of economic and financial affairs,
continuing to justify a marked uplift –
albeit to a lower level than would be
justified purely on the basis of Hong
Kong’s economic and financial strengths
– from Mainland China’s ‘A–’ (A minus)
Long-term foreign currency rating.
Proposed anti-subversion laws are
unlikely to be the precursor to a more
interventionist approach by Beijing in
Hong Kong’s economic affairs. However,
there is a risk that prospects for
democratic reforms in Hong Kong post-
2007 may be diminishing, raising
concerns about the legitimacy of the
government and its capacity to implement
difficult policy measures successfully.
A still fragile global recovery and the
continued unwinding of the mid-1990s
property bubble mean that deflation is
unlikely to diminish rapidly in 2003. And
while recent macroeconomic indicators
have been more encouraging, domestic
demand remains weak. In this
environment, the public finances are
unlikely to turn around very quickly.
Nevertheless, ample fiscal reserve buffers
and a strong balance of payments offer
considerable scope for fiscal policy to
continue to support recovery in the short
term, without significantly undermining
creditworthiness. The Outlook is
Stable. 
FITCH RATES REPUBLIC OF PHILIPPINES’ USD500M GLOBAL BOND ISSUE ‘BB+’
OUTLOOK NEGATIVE
Paul Rawkins, Brian Coulton

On 9 January 2003, Fitch Ratings
assigned a Long-term foreign currency
rating of 'BB+' to a Republic of
Philippines' USD500 million global bond
issue. This issue, a re-opening of the
Republic's 9% February 2013 bond,
marks a continuation of the government's
external funding transactions for 2003.
Fitch says the rating remains on Negative
Outlook in line with the rating action it
took last November, triggered by the
Philippines' deteriorating fiscal accounts
and rising public indebtedness. 

ASIAN SOVEREIGNS COVERAGE MARCH 2003

Long-Term Foreign Currency

Fitch Rating
Asia Pacific Fitch Outlook Moody’s S&P Fitch Analyst
Australia AA+ Stable Aaa AA+ BC
China A- Stable A3 BBB PR
Hong Kong AA- Stable A3 A+ TF
India BB Stable Ba1 BB SS
Indonesia B Stable B3 CCC+ PR
Japan AA Negative Aa1 AA- BC
Korea A Stable A3 A- BC
Malaysia BBB+ Stable Baa1 BBB+ SS
New Zealand AA Stable Aaa AA+ PR
Papua New Guinea B+ Stable B1 B PR
Philippines BB+ Negative Ba1 BB+ PR
Singapore AA+ Stable Aaa AAA PR
Taiwan A+ Stable Aa3 AA- TF
Thailand BBB- Positive Baa3 BBB- BC
Vietnam BB- Positive B1 BB- BC
Source: Standard & Poors and Moody’s websites and Bloomberg.

Short-Term Foreign Currency

Fitch Rating
Asia Pacific Fitch Outlook Moody’s S&P Fitch Analyst
Australia AAA Stable Aaa AAA BC
China A Stable Not Assigned Not Assigned PR
Hong Kong AA+ Stable Aa3 AA- TF
India BB+ Stable Ba2 BB+ SS
Indonesia B Stable B3 B- PR
Japan AA- Negative A2 AA- BC
Korea AA- Stable A3 A+ BC
Malaysia A Stable A3 A+ SS
New Zealand AAA Stable Aaa AAA PR
Papua New Guinea BB- Stable B1 BB- PR
Philippines BBB- Negative Baa3 BBB+ PR
Singapore AAA Stable Aaa AAA PR
Taiwan AA Stable Aa3 AA- TF
Thailand BBB+ Positive Baa1 A- BC
Vietnam BB Positive NR BB BC
Source: Standard & Poors and Moody’s websites and Bloomberg.
Fitch Sovereign Ratings: Fitch rates over 70 Sovereigns worldwide. The list for Asia Pacific Sovereign ratings attached covers long-term foreign currency
and long-term local currency ratings assigned by the three major international rating agencies. In any reference to either S&P or Moody’s ratings in this
newsletter, Fitch has endeavoured to ensure the information is correct, as per data available. It will not be responsible for any inaccuracies therein.

9
ASIAN SOVEREIGNS COVERAGE MARCH 2003 (CONT.)
Continued from page 9

Analysts
Initials First Last Phone
Hong Kong
BC Brian Coulton +852 2263 9963
London
PR Paul Rawkins +44 20 7417 4239
DR David Riley +44 20 7417 6338
New York
TF Therese Feng +1 212 908 0230
SS Shelly Shetty +1 212 908 0324

10
BANKS / FINANCIAL INSTITUTIONS
FITCH: BASEL II CHANGES TO ENHANCE HIGH-YIELD CAPITAL MARKET ACTIVITY
Kim Olson
In a new report commenting on the recent
proposed changes to the Basel II Capital
Accord, Fitch Ratings has found that the
Basel Committee on Banking Supervision
has moved closer to its goal of better
aligning regulatory capital with
underlying economic risk. The revised
version of the New Accord also provides
improved incentives for banks to use
more precise measurement techniques.
Fitch believes that, on a relative basis, the
Accord may enhance mid-to-lower-
quality capital market activity.
The Committee has made a number of
modifications to the internal ratings-based
(IRB) approaches, including lowering
required capital for sovereign, bank and
corporate credits relative to the charges
proposed in 2001, changing the
correlation assumptions within the
corporate and retail risk curves, adding
new risk curves for certain asset
FITCH ASSIGNS ‘F2’ SHORT-TERM RATING TO KOREA FIRST BANK
David Marshall, Paul Grela
On 13 March 2003 Fitch Ratings assigned
a Short-term rating of 'F2' to Korea First
Bank (KFB). This follows the agency's
recent decision to assign a Senior debt
rating of 'BBB+' to KFB.
Under its main shareholder, Newbridge
Capital, KFB has been successfully
rehabilitated. It now presents a much
more sound overall financial profile and
would appear well-positioned for further
FITCH AFFIRMS FAR EASTERN INTERNATIONAL BANK AT ‘BBB-’; OUTLOOK MOVED
TO STABLE
Freda Cheung, Paul Grela, Roxanne Liu
On 11 February 2003 Fitch Ratings
affirmed Far Eastern International Bank
(FEIB)'s foreign currency Long-term
subclasses, changing the loss given
default (LGD) and maturity assumptions
in the foundation IRB approach, allowing
the recognition of loan loss reserves as an
offset to required capital and of future
margin income (FMI) on credit card
portfolios, and specifying the treatment of
equity holdings.
Under the new Basel II proposals, the
level of required regulatory capital will
increase as credit risk increases. Fitch
believes that the pursuit of funding in the
bond markets, particularly by non-
investment-grade companies, may
become relatively more attractive than it
had been previously under the 1998
Accord, where a flat 8% capital
requirement was levied for all corporate
exposures irrespective of underlying risk.
“Under the new Basel proposals, capital
requirements will increase as the
probability of default of the underlying
growth. Significant efforts have been
made to re-establish its franchise, badly
damaged in the crisis; although the
protection of its assistance agreement
with the Korea Deposit Insurance
Corporation (KDIC) expired at the end of
2002, the bank's new management team
has established advanced MIS systems,
along with more robust and rigorous risk
management and loan underwriting
systems and practices. Some concern
rating of 'BBB-' (BBB minus), Short-term
rating of 'F3', Individual rating of 'C/D'
and Support rating of '4'. The Long-term
11
credit increases,” said Fitch Senior
Director Kim Olson. “For corporations
with external ratings or bank internal
ratings further down the credit spectrum,
this process may put the option of
pursuing funding from bond markets on a
more equal footing with bank loans,
particularly to the extent that there is
investor appetite for such exposure.” The
report “Basel II: Refinements to the
Framework” analyses and provides Fitch's
views on the recent proposed changes in
the New Accord to the IRB Approaches,
Revised Standardised Approach and
Credit Risk Mitigation Framework, as
well as Fitch's comments on the use of
Basel II as a common measure for
comparing capital adequacy across banks.
The report is available on the internet at
'www.fitchratings.com'. 
surrounds the very rapid expansion of the
bank's loan book in recent years, although
it should be noted that this growth is in
line with management's longer-term goal
of achieving optimal asset size more
appropriate to its re-instated
administrative infrastructure and capital
base, and also tracks general industry
trends that have seen the Korean banking
sector pursue strong consumer loan
growth in recent times. 
rating Outlook has been revised to Stable
from Negative.
FITCH AFFIRMS FAR EASTERN INTERNATIONAL BANK AT ‘BBB-’; OUTLOOK MOVED TO
STABLE (CONT.)
Continued from page 11
FEIB's ratings reflect its average
performance and small franchise in a
competitive and over-banked market.
Along with other local players, the bank's
financial standing has been weighed down
by asset quality problems, but these have
shown some signs of better management
in 2002. At the end of 2002, FEIB
effected large write-offs, which
effectively cut its impaired loan ratio to
below 5% at the cost of a large expected
full-year net loss. Fitch considers this
cleaning-up exercise as a positive step,
which also underlines the determination
of the bank's management to restore its
competitiveness. The stabilisation of the
bank's asset quality, its improved loan
loss coverage position and capital
replenishment plans explain the revision
of the rating Outlook to Stable from
Negative.
FITCH PLACES AIG FINANCE (HONG KONG) LTD’S LONG-TERM LOCAL CURRENCY
RATING ON WATCH NEGATIVE
Arthur Lau, David Marshall
On 7 February 2003 Fitch Ratings placed
the 'AA' Long-term local currency rating
of AIG Finance (Hong Kong) Ltd (AIGF)
on Rating Watch Negative, following
Fitch's recent announcement that it had
placed American International Group,
Inc.'s (AIG) Senior debt rating and other
FITCH ASSIGNS ‘B-’ SUBORDINATED DEBT RATING TO INDONESIA’S BANK NISP
Peter Tebbutt, Ambreesh Srivastava
On 22 January 2003 Fitch Ratings
assigned a rating of 'B-' ('B minus') to
Bank NISP's proposed USD25 million
subordinated bonds due 2013. Fitch has
also affirmed NISP's Long-term Senior
foreign currency rating of 'B', Short-term
rating of 'B', Long-term local currency
rating of 'B', Individual rating of 'C', and
Support rating of '5T'. NISP's senior
rating (and therefore its subordinated
bonds rating) is constrained by that of
Indonesia, also 'B'.
As per Fitch's August 2002 report, NISP
was one of the few major banks in
Its initial business focus on corporate
banking left FEIB exposed to a sharp
deterioration in asset quality and narrower
margins amid the economic decline that
affected Taiwan in the late 1990s. In
response, the bank launched a new
strategic direction in 1999, diversifying
into consumer banking, including credit
cards. While credit cards, particularly
revolving credit card loans in which the
bank now has a niche presence, has been
and will continue to be a growth driver,
FEIB is moving further beyond traditional
lending products to boost fee-generating
operations, such as treasury products and
asset management services. To date, some
positive impact from its new strategy is
discernible with regard to the bank's
improved credit risk profile and income
diversification. That said, intensifying
competition in the bank's non-traditional
Long-term fixed income security ratings
on Rating Watch Negative. The agency
has affirmed AIGF's Short-term local
currency rating of 'F1+', Individual rating
of 'C' and Support rating of '3'.
Indonesia to survive the country's 1997
economic crisis without a government
bailout. This was due to NISP's
historically prudent management and its
focus on small companies with relatively
low levels of debt. Indeed, NISP was a
recipient of flight-to-quality funds during
the crisis, enabling it to substantially grow
its asset base – initially in the area of
central bank paper, but more recently
through a resumption of lending to small
companies as well as consumers and the
country's remaining, better-quality, larger
corporates. At the same time capital
constraints have been avoided through
12
operations calls for the ongoing
implementation of proactive business
strategies to meet the challenges ahead.
Fitch's Support and Individual Ratings for
Banks: Fitch's Individual ratings assess
how a bank would be viewed if it were
entirely independent and could not rely on
external support. Its Support ratings deal
with the question of whether a bank
would receive support from its owners or
from the state if it were to get into
difficulty. These ratings are not debt
ratings but rather, respectively, an
assessment of the intrinsic strength of a
bank and of any level of outside support
that may, or may not, be available
to it. 
As a wholly owned subsidiary of AIG,
AIGF's credit ratings are linked to those
of its parent. Fitch expects to resolve its
Rating Watch within the next eight
weeks. 
earnings retention and equity issuance, the
most recent of which was in mid-2002,
raising the capital adequacy ratio (CAR)
from 9.0% to 13.9% (all Tier I). The
proposed subordinated debt issue will
further raise the CAR, to nearly 16.0%.
Meanwhile, little in the way of capital
erosion from asset quality problems is
envisaged, with the non-performing
loans/gross loans ratio declining over
9M02 from 4.1% to 1.9%. Furthermore,
NPLs are now fully covered by loan loss
reserves. Indeed, capital should continue
growing on the back of earnings retention,
with profitability being more than
FITCH ASSIGNS ‘B-’ SUBORDINATED DEBT RATING TO INDONESIA’S BANK NISP (CONT.)
Continued from page 12
adequate given the relatively low risks
associated with the bank's quite good loan
quality. This, however, may well be
outstripped by asset growth as the bank
continues to take advantage of its ability
to exploit the limited level of credit
demand in the country. As such, a gradual
FITCH AFFIRMS KOREA DEVELOPMENT BANK’S GLOBAL NOTES RATING ON TAP
ISSUE
Paul Grela, David Marshall
On 22 January 2003 Fitch Ratings
affirmed the rating of 'A' assigned to the
Korea Development Bank's Global Notes
due November 2007 and due November
2012 following the launch of a tap issue
that will increase the size of the deals
FITCH ASSIGNS RATING OF ‘A’ WITH A STABLE OUTLOOK TO OCBC BANK’S
PREFERENCE SHARES
Ambreesh Srivastava
On 13 January 2003 Fitch Ratings
assigned a Long-term rating of ‘A’ (single
A) to Oversea-Chinese Banking
Corporation Limited’s (OCBC Bank’s)
intended issue of SGD300 million to
SGD500m of non-cumulative non-
convertible preference shares referred to
in OCBC Bank’s circular to shareholders
dated 16 December 2002. This is one
notch lower than OCBC Bank’s senior
debt rating of ‘A+’ (A plus) and is in
accordance with Fitch’s criteria of rating
preference stock and hybrid securities of
financial institutions. The preference
shares will rank pari passu with all other
preference shares or other similar
obligations of OCBC Bank that qualify as
its Tier 1 capital, and junior to deposits
and all debt obligations, including the
bank’s subordinated debt. The Outlook on
the rating is Stable.
In line with the characteristics of Tier 1
instruments, Fitch noted that the
dividends on the preference shares may be
restricted under certain circumstances,
notably if the bank’s capital ratios go
below the regulatory minima, or its
distributable reserves, from which the
lowering of the bank's CAR over the
coming years is likely.
Established in 1941, NISP has since its
inception been controlled by the
Surjaudaja family, who maintain a 33%
stake in the bank and have no other
from the original USD300m and
USD450m.
These ratings are contingent upon receipt
of final documents conforming to
information already received.
dividends on the said issue are to be paid,
become insufficient. Fitch, however,
considers the likelihood of either of these
events occurring as remote. Not only are
OCBC Bank’s capital ratios comfortably
above the regulatory minimum, but its
distributable reserves are adequate and,
given the relatively modest servicing
requirements on the preference shares
relative to this amount, it appears unlikely
that in the foreseeable future, the bank’s
distributable reserves would fall to a level
that would trigger the issue’s dividend
restriction provisions. Furthermore, the
terms of the issue provide a strong
incentive for OCBC Bank to ensure that
these preference shares are serviced;
should OCBC be precluded from making
a dividend payment on this issue, it will
also be precluded from making any
dividend payments on its common shares.
Notably, OCBC Bank has not missed a
dividend on its common shares since
World War II.
This issue is a part of OCBC Bank’s
approach to make use of such forms of
regulatory Tier 1 capital instruments and
manage its capital structure more
13
notable interests outside the bank. The
International Finance Corporation owns
15% of the bank. Publicly listed, the
balance is held by a range of other
institutional and private investors. 
The rating of these issues is in line with
the bank's Senior debt rating of 'A'. The
proceeds of the Notes issues will be used
to meet general working capital needs. 
efficiently. The funds raised are likely to
be used for the bank’s normal growth in
business, and its Tier 1 capital ratio,
which was 11.1% of its risk-weighted
assets as at 30 June 2002, is likely to
increase marginally (excluding the impact
of the growth in risk-weighted assets
since June 2002, which is not available).
Fitch also pointed out that credit ratings
do not directly address any risk other than
credit risk and that the price of these
securities may fluctuate, as they are to be
listed. In particular, these ratings do not
deal with the risk of loss due to changes
in market price or other market
conditions.
Established in 1932 and with assets of
SGD84bn (USD48bn) as at 30 June 2002,
OCBC Bank is Singapore’s third largest
bank. In recent years, OCBC has made
considerable investments in people,
technology, risk management and other
infrastructure, and aims to become a
‘world-class financial institution in the
Asia Pacific region’. 
PHILIPPINE BANKS: ASSET QUALITY SITUATION AND SOLUTIONS
Elisha Garcia-Lirios, David Marshall
Philippines Asset Quality Trend
(%) NPLs
35
30
As % of Total Loans
25
20
15
10
5 lower interest rates in the hope of
0 yielded expected results as lending
1997
The asset quality of Philippine banks has
steadily deteriorated over the past two
years, after initially showing a less severe
impact from the Asian crisis compared
with more afflicted neighbours. While
massive government support was utilised
to restructure corporate and banking
systems in Korea, Thailand, Malaysia and
Indonesia, Philippine banks do not seem
to have gained anything from being
shielded from the immediate effects of the
crisis and have not been taking steps to
address the bad debts problem of the past
two years. In this regard they now stand
in contrast to Taiwan, where the
authorities have finally begun efforts to
deal with mounting bad debts in the
banking system.
Philippine banks experienced a serious
deterioration in their asset quality in 2001
with NPLs (non performing loans) rising
to dangerous levels for many banks. The
Arroyo government made it clear early on
that it does not have the capability or the
intention to fund a bail-out for private
Philippine firms. This has led Philippine
banks, in particular, to look to their
existing shareholders or new foreign
investors to share the cost of rehabilitating
their balance sheets. A number of banks
have been successful in shoring up
additional capital from their existing
shareholders over the past 24 months.
Others are in various stages of planning
forays into the international bond market
with dollar denominated issuances.
The lack of a tangible credit culture in the
Philippines is also one of the factors
ROPOA Restructured Loans Allowances
1998 1999 2000 2001 Jun 02
holding back a more rapid recovery phase
in the banking sector. For years, local
banks have relied on name-based or
collateral-based lending and only began to
introduce risk-based techniques two years
after the crisis. This partly explains the
banks’ large volume of real estate and
other properties owned and acquired
(ROPOA), which has grown rapidly since
2000.
The banks also have a tendency to deny
the real extent of their problems. Instead
of immediately instituting aggressive
collection methods or foreclosing on
collateral, many Philippine banks have
opted to restructure loans to keep them
current and performing for at least another
five years. While some companies have
been able to recover with their finances
intact after a renegotiated loan from a
bank, others have not and have gone back
to the nonperforming loans list.
The importance of maintaining a
reputation or “saving face” in an Asian
setting has also been important to many
Philippine banks. Many have been
reluctant to accept losses early on,
preferring instead to minimise loan loss
provisioning, thereby boosting reported
profits and their ability to pay dividends.
Moves to postpone the inevitable are
typical of Philippine banks, especially
when faced with the prospect of a sudden
income loss or a cut in their capital. The
family-owned nature of many banks and
the tightly knit environment in which they
operate contribute to this tendency. On
the other hand, banks that promote
14
corporate values of transparency and
accountability have been quicker to
acknowledge their setbacks and have
emerged noticeably healthier than their
counterparts.
Role of Regulators
The Bangko Sentral ng Pilipinas
(Philippine central bank) and its actions
over the past years have been crucial in
shaping the situation of Philippine banks
today. In 2001, it spearheaded a move to
stimulating credit growth. This has not
growth has been confined to very low
single-digit levels over the past two years.
Meanwhile, after years of strictly
enforcing a three-month past due rule for
bad debts, the central bank is slowly
exercising greater leniency in dealing
with banks’ asset quality problems. In
addition to allowing select banks to
charge reserves directly against capital, it
has also issued a circular allowing NPLs
with 100% coverage (typically those that
have been considered loss loans) to be
deducted from the overall NPL
computation. While this has given some
relief to the system by reducing the
headline number of NPLs, it compromises
the reliability of the Philippines’ bad
debts indicators and increases the opacity
of individual bank accounts by making it
harder to assess the adequacy of reserve
coverage for NPLs. Most of the 5%
reduction in the system NPLs for
September 2002 (from August 2002) was
a result of the implementation of the
relaxed NPL definition.
A similar move is being contemplated for
credit card issuers with the industry
association pushing for new regulation to
declare credits not paid in 31 days past
due and to replace the current one-day
past due rule. The association argues –
with some justification – that the local
standard is harsher than international
practices and should be changed. NPL
volume of credit card issuers (banks, thrift
banks and credit card subsidiaries) was up
57% in June 2002 from the same period a
year earlier while receivables have
continued to rise.
PHILIPPINE BANKS: ASSET QUALITY SITUATION AND SOLUTIONS (CONT.)
Continued from page 14
Meanwhile, in September 2002, the NPL
ratio in the banking system marginally
improved to 16.5% from an average of
18% for most of the year. The trend has
been pointing to slower growth in bad
loans due to redefinition of NPLs, transfer
of NPLs to ROPOA or foreclosed assets,
restructured status and increased write-
offs. While individual banks contend that
their improving NPL ratios were in part
due to a more aggressive debt collection
campaign, a central bank report on NPLs
in September suggested that ROPOA and
restructured loans had continued to grow
as a proportion of total loans, thus leading
to a decline in NPL volume. The
conversion of NPLs into ROPOA has
some benefits for banks as requirements
to re-value and provide for losses on
ROPOA are less onerous: indeed, in
practice banks do not normally make any
reserves against ROPOA during the first
five years after acquisition. However, this
exposes the bank to the prospect of not
recovering the full amount of the original
loan due to depreciation, litigation and
transfer costs. Moreover, the disposal of
these foreclosed assets has become a full-
time occupation of banks, with the
establishment of entire departments
dedicated to selling, improving or
maintaining real estate properties. Limited
restructuring deals among banks’ core
NPLs, compared with ROPOA
conversions, have been attributed strict
central bank conditions for restructured
loans.
Over the past two years, increased
selectiveness among Philippine banks has
resulted in a decline in their loan book
volumes relative to assets. The percentage
has dropped to 51% in 2001 from 56% in
1999. These assets have now been
replaced by investment securities, which
now make up a higher proportion (23%)
of the total assets of banks. While this
significantly reduces the amount of
damage that any further deterioration in
Philippine bank asset quality can inflict
on their balance sheets, it restricts growth
in their interest income and ultimately,
Philippines Economic Data
1999
Real GDP Growth (%)
Inflation Rate (%)
Gen. Gov’t. Deficit (% of GDP)
Income Per Capita in USD 1,019
their ability to internally generate capital.
It also exposes banks to sovereign risk,
now perceived as the best risk in a
weakened business environment.
Although there have been fewer cases of
large corporate bankruptcies over the past
18 months, the continued deterioration of
banks’ loan books has been attributed to
limited economic activity in the country.
However, more recently, loan growth in
select commercial banks has been
attributed to an increase in consumer-
related lending as these banks offer more
credit cards, automotive and housing loan
products. Banks have argued that
consumer loans have been a boon to their
lending operations as they present
minimal NPL increases compared with
corporate loans.
SPAV Law
To provide a framework to the banking
system in addressing its asset quality
problems, the Arroyo government is
pushing for a law that will allow the
establishment of Special Purpose Asset
Vehicles (SPAVs). The law, which has
been approved in both houses of Congress
and is awaiting approval from the
President (expected on January 10, 2003)
will allow the private sector to buy NPLs
from banks and transfer these to SPAVs
at a discount for disposal.
The law is expected to relieve the banking
system of an estimated PHP200 billion of
NPLs and foreclosed assets, which
totalled PHP270bn and PHP177bn,
respectively, in September 2002. As a
means to encourage investors, SPAVs
will be given the right to own property, as
well as tax incentives and fee exemptions.
The Securities and Exchange Commission
(SEC) is expected to approve the
implementing rules and regulations for
the SPAV bill by end-January 2003 in
coordination with the Bureau of Internal
Revenue, Department of Finance and the
Philippine central bank.
Serious questions have emerged regarding
2000 2001 2002f 2003f
3.4 4.4 3.2 3.5 3.9
6.7 4.4 6.1 3.0 4.0
3.9 4.2 4.1 4.0 3.4
979 926 – –
15
the possible impact of SPAVs on the
banking system. Transferring assets from
banks to SPAVs in exchange for debt
papers is seen as a form of window
dressing, with banks still holding most of
the risks associated with the disposed
assets. Doubts about the proper valuation
of transferred assets have also emerged,
especially with over-optimistic valuations
tagged onto banks’ real estate holdings.
Although private sector-led and initiated,
there are also concerns about how the
SPAVs will make money and as to
whether banks or even the government
will ultimately bear the losses associated
with the asset transfers.
So far, only one bank has taken the SPAV
route ahead of all its peer banks and the
passage of the law, by basing its
mechanism on details of available
legislation – Metrobank. In August 2002,
Metrobank formed Asia Recovery
Corporation (ARC) with Rabobank of the
Netherlands as one of the primary
shareholders. The bank has earmarked for
transfer PHP16.3bn of its NPLs,
equivalent to 17% of its total loans, to
ARC in exchange for cash (PHP5bn) as
well as subordinated debt securities
(PHP11.3bn) notes.
More banks are expected to form their
own respective SPAVs as soon as
legislation is put in place. To complement
the SPAV law, the Philippine Congress is
also in the process of legislating a law on
securitisation, which will allow banks to
securitise loans and further improve their
liquidity.
Sub-debt Issuances
To ensure banks will be able to absorb the
impact of possible write-offs from the sale
of NPLs to SPAVs, the central bank is
encouraging banks to continue to beef up
their reserves or raise more capital
internally or through subordinated debt
issuances. The average coverage level for
Philippine banks has been sustained at
more than 45% of bad debts over the past
three years. While a number of individual
banks need more reserves than others, the
banking system’s average NPL coverage
level is clearly sufficient. The large
holdings of ROPOA and substantial
restructured loans are areas of greater
concern.
PHILIPPINE BANKS: ASSET QUALITY SITUATION AND SOLUTIONS (CONT.)
Continued from page 15

Tier 2 Issuers
Metrobank – Dec 2001 USD100m 10-year Private Placement with Dunmore Assets Ltd. of Singapore
Metrobank – Nov 2002 USD100m 10-year Maturity
Equitable PCI – 2003 PHP5bn or USD100m 5-years Maturity to be Sold to Retail Investors
Allied Bank – Expected in 2003 USD50m 10-year Maturity
Rizal Commercial Banking Corp PHP3.5bn 10-year Maturity
Land Bank of the Phils. PHP2bn Planned

Key Philippines Banking Figures

(PHPbn) June 2002 Dec 2001 June 2001
Total Assets 3,335 3,259 3,259
Total Equity 453 444 446
Total Loan Portfolio 1,600 1,625 1,575
Non-Performing Loans 289 282 267
Restructured Loans 116 113 120
ROPOA, gross 168 158 145
Loan Loss Reserves 137 127 120
ROPOA Reserves 8 7 7
NPLs/Total Loans 18% 18% 17%
LLR/NPLs 47% 45% 45%
Equity/Assets 14% 14% 14%
Net NPLs/Equity 34% 35% 33%
Net NPLs + ROPOA/Equity 69% 69% 64%
Equity - Net of reserves after deducting 60% NPLs and 40% ROPOA/Assets 12% 12% 12%

Meanwhile, a shortlist of banks is raising
or planning to raise Tier 2 capital in the
local and international markets. This
move represents a first for most of these
banks since 1996-1997, when most of the
bigger Philippine banks issued certificates
of deposit in the international market to
shore up additional dollar funds.
The Philippine central bank requires
Philippine banks to maintain a minimum
capital adequacy ratio of 10%. With slow
profit recovery and the cost of write-offs,
weakly capitalised Philippine banks will
be hard pressed to maintain the average
capital adequacy ratio of 14% in the near
term. The following chart shows key
Philippine banking system figures as of
June 2002.
Subjected to a worst case scenario where,
after using up all their reserves, 60% of
bad debts and 40% of foreclosed assets
are deducted from equity, the majority of
Philippine banks still reported equity to
assets ratios higher than the industry
minimum of 10%. In fact, the average for
the industry was 12% in June 2002. This
suggests that although a handful of
Philippine banks may be at risk of
depleting their capital amidst a massive
write-off of bad debts and ROPOA, most
will still survive with their balance sheets
intact and will still meet the mandated
minimum required capital adequacy ratio.
Despite this, drastic improvements in the
Individual Ratings of Philippine banks
cannot be expected without them
addressing NPL problems, improving
profitability and, in some cases, the
immediate need for additional capital. 

SINGAPORE BANKS’ 2002 RESULTS: SOUND BANKS, WEAK OPERATING

PERFORMANCE
Ambreesh Srivastava

Overview
The second half of 2001 witnessed
significant consolidation among
Singapore banks (five banks merged into
three), and in 2002, all the surviving
banks, namely, the Development Bank of
Singapore (DBS), United Overseas Bank
(UOB), and Oversea-Chinese Banking
Corp (OCBC), were mainly focused on
integration and other related activities that
necessarily accompany such events. UOB,
which acquired Overseas Union Bank
(OUB) in September 2001, legally
merged with OUB on 2 January 2002, and
the operational merger was completed on
17 June 2002. OCBC, which acquired
Keppel Capital Holdings (KCH), the
owner of Keppel TatLee Bank (KTB), in
August 2001, completed the legal and
operational merger of KTB on 25
February 2002. DBS not only focused on
better integrating with Hong Kong’s Dao
Heng Bank (DHB), but also in
rationalising its Hong Kong operations

16
SINGAPORE BANKS’ 2002 RESULTS: SOUND BANKS, WEAK OPERATING PERFORMANCE
(CONT.)
Continued from page 16
Singapore Banks
Net Income (Including Minority Interest)
SGDm 2002
DBSH 1,150
OCBC 669
UOB 1,094
with the ultimate objective of merging
DHB and Kwong On Bank, another small
acquisition that DBS had made in 1999.
After the consolidation, Singapore’s
surviving banks remain among the
strongest in Asia, as reflected in their high
Long-term and Individual (i.e. standalone
financial strength) ratings, even though
their capital ratios (particularly Tier 1
ratios) have come down from pre-
acquisition levels. Despite a weak
operating environment for the past few
years (Singapore GDP contracted by 2%
in 2001 and grew at a modest 2.2% in
2002 compared with significantly higher
growth in previous years), the banks’
problem assets are not excessive (non-
performing loans average 7.5% of gross
non-bank loans), although a modest
increase in the NPL ratio is possible given
the present weaknesses in the external and
domestic environments. The fact that
these banks have a relatively high loan
loss coverage ratio of more than 60% and
still healthy capital ratios by international
standards, means, in Fitch’s opinion, that
their ability to absorb further loan losses,
although somewhat diminished, remains
satisfactory.
Singapore banks’ profitability was
severely dented in the aftermath of the
Asian financial crisis, but net income
recovered to record levels in 2000, mainly
as a consequence of sharply lower loan
loss provisions on the back of a sharp
economic recovery. Thanks to the fresh
economic turbulence in 2001, Singapore
suffered a severe economic contraction.
Although it registered slightly positive
growth in 2002 as mentioned earlier, there
is still considerable uncertainty about the
outlook for the global economy, and in
particular the economic recovery in the
US (which, in turn, has an impact on the
economies in the Asia Pacific region).
Singapore’s export-oriented economy
(with a relatively large exposure to
electronics) is highly dependent on the
economic environment in the US and
2001 % Change
1,095 5.1
781 (14.4)
929 17.8
while it is currently expected to grow by
about 3% in 2003, this forecast could be
downgraded if the expected US recovery
in 2H2003 does not materialise and also
as a result of the consequences of the US-
led attack on Iraq. Consequently, some
pressure on banks’ asset quality is likely
to persist in the near term. As a result, the
banks’ profitability, which has already
been adversely affected, may remain
weak, but Fitch Ratings does not expect
the banks’ financial position to deteriorate
significantly.
In the past few years, ‘enhancement of
shareholder value’ has been the mantra of
Singapore banks, as it has for the rest of
the corporate sector. Before the recent
round of M&A activity in Singapore,
most banks were targeting a return on
equity of 15%, although prior to the Asian
crisis in 1997, only UOB had achieved
that level, whereas OCBC and DBS had
achieved highs of 13% and 10%,
respectively. The weak operating
environment coupled with severe
competition for new loans has adversely
affected the banks’ profitability in recent
years. The extraordinary charges relating
to integration-related matters, including
amortised goodwill, have further dented
the banks’ profitability, and an ROE
(excluding goodwill) target of 15% now
appears more distant than before. It is
possible that this target may be revised
downwards by all banks, as was done by
OCBC recently when it announced a new,
‘more realistic’ ROE target of 12%.
Another consequence of the consolidation
process has been the lowering of the
surviving banks’ capital ratios, which had
historically been close to or even higher
than 20%. One reason for Singapore
banks’ relatively low ROEs in the past
was their exceptionally high
capitalisation, which will no longer be a
significant factor per se for depressing
their ROEs in future. In the past, UOB
consistently ranked higher than its peers
in terms of ROE (excluding goodwill) and
17
Loan Loss Provisions
2002 2001 % Change
534 379 41.0
501 518 (3.3)
451 165 174.0
although this trend has continued as of
end-2002 (UOB: 9.8%; DBSH: 9.21%;
OCBC: 8.8%), the differential between
the various banks has narrowed
considerably. While all banks have made
considerable progress on integration-
related matters over the past eighteen
months, the underlying theme is likely to
remain the extraction of further cost
synergies and continued cost control, for
at least another year or so.
Although the first round of consolidation
is now complete for Singapore banks,
from a medium-term perspective, regional
expansion is still high on the agenda for
most banks, in order to overcome the
limitations of their small domestic market
and also to boost profitability to achieve
their target ROEs. DBS already has a
fairly substantial presence in Hong Kong,
thanks to Dao Heng and Kwong On, in
addition to its existing (although smaller)
franchises in Thailand, Indonesia and the
Philippines. UOB, in addition to
Singapore and Malaysia, has smaller
banks in Thailand and the Philippines,
and it has made no secret of its plans to
have a more ‘meaningful presence’ in
Greater China in future. Similarly, OCBC,
which is the smallest local bank, but still a
relatively large bank in the region, has
recently announced that it will be looking
into expanding its presence in the ASEAN
and China region over a three-year time
horizon.
The segregation of banking and non-
banking businesses is another issue that
the surviving banks will need to address,
although given the current weak property
and stock markets and the fact that the
Monetary Authority of Singapore (MAS)
allows them to do so by July 2004, they
are unlikely to divest their property and
equity investments in a hurry. OCBC is
likely to be the biggest beneficiary from
this exercise, although UOB will also
realise large gains. Although DBSH still
had SGD913m of such investments as at
end-2002, it is notable that it was the first
SINGAPORE BANKS’ 2002 RESULTS: SOUND BANKS, WEAK OPERATING PERFORMANCE
(CONT.)
Continued from page 17

Asset Quality
DBSH OCBC UOB
SGDm or % Dec 2002 Dec 2001 Dec 2002 Dec 2001 Dec 2002 Dec 2001
Global NPLs 4,224 4,512 4,356 5,183 5,679 5,968
As % of Global Non-Bank Loans 6.1 5.7 8.1 9.7 9.0 9.3
Regional NPLs 1,595 1,635 1,407 1,435 1,458 1,600
As % of Regional Non-Bank Loans 32.9 27.5 15.8 18.0 17.0 19.2
As % of Global Non-Bank Loans

Global LLR, Comprising 2,500 2,719 2,713 3,355 3,504 3,334

Specific Loan Loss Reserve 1,511 1,659 1,506 2,109 1,425 1,435
General Loan Loss Reserve 989 1,060 1,206 1,246 2,079 1,899

Regional LLR, Comprising* 1,011 1,187 415 463 1,215 1,218

Specific Loan Loss Reserve 645 789 171 192 700 691
General Loan Loss Reserve 366 398 244 271 515 527

Total LLRs to NPLs (%) 59.2 60.3 62.3 64.7 61.7 55.9
Net NPLs to Equity (%) 11.9 13.2 17.8 20.7 19.3 20.7
Grading of NPLs (%) :
Substandard 68.3 68.4 67.8 66.6 63.7 64.5
Doubtful 9.4 11.5 21 .5 20.5 7.9 8.3
Bad 22.3 20.1 10.7 12.9 28.4 27.2
* Included in global loan loss reserves

local bank to initiate the divestment
process voluntarily in 1999, even before
MAS had issued regulations in this
regard.
Economic Environment
As stated earlier, Singapore’s GDP grew
only modestly in 2002 as external demand
for its goods, particularly for electronics-
related products (which constitute nearly
60% of the country’s non-oil exports)
dropped considerably. Together with the
weaknesses in domestic corporate credit
and personal consumption, demand for
loans remains extremely weak. The only
exception has been demand for housing
loans, which grew by a little over 10%
even as total bank lending contracted by
2%. Domestic liquidity remains ample
and in the absence of good quality lending
opportunities, competition among local
banks for mortgage finance business (in
particular for the recently liberalised HDB
loan market) has been keen. This has
resulted in price wars, putting downward
pressure on the banks’ loan yields. While
the departure of the aggressive smaller
banks (Keppel and OUB), which were
keen to build market share, was expected
to bring about more ‘rational pricing’ for
such products, the aggression displayed
by the foreign banks (such as HSBC,
Standard Chartered, ABN Amro and
MayBank) in mortgage financing has only
reinforced the competitive pressures in
this segment. However, UOB and DBS
have recently been able to arrest the
decline in their interest margins, and even
to improve them, by aggressively
reducing their deposit rates since early
2002.
Performance of Banks
Profitability
The 2002 results of local banks were a
mixed bag as far as net profit was
concerned. While net income before
minorities declined by 14% at OCBC, it
rose by a modest 5% at DBSH and was up
nearly 18% at UOB. However, thanks to
the full impact of their acquisitions in
2002, all banks reported an increase at
operating profit level (before loan loss
provisions and goodwill amortisation)
although the quantum varied significantly.
While OCBC’s operating profit grew by
just 2%, the corresponding growth rates
for DBSH and UOB were 22% and 48%,
respectively. It should be noted that
OCBC’s FY2001 profit included
extraordinary gains on the sale of OUB
shares; adjusted for this, OCBC’s FY2002
operating profit was 26% higher than the
2001 level.
Net interest margin (NIM) also showed a
divergent trend. Thanks to lower funding
costs, the NIM for DBS improved to
1.99% in 2002 compared with 1.87% in
2001, although this was still lower than
the 2.02% registered in 1999 and 2000.
For the same reasons, UOB’s NIM
increased by 20 bps to 2.26% in 2002
(2.06% in 2001), around the same level
that the bank had recorded in 2000
(2.22%), although lower than the levels
seen in 1998 (2.65%) and 1999 (2.34%).
OCBC again bucked the trend with its
NIM contracting by 15 bps to 1.94% in
2002 (2.09% in 2001), considerably lower
than the 2.32% reported in 2000,
underscoring the aggressive pricing
strategy that it has been following over
the past year or so, especially in the
mortgage segment. Historically, DBS had
the lowest NIM amongst Singapore
banks, but at end-2002, DBS ranked
slightly better than OCBC on this
measure, while UOB remained well ahead
of both these banks. Thanks to higher loan
volumes, reflecting acquisitions, and
despite OCBC’s considerably lower NIM,
year-on-year net interest income rose for
all banks (DBSH: 17%, UOB: 52%,
OCBC: 8%).
In the light of limited lending
opportunities, all banks focused on fee
income, where UOB reported a healthy
41% rise, stemming mainly from its
enlarged customer base. DBS’ fee income
rose by 27.3%, primarily driven by the

18
SINGAPORE BANKS’ 2002 RESULTS: SOUND BANKS, WEAK OPERATING PERFORMANCE
(CONT.)
Continued from page 18
full-year contributions from Dao Heng
Bank and Singapore’s stock broking firm,
Vickers Ballas. OCBC’s fee income also
rose by nearly 28% in 2002, due to higher
credit card-related fees, bancassurance
and a focus on other wealth management
products, together with increased cross-
selling to an enlarged customer base.
Singapore banks’ operating expenses have
risen sharply over the past few years, due
to their ‘infrastructure capability building
efforts’, including their technological
initiatives. However, due to limited
income-generating opportunities in the
near term, all banks have actively focused
on cost control. While operating expenses
rose at UOB (23%) and DBSH (7%) due
to acquisitions, OCBC’s operating
expenses declined by 2%; and the cost-
income ratios declined for all banks
(DBS: 45.5% in 2002 versus 48.9% in
2001; OCBC: 38.2% versus 39.1%; UOB:
34.9% versus 39.3%). Given that UOB
and OCBC may be able to extract some
more cost synergies from their Singapore
acquisitions in the coming years, this ratio
is unlikely to exceed 40% for UOB and
OCBC in the near term. DBS’
management is also committed (as
evidenced in the steps taken over the past
year or so) to aggressive control of its
expenses and, together with a recovery in
operating income, this should mean that
its cost-income ratio stabilises at around
45% during the next two to three years.
In the light of the somewhat uncertain
economic outlook and sharply lower
collateral values in a declining property
market, the loan loss provisions for UOB
and DBS rose by 174% and 41%
respectively in 2002, while declining by
3.3% for OCBC. These provisions,
together with amortised goodwill and
other integration-related costs, were the
main reasons for the banks’ lower net
incomes, despite reasonable growth at the
pre-provision operating level. Given the
uncertain global outlook and continued
weaknesses in the Singapore property
market, we expect the banks’ loan loss
provisions to remain high in the near term
in order to cope with the resultant
pressures (albeit modest) on asset quality.
Asset Quality
Non-performing loans (NPLs) peaked for
most banks at end-1999 in the aftermath
of the Asian crisis, except in the case of
OCBC, where they peaked in 1H2000.
Until 1H2001 (at end-June 2001 and
before the impact of bank consolidation),
the gross NPL ratio was declining for
DBSH, UOB and OCBC, although
absolute amounts of NPLs understandably
increased for all banks after consolidation.
Nevertheless, thanks to more proactive
NPL management, all banks reported a
slight decline in their absolute NPLs at
end-2002 compared with end-2001 (DBS:
-6.4%; UOB: -4.8%; OCBC: -16%).
However, the fact that net loans
contracted for all banks (DBS: -11%;
OCBC: -4.7%; UOB: -5.6%) meant that
the improvement in the gross NPL ratio
was somewhat muted for OCBC (8.1% in
2002 compared with 9.7% in 2001) and
UOB (9% in 2002 versus 9.3% in 2001)
while this ratio in fact deteriorated for
DBS (6.1% versus 5.7%) despite a
reduction in absolute amounts of NPLs.
Prior to the bank consolidation in mid-
2001, UOB had the lowest absolute NPLs
amongst the three major banks, but thanks
to OUB (which contributed almost 60%
of the merged UOB’s total NPLs), UOB
now has the largest absolute amounts of
NPLs. Since DBS had already
substantially cleaned up its problem loans
in Thailand in mid-2000, and was aided
by a larger balance sheet due to the
consolidation of Dao Heng Bank, its NPL
ratio (6.1%) was the lowest among all
local banks at end-2002, in addition to
having the lowest absolute amounts of
NPLs. Thanks to OCBC’s decision to
write off about SGD1bn of old
uncollectible NPLs during 2002, its end-
2002 NPLs were only slightly more than
those at DBS, and its gross NPL ratio at
8.1% was the second-lowest, followed by
UOB at 9%. Another positive
development stemming from OCBC’s
decision to write-off its sticky NPLs was
the substantial improvement in the
relative composition of its NPLs; ‘loss’
NPLs were a relatively low 10.7% of total
NPLs compared with 22.3% for DBS and
28.4% for UOB.
On the positive side, Singapore banks
remain well provisioned, with their total
loan loss reserves covering about 61% of
their NPLs. UOB’s NPL coverage, which
was the highest before the consolidation
process got underway (68% in 1H2001),
increased to 61.7% at end-2002 from a
19
low of 55.9% at end-2001. OCBC’s NPL
coverage was the highest at end-2002
(62.3%) and DBS’ was the lowest, at
59.2%. However, this is partly explained
by the fact that DBS’ share of less
problematic substandard NPLs is greater
than that of the other banks. Nevertheless,
all banks’ loan loss reserves covered more
than 100% of their unsecured NPLs. The
key solvency ratio – net NPLs to equity –
was the lowest for DBSH (11.3%)
followed by OCBC (17.8%) and UOB
(19.3%). Clearly, the acquisition of OUB
has increased UOB’s risk profile, as UOB
ranked the best on this ratio as at 1H2001
(11.5%) followed by DBSH (16.8%) and
OCBC (19.2%).
Capital
Singapore banks have for many years
been strongly capitalised, although their
capital adequacy ratios came down as a
result of the M&A activity in 2001. The
capital ratios as at Dec 2002 are shown in
the following table:
Capital
Capital Ratio Revaluation
(%) Surplus
Tier 1 Total SGDm % Equity
DBSH 10.3 15.5 913 6.3
OCBC 11.5 20.9 3,273 35.5
UOB 12.2 15.3 1,186 9.4
As a result of the large goodwill involved
in these acquisitions, which was deducted
from the acquiring bank’s Tier 1 capital,
the Tier 1 ratio of all the banks declined
significantly, as follows: DBS 10.3%
(14.4% at end-2000 before its acquisition
of Dao Heng Bank); UOB 12.2% (17.2%
at June 2001); and OCBC 11.5% (18.7%).
This decline was more severe for OCBC
as it acquired KCH in an all-cash deal,
while it was less dramatic for UOB,
which financed 60% of OUB’s purchase
through new shares. The fall was also less
sharp for DBS, which issued new shares
worth SGD2.2bn in Nov 2001 to prop up
its Tier 1 capital position, which had been
severely depleted due to its SGD10bn all-
cash purchase of Dao Heng Bank.
As all banks raised Tier 2 subordinated
debt to part-finance their acquisitions, the
total capital adequacy ratios suffered less
erosion. The total CAR as at end-2002
was as follows: DBS 15.5% (18.9% at
SINGAPORE BANKS’ 2002 RESULTS: SOUND BANKS, WEAK OPERATING PERFORMANCE
(CONT.)
Continued from page 19
end-2000); UOB 15.3% (20.1% in
1H2001); and OCBC 20.9% (23.3% in
1H2001). It should be noted that
Singapore banks’ capital ratios, although
they have fallen, are still extremely
healthy by international standards. The
minimum regulatory requirement (Total:
12%; Tier 1: 8%) is quite high and banks
voluntarily intend to maintain a buffer of
about 2% above the minimum
requirements. However, DBS’ quality of
capital is somewhat inferior to its peers as
it had raised hybrid Tier 1 capital and
preference shares in 2001 to bolster its
Tier 1 capital position. Consequently, its
adjusted common equity to assets ratio
(excluding goodwill) was 4.5% at end-
2002, which, although adequate, is
considerably lower than its peers. OCBC
and UOB also have reasonably large
revaluation surpluses on account of their
property and equity investments, which
provide a further cushion to their already
comfortable capital ratios. The capital
position of all banks is expected to remain
comfortable unless they make a sizeable
overseas acquisition, which appears
unlikely in the near term.
THAI BANKS’ 2003 OUTLOOK STRONGER BUT RISKS REMAIN
Vincent Milton, Dusadee Srishevachart
The release in early February of
preliminary 2002 full-year results for the
Thai banks was generally in line with
Fitch’s expectations and should lay the
foundation for a generally stronger
performance for the sector in 2003,
although the weaker banks will continue
to struggle. Fitch upgraded the
international foreign currency ratings for
the largest four Thai banks – Bangkok
Bank (“BBL”), Krung Thai Bank
(“KTB”), Thai Farmers Bank (“TFB”)
and Siam Commercial Bank (“SCB”) – to
the minimum investment grade in October
2002. The 2002 results for these banks
indicate that their recovery is on track,
although weaknesses in earnings, asset
quality and capital are yet to be fully
resolved, the agency cautions. The better
outlook is dependent on a continued
improvement in the Thai economy and a
pick-up in corporate financing activity,
which could be affected by the adverse
Conclusion
The first phase of consolidation for
Singapore banks resulted in the
emergence of three large, strong
institutions. While the near-term
performance of the surviving banks (in
terms of profitability, incremental NPLs
etc.) may yet have some more downside
in the light of a weak operating
environment, from a credit standpoint
they are amongst the best bank credits in
Asia. This is also reflected in Fitch’s
Long-term senior unsecured credit ratings
for these banks, which are currently at
‘AA-‘ with a Stable Outlook for DBS,
‘A+’ with a Positive Outlook for UOB,
and ‘A+’ with a Stable Outlook for
OCBC. While the operating performance
of these banks is likely to be
unspectacular in the near term for the
reasons mentioned earlier, key solvency
indicators (asset quality, NPL coverage,
amount and quality of capital to absorb
fresh losses etc.) are satisfactory and are
unlikely to deteriorate substantially even
if the operating environment were to
worsen further. Therefore, Fitch does not
expect these ratings to change in the near
Net Profit/Loss
10
Thousands
5
0
(5)
(10)
(15)
BAY
BBL
SCB
KTB
TFB
global economic
environment.
TFB and DBS Thai Danu Bank
(“DTDB”) reported the strongest
performances in 2002, with improved net
profit, helped by their stronger reserve
20
term. Indeed, the real challenge for
Singapore banks going forward is to
manage their transition from being purely
local banks into pan-Asian regional banks
and to strengthen their management
capabilities at all levels to successfully
implement this transition. All banks are
aware of this challenge and have taken
considerable initiatives (such as injecting
greater professionalism by attracting
skilled and experienced bankers into their
ranks, introducing best international
practices, improving corporate
governance by, for example, separating
ownership from management) in the past
few years in building up their capabilities
in this regard. With a strong domestic
franchise, healthy financial position and
improved management capabilities, these
banks are, in Fitch’s view, well-
positioned to manage this transition. 
and capital positions, and interest and
non-interest earnings growth, which
should continue in 2003. For both BBL
and KTB, interest income remains
sluggish and net interest margins weaker,
constrained by their greater reliance on
lower yielding corporate or state
enterprise lending, lingering asset quality
problems and aggressive price
competition. In the case of KTB, despite
very high loan growth of over THB100
billion, interest income remained
surprisingly flat. This underscores the
agency’s concerns about its lending
TMB
BOA
DTDB
practices, implying aggressive price
competition and possibly the re-
emergence of asset quality deterioration.
and political
KTB appears to be affecting the
performance of BBL in particular, which
was one of the few banks to report a fall
in its net interest margins, net interest
income and pre-provision profit in 2002.
THAI BANKS’ 2003 OUTLOOK STRONGER BUT RISKS REMAIN (CONT.)
Continued from page 20
Non interest income has also helped to
boost the banks’ performance, particularly
the three largest private banks – BBL,
TFB and SCB – reflecting their stronger
franchise and efforts to diversify their
over-reliance on lending to a more
diversified financial services model. Non-
interest revenues were boosted by fee
income from credit and debit cards,
treasury, capital market activities, foreign
exchange and guarantees, as well as gains
on investments. These account for an
increasing proportion of total revenues,
although this is due in part to the decline
in interest income since the 1997 crisis.
SCB reported a turnaround in its earnings
and accelerated provisioning of THB24bn
(or 5% of loans) in 2002, which should
provide a basis for a strong result in 2003.
Bank of Asia (“BOA”) similarly made a
high level of provisions in June 2002,
following its recapitalisation, which
should also enable it to report a strong
result for 2003. BOA, TFB and SCB are
benefiting from a shift towards retail
banking. SCB’s performance in particular
has been helped by consumer lending,
mainly residential housing, which
Net Interest Margin
(%)
3.0
2.5
2.0
1.5
1.0
0.5
0.0
BAY
BBL
SCB
TMB
BOA
KTB
TFB
DTDB
accounts for about a quarter of its loans,
compared with the sector average of 10%.
Both SCB and BOA also have the benefit
of a strong capital position and lower
interest expense, as neither bank issued
expensive hybrid securities. This has
helped SCB and BOA to achieve higher
net interest margins and earnings growth,
which should gather momentum in 2003.
SCB also has the lowest cost-to-income
ratio of the sector at about 50%, compared
with a sector average of about 70%.
Overall sector loan growth remains weak,
with the exception of state-owned KTB,
which reported very high loan growth of
about 30% due in part to lending to state
enterprises and its support of government
economic policies. Excluding KTB,
sectorial loan growth was in the order of
2%-3%, after discounting for the effect of
the write-back of collateral on impaired
loans. Loan growth of 4%-5% is expected
in 2003. To date, the key drivers of the
profit recovery for most banks have been
the large fall in provisioning, funding
costs and operational cost cutting.
Corporate loan growth is likely to remain
weak in 2003 and will continue to
constrain the robustness of earnings
growth even for the stronger banks,
although lending should start to pick up
with ongoing restructuring and new
investment underpinned by a broadening
economic recovery in Thailand.
While there was some improvement in the
performance of the two weaker banks,
Bank of Ayudhya (“BAY”) and Thai
Military Bank (“TMB”) in 2002, earnings
remain constrained and reserve levels
very low (about half the level of their
peers), implying the risk of further large
provisioning and capital depletion. The
Loan Loss Reserves/NPLs
(%)
80
60
40
20
0 0
BAY
BBL
SCB
TMB
BOA
KTB
TFB
DTDB
NPL figure of 14% for TMB appears to
be significantly understated, with the
consolidated figure more likely to be in
the order of 25%, which would reduce its
coverage levels to about the same as for
BAY.
The Bank of Thailand, in a positive
regulatory development, recently
announced a change in the definition of
non-performing loans (previously three
month non-accrual, which generally
excluded all restructured loans and was on
an account rather than group basis) to be
consistent with the tighter classified
21
impaired loan reporting criteria, namely
those loans classified as loss, doubtful and
substandard. Previously written off
principal and reserves on “loss” loans
were also reversed. These changes should
resolve some of the confusion and
inconsistency in the way impaired loans
have been reported in Thailand.
The revised reporting rules on bad loans
resulted in most banks’ non-performing
loans (“NPLs”) increasing to about 25%
at end-2002 from under 20% the prior
year. DTDB has the cleanest balance
sheet with NPLs at 9% of loans, having
sold most of its bad loans to third parties
in 2000. For the other Thai banks, a large
portion of the remaining bad loans is
going through a liquidation process, so it
may be several more years before these
loans are removed from the banks’ books,
unless the loans are sold to a third party.
Due to the write-back of both principal
and reserves, loss coverage ratios have
generally been maintained or improved.
The banks with the highest reserves are
DTDB, BBL, SCB, BOA, TFB and KTB,
which have coverage of 60% or more.
Net NPLs/Equity
(%)
350
300
250
200
150
100
50
BAY
BBL
SCB
TMB
BOA
KTB
TFB
DTDB
This coverage should be sufficient but
downside risks remain, particularly given
the low level of ordinary equity and the
high level of rescheduled loans for which
reserves are low.
Fitch’s concerns about the adequacy of
reserve and capital levels are underscored
by the very high net NPL/equity ratios of
several of the banks. The ratio for a strong
bank would typically be less than 20%.
The average for the Thai banks is about
100%, with DTDB clearly the strongest,
while BAY and TMB appear significantly
weaker than their peers. The ratio for
THAI BANKS’ 2003 OUTLOOK STRONGER BUT RISKS REMAIN (CONT.)
Continued from page 21
TMB deteriorates further to about the
same level as BAY, if the higher
consolidated impaired loan figure is used.
The equity figure used in the net
NPLs/equity ratio excludes the hybrid
capital instruments (CAPs, SLIPs) as
these are generally excluded from the
shareholders equity figure shown in the
balance sheets of the Thai banks
(although these hybrids are included for
regulatory purposes in the calculation of
Tier 1 capital, and disclosed in the notes
to the accounts). However, convertible
preference shares issued by SCB
(THB65bn) and TMB (THB20bn) under
the Ministry of Finance capital support
scheme are included in the shareholders
equity, as are DTDB’s convertible hybrids
(THB9bn).
Over half the Tier 1 capital of several
Thai banks is made up of hybrid
capital/debt securities. While these
hybrids are structured in a form that
purports to be equity and perpetual in
nature, the banks are required to pay a
minimum return of about 11% p.a. on the
securities and have the option to call the
securities. The following amounts have
been issued: BBL – THB46bn, of which
THB35bn is counted as Tier 1; TFB –
THB40bn, of which THB20bn is counted
as Tier 1; BAY – THB26bn, of which
THB13bn is counted as Tier 1; TMB –
THB13bn, of which THB10bn is counted
as Tier 1; and DTDB – THB5bn, all of
which is counted as Tier 1. The
subordinated debt component of the
instruments has a maturity of seven years,
SK GLOBAL NOT ANOTHER DAEWOO FOR KOREA’S BANKS
Paul Grela
Executive Summary
On 11 March 2003, it was announced that
investigations by the Seoul Public
Prosecutor’s Office had revealed
accounting irregularities at SK Global, the
trading arm of SK Group, which had
overstated end-2001 earnings by as much
as KRW1.6trillion. The company’s stock
price plunged as a result (it has since
rebounded) and SK Global was placed
under the direction of its creditors in
accordance with Korean corporate
restructuring law. A creditors’ meeting to
but both the Tier 1 component and the
subordinated debt component are callable
by the banks after the fifth year, most in
the first half of 2004.
Provided that market conditions continue
to improve, the stronger banks – BBL,
TFB and DTDB – are likely to call the
hybrids in 2004. TFB may be able to
generate sufficient earnings to refinance
its THB20bn Tier 1 hybrid portion
internally, but this would leave it weakly
capitalised, with limited scope for
expansion. If the hybrids are called, the
banks are likely to need to raise ordinary
equity in the next year to restore their core
capital, particularly as current Bank of
Thailand rules now restrict hybrids to
25% of Tier 1 (compared with the stricter
international guideline of 15% and Fitch’s
internal guideline of 20%). Raising
ordinary equity should enable the Thai
banks to more fully restore their balance
sheet strength, provide capital for growth
and help further reduce interest expense
and improve earnings and profitability.
TMB recently indicated that it also
intends to raise capital over the next year
to increase provisions and refinance its
Tier 1 hybrids, which, if completed,
should be positive in restoring the bank’s
financial position. BAY also indicated
that it intends to refinance its hybrids,
which if successful, will also be a positive
step. Nonetheless, given their financial
weaknesses, raising a relatively large
amount of capital will be a challenge for
both banks, even with improved market
sentiment. TMB has the benefit of partial
determine the actions needed to deal with
SK Global’s problems took place on 19
March 2003. This note examines the
impact of the fallout from SK Global on
Korea’s main banks.
Fitch Ratings concludes that the extent of
SK Global’s problems, while representing
a serious challenge to its management in
order to ensure its ongoing viability, does
not represent a substantial blow to the
solvency of the Korean banking sector. It
is Fitch’s judgement that, while banks
with exposure to SK Global are likely to
22
state support in the form of a 49% stake
held by the Ministry of Finance, with
additional smaller shareholdings by other
state defence agencies, though it is still a
private entity. Nonetheless, partial state
ownership and the likelihood of some
support is one of the key factors that
underpin TMB’s slightly higher ratings
compared with BAY.
The debt ratings of the largest four banks
– BBL, KTB, TFB and SCB – are
underpinned by these banks’ systemic
importance to the Thai financial system
and economy and the strong expectation
of government support. These four
commercial banks account for about 70%
of total system loans and deposits. Fitch
believes that even with the proposed
withdrawal of the central bank’s Financial
Institutions Development Fund guarantee
in 2004, government support for senior
creditors would be forthcoming. The
lower debt ratings of TMB and BAY
reflect their weaker financial position, as
well as their smaller size and systemic
importance, which results in a lower
expectation of support than for the big
four. The debt ratings of BOA are based
on ABN AMRO remaining the
controlling shareholder. While even the
stronger Thai banks remain vulnerable to
adverse changes in economic conditions
(reflected in their still low Individual
ratings), Fitch expects a gradual
improvement in the financial strength of
these banks over the next two to three
years. 
incur increased provisioning charges as a
result of the company’s heightened risk
profile, the level of SK Global’s
indebtedness does not pose a systemic
risk to the sector and no individual bank
will face serious problems as a result of
the consequences of SK Global.
Background
SK Global (the former Sunkyong
Limited) was established in 1956 and
operates in the capacity of a general
trading company as the principal trading
arm of the SK Group, one of Korea’s
SK GLOBAL NOT ANOTHER DAEWOO FOR KOREA’S BANKS (CONT.)
Continued from page 22
Main Exposures to SK Global
(KRWbn)
Korea Development Bank
Export Import Bank of Korea
Hana
Shinhan
Kookmin
National Agricultural Cooperative Federation
Korea Exchange
Chohung
Woori
KorAm
Industrial Bank of Korea
Pusan
Others
Total Domestic Banks
Other Banks
Non-banks*
Grand Total
* Investment trust companies, securities companies, insurance companies
leading conglomerates (‘chaebol’). The
company’s problems surfaced earlier this
month when it was announced that it had
substantially overstated its end-2001
earnings and under-reported its debt
obligations, leading to heightened
concerns about the company’s financial
viability and liquidity. In response, and in
order to map out a future course for SK
Global, it was placed by its main creditors
under workout procedures.
SK Global’s main shareholders are: SK
Corp – one of the country’s main oil and
energy companies, with a 38.7% holding
of common shares issued; SK
Construction (3.55%); SKC (3.29%); Mr.
Taewon Chey – the owner of SK Group,
who holds 3.31%; and SK Chemical
(2.51%).
As of 11 March 2003, SK Global was
reported to be carrying a total of
KRW8.6trn of debt from banks and other
financial institutions, such as local
investment trust companies, insurers and
securities companies. The main estimated
exposures are shown in the table on the
next page. (Note that Hana Bank, Korea’s
third largest commercial bank, is SK
Global’s main creditor and the
coordinator of its rescue and restructuring
plan).
Please note that the above exposure
figures include guarantees extended to SK
Global’s overseas affiliates (equal to
about one third of estimated exposure
totals).
1,057.4
603.1
559.2
540.9
468.7
462.7
364.5
420.2
404.1
261.3
86.8
8.4
10.0
5,247.2
204.6
3,115.6
8,567.4
Nature of the Exposure
The following points should be noted with
regard to the exposure of Korea’s main
banks to SK Global:
The total size of the exposure is moderate,
equivalent to about 15% of the
commercial banking sector’s combined
net worth (as of end-June 2002).
The main exposures are concentrated in
two state-run development banks, namely
Korea Development Bank and Export
Import Bank of Korea. In common with
Industrial Bank of Korea, both of these
banks are protected by ‘solvency
guarantees’ from their shareholder, the
Korean government.
The vast majority of the bank-related
exposure is in the form of trade finance
(letters of credit, bills purchased and
usance). This is in line with SK Global’s
main role as the trading arm of SK Group.
As such, the ultimate risks associated with
the exposure are substantially mitigated
by the self-liquidating and short-term
nature of the financing provided. It should
also be noted that the company has
financed its activities predominantly
through the issuance of longer-term bonds
(and CP) that have been purchased by
non-bank financial institutions such as
investment trust companies; there is very
little direct lending to SK Global from the
banking sector. (See below).
Although a number of commercial banks
carry what appear to be relatively large
23
exposures to SK Global, Fitch does not
consider that any commercial bank faces
an insolvency risk as a result of the
problems at SK Global. (Note that the
financing provided by the main
commercial banks is predominantly in the
form of short-term trade finance, as
explained above; and that the capital
positions of the main creditor banks are
not under inordinate pressure because of
SK Global. For example, the total
reported exposure of Hana Bank – SK
Global’s main commercial creditor bank –
equated to about 21% of the bank’s
estimated end-2002 net worth: while high,
the overall risk profile of Hana Bank’s
exposure to SK Global is mitigated by its
trade finance nature).
Rescue Plans
On 19 March, SK Global’s main creditors
(banks and non-banks) met to discuss
efforts to restructure the company and
restore its financial viability. The meeting
was called pursuant to Korea’s ‘corporate
restructuring promotion law’, first
promulgated in August 2001, which is
designed to normalise firms experiencing
financial or operational stress as early as
possible and to allow creditor financial
institutions to initiate further action to
impose corporate restructuring. The main
elements of the contingency plan agreed
upon are as follows:
1. Securities and real estate owned by SK
Global will be sold if required, to secure
liquidity amounting to KRW1.57trn. This
breaks down into the following
components: sale of stock in associated
SK Group companies currently valued in
excess of KRW400bn; the disposal of SK
Global’s real estate (held in the form of
gas stations operated on behalf of SK
Corp) valued at KRW903bn; and other
sundry investments.
2. SK Global will also undertake a cost
reduction plan that is estimated to produce
expense savings of KRW59.2bn,
principally through the company’s
withdrawal from unprofitable businesses
(KRW17.9bn) and the scaling back of its
international operations. No details have
yet been decided with regard to the
timeframe of SK Global’s
restructuring/asset sales. However, we
understand that no domestic bank has
called in its loans to SK Global and that
SK GLOBAL NOT ANOTHER DAEWOO FOR KOREA’S BANKS (CONT.)
Continued from page 23

the restructuring plan has been agreed
upon and will move forward.
Conclusion
It is inevitable that the problems at SK
Global will create some fallout for the
company’s main creditor banks, but this is
expected to be manageable and
predominantly in the form of increased
provisioning costs due to the re-
classification of SK Global debt at lower
asset classification levels. No
announcement has yet been made by
individual banks, but it is believed that
most banks will re-classify their exposure
to SK Global as ‘substandard’ or below,
resulting in provisioning charges of 20%
or more for unsecured exposures.
Separately, there has been some increased
concern about the potential impact of
heightened liquidity restraints on the
country’s investment trust companies (and
credit card companies). As noted above,
the main creditors of SK Global – in
addition to the banking sector – are non-
bank financial institutions, predominantly
investment trust companies (ITCs) that
have financed SK Global through the
purchase of its commercial paper and
other corporate debt. Following the
revelation of SK Global’s problems, the
ITC sector experienced a sudden liquidity
drain as investors (who purchased short-
term investment products issued by the
ITCs, such as beneficial certificates)
withdrew their funds. A total of
KRW20trn was withdrawn from the ITC
sector during 11-20 March following the
announcement of SK Global’s problems,
according to recent estimates by the
Financial Supervisory Service. This added
to concerns about the liquidity of Korea’s
credit card companies, as local ITCs are
also major purchasers of credit card
company paper. However, it should be
noted that this funds withdrawal has since
eased and that there has been no
‘spillover’ effect for the banking sector as
a result. (The outlook for local credit card
companies will be examined in a separate
Fitch comment, to be released shortly).
While the increase in provisioning costs
will dent profitability, Fitch has
concluded that the problems at SK Global
do not pose any serious solvency threat to
the Korean banking system. As such,
there is no intention on the agency’s part
to alter the Individual or Long-term
ratings of the banks that Fitch covers that
have exposure to SK Global. 

Asian Banks Selected Subordinated Debt Ratings March 2003

Country Foreign Currency Subordinated Debt
Long Term Debt Rating
Development Bank of Singapore Singapore AA- A+
DBS USD750m (2009) Upper Tier II
DBS USD500m (2010) Upper Tier II
DBS Capital Funding Corp
USD725m (2011) Perpetual Tier I
Oversea-Chinese Banking Corp Singapore A+ A
USD1.25bln (2011) Upper Tier II
Euro 400m (2011) Upper Tier II
SGD500m Non-Cum Non-Conv, Pref Shares A+ A
Malayan Banking Berhad Malaysia BBB+ BBB+
USD380m (2012) Lower Tier II
RHB Bank Malaysia BBB BBB-
Subordinated Notes Due 2012
Bank Mandiri Indonesia B B
USD125m (2012) Lower Tier II
Bank Negara Indonesia Indonesia B B-
USD100m (2012) Lower Tier II
Bank NISP Indonesia B B-
USD25m (2013)
Equitable PCI Bank Philippines BB *BB-
Metropolitan Bank & Trust Co Philippines BB *BB-
Korea Exchange Bank Korea BBB- BB
USD200m (2010) Upper Tier II
Woori Bank Korea BBB BBB-
USD300m (2010) Lower Tier II
Woori Bank Korea BBB BB+
USD550m (2010) Upper Tier II
KorAm Bank Korea BBB+ BBB-
USD160m (2011) Upper Tier II
Korea First Bank Korea BBB+ BBB-
USD200m Upper Tier II
Bank of East Asia (East Asia Financial Holding BVI Ltd) Hong Kong A- BBB+
USD550m (2011) Lower Tier II
Dah Sing Bank Hong Kong A- BBB+
USD125m (2011) Lower Tier II
Citic Ka Wah Bank Hong Kong BBB BBB-
USD300m (2011) Lower Tier II
Citic Ka Wah Bank Hong Kong BBB BB+
USD250m (2012) Upper Tier II
* Fitch has not assigned a subordinated debt rating but this is likely to be one notch below the senior debt rating, in line with Fitch's normal rating
methodology

24
Contact List
Fitch Analyst Phone Email
Singapore Ambreesh Srivastava +65 6336 5704 ambreesh.srivastava@fitchratings.com
Korea Paul Grela +852 2263 9944 paul.grela@fitchratings.com
Hong Kong Arthur Lau +852 2263 9966 arthur.lau@fitchratings.com
Malaysia / Indonesia Peter Tebbutt +65 6337 5619 peter.tebbutt@fitchratings.com
Financial Institutions: Asia
Hong Kong David Marshall +852 2263 9911 david.marshall@fitchratings.com
Capital Markets & Issuer Marketing: Asia
Singapore Vivek Goyal +65 6336 6064 vivek.goyal@fitchratings.com

25
CORPORATES
FITCH UPGRADES RATING OF KOREA ELECTRIC POWER CORPORATION TO ‘A-’
Charles Chang, Jonathan Cornish
On 6 March 2003, Fitch Ratings upgraded
the foreign currency Senior Unsecured
rating of Korea Electric Power
Corporation ("KEPCO") to 'A-' (A minus)
from 'BBB+'. Fitch has maintained
KEPCO's foreign currency Short-term
rating at 'F2'. The Outlook on the Long-
term rating is Positive.
The upgrade reflects KEPCO's strong
performance during FY2002, which
resulted from better than expected volume
growth in electricity sales (8%), and from
extraordinary income from the sale of
controlling stakes in Powercomm
(KEPCO's telecom subsidiary).
The upgrade is also supported by
significant and timely developments with
respect to structural reform of Korea's
electricity sector. Specifically, the
credibility of the reform programme has
been strengthened by progress on the sale
of Korea Southeast Power ('KOSEPCO')
and by the success of debt issuances in
domestic and international capital markets
from KEPCO's unbundled generating
subsidiaries (such issuances being key to
envisaged reforms).
Visible interest thus far from domestic
and international bidders suggests that the
sale of 34%-51% of KOSEPCO could
FITCH MAINTAINS TELSTRA RATINGS FOLLOWING WRITE-OFF OF REACH
INVESTMENT
Jonathan Cornish, Andrew Smith
On 21 February 2003, Fitch Ratings
maintained its 'AA-' (AA
minus)/Stable/'F1+' ratings on Telstra,
despite the announcement by Telstra that
it would write off its investment in Reach,
which is one of the leading wholesale
providers of voice, data and internet
connectivity services in the Asia-Pacific
region. Reach is currently in breach of
covenants with respect to its USD1.5
billion debt. Telstra owns 50% of Reach,
with the remainder owned by PCCW Ltd.
well be completed during 1H03. Debt
issues from KEPCO's generating
subsidiaries also provide further evidence
of their capacity to fund their own
ongoing capital needs. Over the past year,
positive developments on these two fronts
have allowed planned reforms to continue
and have reduced uncertainties with
respect to associated structural and
regulatory changes over the medium term.
However, KEPCO's current ratings are
based on Fitch's expectation that planned
sector restructuring will continue broadly
on track over the announced timeframe to
2009. Major delays or reversals could
therefore trigger appropriate reviews.
While the probability of reversals has
been reduced by the developments cited
above, the potential for delays (and the
prospect of associated uncertainties)
nevertheless serves to restrict ratings to
their current level.
Fitch further notes that its current credit
view is based on KEPCO's fundamental
credit profile on a consolidated basis, an
approach the agency deems appropriate
given the medium- to long-term timetable
for KEPCO's divestment plans. While
profitability and coverages are strong,
substantial leverage exists on KEPCO's
balance sheet, and material foreign
Telstra has indicated that it intends to
write down the carrying value of Reach
by USD546 million (AUD965m) to zero.
The write-off follows a review by Telstra
of the outlook for the international
connectivity market in light of evidence
of extremely competitive pricing by
Reach's competitors, who – in the process
of emerging from bankruptcy – are now
operating on a much lower cost base.
As a credit rating agency, Fitch focuses
on cash flows and this write-off per se has
26
exchange exposure persists in its debt
profile. Recent improvements in this
regard include modest reductions in
nominal debt levels – largely
accomplished with proceeds from the
Powercomm sale and with cash flows
from strong sales performance. While
these developments are modest in
magnitude, Fitch believes that they could
signal the reversal of a history of funding
moderate cash outflows with creeping
increases in debt (although Fitch notes
that debt levels relative to capitalisation
and equity have continuously fallen).
Significant and continued progress in this
regard would constitute positive rating
triggers in the medium term.
Fitch expects the government and
KEPCO to execute the reform programme
and divestments in accordance with
current plans. While it remains to be seen
whether progress will indeed be made as
scheduled, and whether debt will be paid
down as announced, the balance of risk,
in Fitch's view, favours the positive, and
justifies the current rating Outlook. That
being said, no further upgrade is likely for
the remainder of this year. 
no direct bearing on Telstra's future cash
flows. But the write-off is indicative of
Reach's reduced capacity to generate cash,
and implies at best a deferral of the time
when Reach can generate dividend cash
flows to Telstra. In Fitch's view, dividend
cash flows to Telstra over the medium
term were never expected to be material
and Fitch's ratings of Telstra reflected this
and the fact that the investment in Reach
is non-recourse. However, should the
non-recourse nature of the investment
change, Fitch would then assess the
FITCH MAINTAINS TELSTRA RATINGS FOLLOWING WRITE-OFF OF REACH INVESTMENT
(CONT.)
Continued from page 26
materiality of such a decision with respect
to the impact it would have on Telstra's
credit risk profile going forward.
While Telstra is the leading domestic
operator, Fitch acknowledges that Telstra
operates in an increasingly competitive
market and faces shareholder pressure to
increase returns. Likewise, Telstra's
FITCH AFFIRMS NEW WORLD INFRASTRUCTURE ‘BB-’ RATING; WITHDRAWS ON
RESTRUCTURING COMPLETION
Elizabeth Allen, Adam Preece
On 30 January 2003, Fitch Ratings
removed the Senior Unsecured foreign
currency rating of New World
Infrastructure Ltd (“NWI”) from Rating
Watch Evolving, so affirming its rating of
‘BB–’ (BB minus) following the
completion of a group restructuring. Fitch
has simultaneously withdrawn the rating.
Following the restructuring, NWI’s
operations are principally focused in the
telecom, media and technology (“TMT”)
sectors. Most of these operations are in an
early stage of development or operation
and do not generate operating cash flow.
FITCH ASSIGNS ‘BBB+’ RATING TO HUANENG POWER INTERNATIONAL
Charles Chang
On 22 January 2003, Fitch Ratings
assigned a foreign currency Senior
Unsecured rating of 'BBB+' to Huaneng
Power International ('HNP'). The Outlook
is Stable. The rating reflects HNP's
strength as the largest independent power
producer ('IPP') in China, with a
geographically diversified portfolio of
generating assets spanning the entirety of
China's prosperous coastline. The rating
also takes into consideration the
company's strong financial profile, its
robust and stable margins, and its success
in achieving growth through acquisitions
and development.
Since its establishment in 1994, HNP has
realised a five-fold increase in net
capacity through continued acquisitions
international investments face challenges.
But even in this environment, Telstra has
improved its cash flow generation through
disciplined cost reduction programmes
and by reducing capital expenditure,
leading to still strong credit metrics that
support Telstra's high credit ratings.
Although negotiations are continuing
between Reach, its shareholders and
The division incurred an attributable loss
of HKD102m in FY2002. All traditional
infrastructure businesses previously
owned by NWI were sold as part of the
restructuring to Pacific Ports Company
Limited (to be renamed NWS Holdings
Ltd) for HKD10.2 billion, of which
HKD8.5bn was a cash consideration.
In a shareholders circular distributed in
November 2002, NWI estimated that it
had a pro forma net cash position as of
June 2002. The company intends to
redeem the approximately HKD1.3bn
outstanding 1% convertible bonds due
and plant development. This has led
output to expand by over four times
between 1996 and 2002, under a 23%
CAGR. Successful scale growth has
allowed HNP to grow its revenue base by
some 25% per annum, while EBITDA
margins have remained at between 53%
and 56%.
As with other generators in China, HNP is
exposed to risks associated with the
country's evolving and fragmented
regulatory regime. Tariff rates in China
are subject to regulatory control by
national as well as local authorities under
broadly defined guidelines implemented
in the late 1990s.
27
financiers, the current market conditions
could have positive implications for
Telstra in terms of reducing its own
operating costs.
Fitch intends to monitor developments
closely with respect to Telstra's
investments and its own operating
markets. 
2003 (ahead of schedule) and to repay the
USD45m floating rate notes due 2003 on
their maturity in February. Most of the
other outstanding borrowings of NWI
were repaid during the restructuring.
The ‘BB–’ rating reflects the business risk
and the start-up nature of NWI’s TMT
operations. Such concerns are mitigated
by the company’s achieving a more
conservative capital structure through the
restructuring, as well as the implicit
support from the New World Group, as
evidenced by the restructuring
exercise. 
Fitch notes, however, that HNP is more
protected from local regulatory risks than
its domestic peers. Associated with
conditions and policies of relevant
provinces/municipalities in China, such
risks are necessarily geographically
specific. Given such conditions, regional
concentration creates material risks and
geographic diversification provides
substantial benefits. Unique among
Chinese IPPs, HNP's diversified portfolio
hedges against price risks emanating from
different regions, with weaker results
from one province often nullified by
stronger performance elsewhere.
As HNP owns principally coal-fired
facilities and procures almost all its fuel
supply domestically, its cost structure is
FITCH ASSIGNS ‘BBB+’ RATING TO HUANENG POWER INTERNATIONAL (CONT.)
Continued from page 27
largely shielded from instabilities in
international energy commodity markets.
Its earnings are less vulnerable to global
oil and gas prices compared with fuel
importing peers in the region. This
structural protection allowed HNP to
emerge unscathed from recent energy
price turbulence.
The company is, however, exposed to
coal prices in China, and its results have
been negatively affected by coal sector
adjustments in recent years. Rising coal
prices led HNP's average procurement
costs to rise by 5%-10% during 2001 and
2002. While lower coal prices have yet to
materialise, Fitch expects China's
abundant coal reserves to allow for a
supply response in the medium term.
HNP historically financed growth through
a combination of internally generated
cash flow, domestic bank loans and debt
TELSTRA DIVIDENDS, INVESTMENTS COULD PRESSURE RATINGS
Jonathan Cornish
Fitch Ratings said on 10 March 2003 that
it did not expect any change in Telstra's
ratings due to the competitive
environment alone, but commented that
the ratings could experience pressure
from increased dividend payments or
from acquisitions or increased
investments that the agency viewed as
material and detrimental to the company's
financial flexibility and credit quality.
Fitch's Long-term and Short-term ratings
of Telstra are 'AA-' (AA minus) and 'F1+'
respectively. The rating Outlook is Stable.
The ratings take into account Telstra's
leading domestic market position, and
continued growth in robust operating cash
flows. Telstra's reduced capex programme
has allowed the company to make modest
debt reductions since June 2001 and to
retain strong credit metrics that remain
appropriate for the rating.
Telstra's financial results for the six
months ending December 2002 were in
line with the agency's expectations.
Revenues remain under pressure as a
result of low economic and industry
growth and intensifying competition
arising from past regulatory decisions.
and equity issuances in China and abroad.
Its total debt amounted to CNY13 billion
(USD1.57bn) as of Q302, below historical
levels of CNY15.3bn (USD1.85bn). Debt
reduction during 2002 mainly involved
the use of substantial cash holdings
(CNY8.4bn, USD1bn at year-end 2001)
for the redemption of convertible bonds
issued in 1997.
Although HNP has reduced debt from
45%-50% of capitalisation in the late
1990s to 30%-35% recently, material
foreign exchange (“FX”) risk remains in
its debt profile. Such debt (not hedged by
incomes in hard currencies) historically
accounted for some 85% of total debt,
arising from an active development
programme that incurs continuing capex-
related FX needs.
HNP's ability to raise funds for capex or
debt service is supported by its strong
Although cash flow levels remain high
thanks to success in process improvement,
in managing the effects of competition
and due to lower capex, Fitch notes that
this has been partly offset by increased
distributions to Telstra's shareholders.
Fitch recognises the mounting pressure by
Telstra shareholders for the company to
lift returns given the low-growth
environment, its depressed share price and
the postponement of full privatisation.
The agency believes this led Telstra to
pay a special dividend of three cents per
share in addition to raising, for the second
successive period, its regular dividend
payout to shareholders. Fitch sees the
special dividend as indicative of a change
of policy since the agency first assigned
ratings to Telstra in May 2001, even
though the dividend increase itself is
manageable within current rating
parameters and the increase was funded
by non-operating cash flows arising from
the sale of seven commercial properties.
Fitch also notes that the sale and
leaseback nature of the transactions
resulted in the creation of an off-balance
sheet liability of approximately AUD500
28
record of acquiring funds from debt and
equity markets at home and abroad.
Robust energy demand, stable margins, a
growing revenue base and substantial
financial flexibility also enhance the
company's capacity to secure needed
funds or FX in a timely fashion. Although
ongoing regulatory reforms and structural
changes (most prominently tariff reforms
and the break-up of China's State Power
Corp.) cast uncertainties over the sector,
Fitch expects HNP to maintain a strong
credit profile as China's power sector
continues to rationalise and consolidate.
A full report is available on the agency's
subscription web site,
www.fitchresearch.com, or from the
ratings desk in Singapore,
ratingsdesk@fitchratings.com (Tel: +65
6336 6801). 
million. Taking into consideration the
recent dividend payment trend and limited
growth prospects over the next 12-18
months, Fitch cannot rule out further
shareholder distributions, although the
agency is not aware of any plans by
Telstra to do so. There is clearly a danger
that rising dividends might render key
credit metrics incompatible with the
current rating.
The agency has other concerns that, if
they were to develop further, might
destabilise Telstra's risk profile going
forward. These include:
• A competitive, low-growth domestic
telecom market that threatens to further
intensify in 2003, especially in mobile
and data/internet services; these are
markets that Telstra has more recently
looked to for most of its revenue
growth.
• The low returns generated by Telstra's
major international investments
relative to its domestic businesses.
However, Fitch notes that these
investments currently provide a
TELSTRA DIVIDENDS, INVESTMENTS COULD PRESSURE RATINGS (CONT.)
Continued from page 28
proportionately low percentage of the
group's total revenue and cash flow.
• Wholly owned subsidiary CSL, Hong
Kong's leading mobile operator, has
faced considerable revenue pressure in
recent years due to intense
competition. Furthermore, the outlook
for the Hong Kong mobile market
remains subdued, in Fitch's opinion,
despite the imminent introduction of
Hutchison's 3G services. Mobile
penetration is among the highest in the
world at 90%, and the market is
saturated with six network operators.
Fitch believes that consolidation will
be required in order to sustain long-
term operator profitability: one
potential catalyst for this would be the
rollout in Hong Kong of 3G services.
The agency believes that CSL is likely
to be interested in participating in any
industry consolidation, but it is not yet
clear when consolidation may occur or
to what extent CSL's participation
would affect Telstra's financial profile.
However, Fitch would expect CSL's
business risk profile to benefit in the
long run.
• Telstra's 50% interest in Australia's
leading subscription television
FITCH ASSIGNS ‘AA+’ RATING TO SINGAPORE POWER
Charles Chang
On 27 March 2003, Fitch Ratings
assigned a foreign currency Senior
Unsecured rating of 'AA+' to Singapore
Power Limited (“SP”). The Outlook on
the rating is Stable. The rating reflects
SP's dominance of its industry: it owns
and operates Singapore's electricity and
gas transmission and distribution systems.
The rating also takes into consideration
SP's stable cash flows (reflecting its
monopoly status) and SP's central role in
Singapore's energy sector. SP's stand-
alone credit profile is in line with a 'AA+'
rating: it has a robust financial profile that
was strengthened by the divestment of its
generating subsidiaries in 2001 and by the
provider Foxtel. Although Foxtel is
currently unprofitable and cash flow
negative, recent industry developments
have improved the prospects for its
profitability and for Telstra's
competitive strategies. Developments
include a decision by the Australian
Competition and Consumer
Commission to approve a content
sharing agreement with Optus Vision
and for Telstra to provide bundled
service packages, including Foxtel
pay-TV, under a single bill. In gaining
this regulatory approval, Foxtel is
required to provide competitors with
access to its pay-TV infrastructure and
to upgrade the current analogue
network to digital. Fitch understands
the cost of doing so could be several
hundred million AUD, and while
funding is likely to be undertaken at
the operating entity level, Telstra may
be required to increase its investment
in Foxtel.
• Reach Ltd Reach Ltd loan
negotiations. Overcapacity, lower than
expected demand and significant tariff
discounting have conspired to create a
difficult operating environment for
Reach, Asia's leading international
carrier of voice, private line and IP
sale of its gas import, manufacturing and
retail businesses in 2002. The sale of the
generators allowed SP to reduce its capex
burden by one third and to remove its
direct exposure to international fuel
prices. The divestments also transferred to
the spun-off entities the competitive risks
that had arisen from Singapore's
liberalisation of its electricity and gas
markets. These fundamental strengths
support SP's current rating; however, the
rating is not constrained by the Fitch
Sovereign rating for Singapore. While SP
has foreign currency exposure in its
consolidated debt profile, this is matched
by its subsidiaries' foreign exchange
29
data services, which is jointly owned
by Telstra and PCCW. A sharp decline
in operating performance by Reach
caused it to seek a waiver on the
covenants applicable to its USD1.5
billion non-recourse syndicated bank
loan, prompting negotiations between
Reach, its lenders and its shareholders.
Compounding the issue is an uncertain
global economic outlook that provides
little clarity about the timing of a
recovery in the international
connectivity market. Despite the loan
being non-recourse, Reach's lenders
are believed to have sought capital
contributions from the shareholders as
part of a business recapitalisation and
loan restructuring compromise. In the
past, Fitch has noted the existence of a
contingent liability only on the basis of
the loan being non-recourse to Telstra.
However, the risk of Telstra
contributing capital in some form has,
in the agency’s opinion, increased –
despite Telstra having recently written
off its entire investment in Reach. Any
contribution or support for the loan by
Telstra would itself likely be a credit
negative, but this would need to be
assessed in the context of any
operating benefits that might ensue. 
earnings and funding capacities in
corresponding jurisdictions. The principal
threats to SP's credit profile comprise any
significant change in the regulatory
environment or further overseas
acquisitions. The latter could increase
debt and dilute profitability if margins of
acquired assets were to under-perform
current operations. Given SP's value-
driven acquisition philosophy, risks in this
regard should remain moderate in the
medium term. A full report on Singapore
Power will be available during the third
quarter of this year. 
Asian Corporates Coverage March 2003
Fitch Rating Fitch
Country Fitch Outlook Moody’sS&P Analyst
Telecommunications
China Mobile (Hong Kong) Limited Hong Kong BBB+ Stable Baa2 BBB JC
KT Corporation (Korea Telecom) Korea A- Stable Baa1 BBB+ JC
Philippine Long Distance Telephone Company (PLDT) Philippines BB- Negative Ba3 BB JC
PT Telekomunikasi Selular Indonesia B Stable B3 B+ JC
Singapore Telecommunications Limited Singapore A Stable A1 AA- JC
Telstra Corporation Limited Australia AA- Stable Aa3 AA- JC
Telecom Corporation of New Zealand Ltd New Zealand A Stable A2 A JC
Power / Energy
CNOOC Limited China BBB+ Stable Baa1 BBB CC
Huaneng Power International China BBB+ Stable NR BBB CC
Korea Electric Power Corporation Korea A- Positive A3 A- CC
Petroliam Nasional Berhad Malaysia BBB+ Stable Baa1 BBB+ CC
Singapore Power Singapore AA+ Stable NR AAA CC
Transportation / Infrastructure
Asiana Airlines Korea B Negative Watch NR NR EA
Cheung Kong Infrastructure Holdings Hong Kong A- Stable NR A- EA
Limited
Hopewell Holdings Limited Hong Kong BB- Stable NR BB- EA
The above list includes selective institutions that are covered by the three major international rating agencies. Ratings indicated are foreign currency long-
term (Fitch), Long Term foreign issuer credit (S&P) and Issuer Rating/Senior Unsecured Debt (Moody’s) Fitch has endeavoured to ensure the information is
correct, as per data available. It will not be responsible for any inaccuracies therein. NR = Not Rated

Contact List
Fitch Analyst Phone Email
JC Jonathon Cornish Hong Kong +852 2263 9901 jonathan.cornish@fitchratings.com
CC Charles Chang Hong Kong +852 2263 9900 charles.chang@fitchratings.com
EA Elizabeth Allen Hong Kong +852 2263 9696 elizabeth.allen@fitchratings.com
Head of Corporates: Asia
AP Adam Preece Hong Kong +852 2263 9559 adam.preece@fitchratings.com

30
STRUCTURED FINANCE

FITCH ASSIGNS RATINGS TO ARTEMUS STRATEGIC ASIAN CREDIT FUND LIMITED

CDO
Ben McCarthy

Notes Issued by Artemus

USD127,000,000 Class A Secured Floating-Rate Notes Due 2010 'AAA'
USD20,000,000 Class B Secured Floating-Rate Notes Due 2010 ‘AA’
USD20,000,000 Class C Secured Floating-Rate Notes Due 2010 ‘A’
USD13,000,000 Class D Secured Floating-Rate Notes Due 2010 ‘BBB’

On 13 March 2003 Fitch Ratings assigned USD1 billion, which primarily consists of 2003, the closing date, the proceeds of the
final ratings to Artemus Strategic Asian five-year credit default swaps between notes were held as a GIC deposit in the
Credit Fund Limited ("Artemus") notes multiple swap counterparties and Artemus name of Artemus and eligible cash
due 2010 as above. and a small proportion of cash securities. securities.

This transaction is a partially funded The ratings are based on the credit quality A copy of the new issue report for this
synthetic collateralised debt obligation of the credit default swaps, available transaction is available on the agency's
(CDO) of global assets. The notes absorb credit enhancement and the sound legal website at www.fitchratings.com. 
the credit risk on a reference portfolio of structure of the transaction. On 5 March

FITCH ASSIGNS ‘A+’ RATING TO COBALT ASSET MANAGEMENT’S NOTES

Ben McCarthy

On 4 February 2003, Fitch Ratings
assigned an 'A+' rating to the
SGD45,000,000 notes issued by Cobalt
Asset Management Ltd. The ratings
address the timely payment of interest and
the ultimate payment of principal by the
legal final maturity in June 2019.
This transaction represents the
securitisation of rental lease receivables
from the Siemens Center Building,
currently under construction in Singapore.
The ratings principally reflect the credit
quality of the major tenant of the
property, Siemens Pte Ltd. Upon
completion of the property Siemens will
occupy 82% of the total lettable area. The
obligations of Siemens Pte Ltd are
unconditionally and irrevocably
guaranteed by Siemens AG, rated 'A+' by
Fitch.
The ratings also reflect:
• The mitigation of construction risk
through a fully funded construction
escrow account in the amount of
SGD32,239,760 at closing;
• A fully funded expense escrow account • An extraordinary expense LC provided
funded with six months of interest and by HVB in the amount of
expenses to cover costs until the SGD2,500,000 to cover any
expected completion of the property. unforeseen costs including
The account will be funded with SGD unexpected/non-budgeted capital costs
1,598,407 at closing; during the life of the transaction;
• A construction letter of credit (LC), • A liquidity reserve funded at closing of
provided by Bayerische Hypo- und SGD100,000 increasing to
Vereinsbank AG (“HVB”, rated 'A/F1' SGD1,355,452 upon completion of the
by Fitch) to a total amount of property;
SGD11,500,000 covering cost • Credit enhancement provided by the
overruns and variation orders; subordinated loan of SGD6,398,668
• A delay LC in the amount of provided by the developer M+W
SGD3,087,102, provided by HVB to Zander;
cover the costs of the issuer, including • Insurance cover for both pre and post
interest, in the event that construction the construction period, including 24
is delayed by up to one year; months’ rental abatement insurance
• A defects liability LC provided post once the property has been completed;
completion, through a reduction of the
• Facility management services provided
construction LC provided by HVB, to by M+W Zander; and
cover any defects liability warranty
given by the developer. The amount • A sound financial and legal
will be the lesser of SGD3,600,000 and structure. 
the undrawn portion of the
construction LC at completion;

31
FITCH AFFIRMS RATINGS OF NOTES ISSUED BY ALCO 1 LTD
Ben McCarthy

On 20 February 2003 Fitch Ratings CLO originated by the Development transaction. Ratings have been affirmed as
affirmed the ratings of the notes issued by Bank of Singapore (DBS), following the follows:
ALCO 1 Ltd., a synthetic balance sheet annual performance review of the

Notes Issued by Alco 1 Ltd.

USD29,550,000 Class A1 Floating Rate Notes Due 2009 ‘AAA’
SGD30,000,000 Class A2 Floating Rate Notes Due 2009 ‘AAA’
USD12,150,000 Class B1 Floating Rate Notes Due 2009 ‘AA’
SGD20,000,000 Class B2 Floating Rate Notes Due 2009 ‘AA’
SGD56,000,000 Class C Fixed Rate Notes Due 2009 ‘A’
SGD42,000,000 Class D Fixed Rate Notes Due 2009 ‘BBB’

In December 2001, ALCO 1 Ltd, a
special purpose company incorporated in
the Cayman Islands, issued various
classes of notes with the ratings listed
above. The initial reference portfolio of
SGD2.4 billion consisted of 199 senior
corporate loans (136 obligors) originated
by DBS (rated ‘AA-/F1+’ by Fitch). The
weighted average Fitch rating factor of
the initial portfolio at the time of issue
was 23, which corresponded to between
‘BBB-’ (BBB minus) and ‘BB+’. The
transaction has a final maturity date of
February 2009.
The transaction allows replacement of
reference obligations that have matured,
prepaid, or amortised if the substitution
conditions are met. The transaction also
allows discretionary substitution at the
sole discretion of DBS of up to 10% of
the initial portfolio (SGD280,000,000).
Following a review of the performance of
the current portfolio, Fitch comments that
to date, there has been no credit event
with regard to any reference obligation in
the portfolio and the credit quality of the
portfolio has remained in line with the
agency’s expectation. The size of the
current portfolio is approximately
SGD2.4bn and the weighted average Fitch
rating factor of the portfolio has slightly
increased to 25, still corresponding to
between ‘BBB-’ (BBB minus) and ‘BB+’.
To ensure sufficient diversification and
consistent credit quality over time,
various tests have been set as replacement
eligibility criteria, including a maximum
single obligor concentration test, an
industry concentration test, and a
weighted average rating test. The current
portfolio has satisfactorily passed all the
replacement eligibility tests that have
been set by Fitch.
The original ratings report is available on
the Fitch web site at
www.fitchratings.com. 

FITCH ASSIGNS RATING TO ABN AMRO ABCP CONDUIT – ORCHID FUNDING

CORPORATION
Ben McCarthy

On 23 December 2002, Fitch Ratings
assigned a rating of 'F1' to the asset
backed commercial paper (ABCP) issued
by Orchid Funding Corporation (Orchid).
Orchid is an ABCP programme structured
to issue USD-denominated ABCP to fund
the acquisition of pools of assets or
receivables originated from the Asia-
Pacific region, rated at least 'A/F1'.
The 'F1' rating assigned to the ABCP
issued by Orchid is based on the
following: the credit quality of the assets
or receivables purchased; the availability
of transaction-specific credit
enhancement, if required; the 102%
transaction-specific liquidity facilities
(sized on the performing asset base)
provided by ABN AMRO Bank N.V.
(ABN AMRO, rated 'AA-/F1+/Stable')
and other financial institutions rated at
least 'F1'; the availability of appropriate
hedging transactions with ABN AMRO
and other counterparties rated 'F1' and
above to mitigate potential interest rate
and foreign exchange exposures; a
working capital facility of up to
USD500,000 provided by ABN AMRO to
fund the fees and expenses of the
programme; the administrative
capabilities of ABN AMRO; and the
programme's sound legal structure.
The rating addresses the likelihood of
investors receiving the full face value of
the purchased ABCP on the maturity date,
in accordance with the terms of the
transaction documents.
The full report is available on the agency's
web site, www.fitchratings.com. 

32
Structured Finance Coverage (Asia Ex-Japan / Australia) March 2003
Country Asset Class Fitch Ratings
Emerging Asia CBO Ltd Asia CDO
Class 1 Senior AAA
Class 2 Senior AA-
Class 1 Mezzanine BBB-
Class 2 Mezzanine BB-

Artemus Strategic Asia Credit Fund Global CDO

Class A floating-rate notes AAA
Class B floating-rate notes AA
Class C floating-rate notes A
Class D floating-rate notes BBB

German Hong Kong Residential MBS 1998-1 Ltd Hong Kong RMBS
Class A AAA
Interest Only Notes AAA
Class B AAA
Class C BBB+
Harbour City Funding Hong Kong CMBS
Series A1 AAA
Series A2 AAA
Series A3 AAA
Series B1 AA+
Series B2 AA+
Series B3 AA+
SeriesC1 A+
Series C2 A+
Series C3 A+
HK Synthetic MBS Co. Limited Hong Kong RMBS
Class A AA
Class B A
Class C BBB
Class D BB
Hong Kong Turbo Mortgage Funding Limited Hong Kong CMBS
Class A-1 AAA
Class A-2 AAA
Class B-1 AA
Class B-2 AA
Class B-3 AA

Bank Internasional Indonesia Receivables Trust Indonesia Future Flow

Trust Certificates B-

Coro Voltin Fund Ltd Korea CDO

Class A1 Senior Notes A
Class A2 Senior Notes A
Han LSP (KDB) PLC Korea ABS
Secured Notes A
KDBC Leasing Receivables Korea ABS
Senior Notes A
Korea Asset Funding 2000-1 Korea ABS
Secured Notes A
OZ Receivables Korea ABS
Secured Notes B+
Plus One Ltd. Korea ABS
Floating-Rate Notes Due 2009 AA
Samsung Capital Aha 2002-1 Korea ABS
Aha 2002-1 Notes Due 2008 AA

Alco 1 Ltd Singapore CDO

Class A1 AAA
Class A2 AAA
Class B1 AA
Class B2 AA
Class C A
Class D BBB
Aragorn Investment Corporation Ltd. Singapore RMBS
A1 Floating-rate Notes AAA
A2 Floating-rates Notes AAA
B Fixed-rate Notes AA
C Fixed-rate Notes A

33
Structured Finance Coverage (Asia Ex-Japan / Australia) March 2003 (cont’d)
Country Asset Class Fitch Ratings
Cobalt Asset Management Ltd Singapore CMBS
Notes due June 2019 A+
Jasmine Investment Corporation Singapore RMBS
Class A AAA
Class B AA
Class C A
Maximilian Capital Corp Singapore ABCP
ABCP F1
Orchid Funding Corporation Singapore ABCP
ABCP F1
Peridot Investment Limited Singapore ABS
Class A AAA
Class B AA
Class C A
Class D BBB

PTCL Receivables Master Trust Pakistan ABS

Series 1997 Trust Certificates BB

Contact List
Fitch Analyst Phone Email
BM Ben McCarthy Hong Kong +852 2263 9922 ben.mccarthy@fitchratings.com

34
CREDIT MARKET RESEARCH
FITCH RATINGS: INVESTORS LOSE USD80BN PAR VALUE ON 2002 DEFAULTS
Mariarosa Verde, Paul Mancuso
Marking an unprecedented decline in
corporate credit quality, 2002 produced
USD109.8 billion in high yield defaults
and a new par based record default rate of
16.4%, exceeding 2001's USD78.2bn
default volume and 12.9% default rate.
The number of defaulted issuers actually
decreased in 2002 to 163 from 2001's
173, but the average size of 2002 defaults,
at USD674 million per issuer, was up
49% from 2001's USD452m per issuer.
The biggest factor contributing to the
volume growth was by far the long list of
supersized telecommunication defaults.
The likes of Global Crossing, McLeod,
Telewest and above all WorldCom
contributed USD59.6bn in defaults, 54%
of the year's volume tally. The average
default balance for telecom issuers was
USD1.3bn in 2002. The default rate for
the sector was an astonishing 43.5% for
the year, following a 23.9% default rate in
2001. The impact of the sector's crisis on
default statistics over the past few years
cannot be overstated. In 2001 and 2002,
telecommunication defaults totalled
USD87.8bn, nearly half the total default
toll for the two years of USD188bn.
Another remarkable statistic: the
combined volume of defaults in 2001 and
2002 exceeded the total volume of bond
defaults in the US between 1980 and
2000.
Fallen angels (companies rated
investment grade one year prior to
default), including WorldCom,
represented USD35.7bn of 2002 defaults,
or 33% of the year's total. The default rate
excluding fallen angels was 12.4%. This
compares with a 2001 default rate
excluding fallen angels of 9.7%.
The top default rates by industry in 2002
included: telecommunication at 43.5% on
default volume of USD59.6bn, insurance
35.2% on default volume of USD3bn,
cable 34.4% on default volume of
USD16.5bn, metals and mining 20.2% on
default volume of USD3bn, and utilities
14% on default volume of USD6.5bn.
The year's top ten defaults represented
57% of 2002 default volume, with
WorldCom making up nearly a quarter of
the year's volume.
Excluding fallen angel defaults, 20.9% of
the year's defaulted issues consisted of
bonds sold in 1999, 21.3% bonds sold in
1998 and 14.7% bonds sold in 1997. The
three issuance years continued to produce
the bulk of defaults.
Excluding fallen angels, the default rate
for the remaining universe of high yield
bonds was down substantially in the
second half of the year. The default rate
was 9.3% to June but just 3% for the six
months ending in December. While
defaults are still running at above average
annual levels, for the traditional high
yield market they have slowed
considerably from the frenzied pace of the
first half of 2002 when large telecom and
cable defaults caused default volumes to
soar.
The weighted average recovery rate for all
defaults in 2002 was 22% of par. In a
reversal of the previous year's trend,
fallen angel defaults depressed the
average recovery statistics. The weighted
average recovery rate excluding fallen
angels was 26% of par, a material
improvement over the 15% of par
recorded in 2001. In total, investors lost
35
78% of par value on the year's defaults,
grossing more than USD80bn.
Perhaps the biggest sign of the high yield
market's continued vulnerability at year-
end was the persistently large
concentration of bonds rated 'CCC/C'.
The 'CCC/C' pool started the year at
USD117bn and ended the year at
USD116bn. Despite the year's long list of
defaults, downgrades continued to
replenish the 'CCC/C' bucket. In each
quarter of 2002, the dollar volume of
downgrades towered over nearly
negligible upgrades.
Fitch's complete analysis of 2002 results,
with a full listing of all defaults, an
analysis of default and recovery rates by
industry and seniority, and a review of
credit quality measures for the US high
yield market, is available on the Fitch
Ratings web site at
'www.fitchratings.com'.
Overview of the Fitch US High Yield
Default Index: Fitch's default index is
based on the US, dollar-denominated,
non-convertible, speculative grade bond
market (the rating equivalent of 'BB+' and
below, rated by Fitch or one of the two
other major rating agencies). Fitch
includes rated and non-rated, public bonds
and private placements with 144A
registration rights. Defaults include
missed coupon or principal payments,
bankruptcy, or distressed exchanges.
Default rates are calculated by dividing
the volume of defaulted debt by the
average market size for the period under
consideration. Fitch's high yield default
studies are available in the 'Credit Market
Research' section at
'www.fitchratings.com'. 
NATIONAL RATINGS
FITCH AFFIRMS THAILAND’S NATIONAL PETROCHEMICAL AT ‘A+(THA)/F1(THA)’
Pimolpa Simaroj, Vincent Milton
On 11 March 2003, Fitch Ratings
(Thailand) Limited affirmed the Long-
term and Short-term National ratings of
National Petrochemical (NPC) at
'A+(tha)' and 'F1(tha)', respectively. The
agency also affirmed the Long-term
National rating of NPC's outstanding
THB3.0bn Senior Unsecured Amortising
Debentured No.1/2545 due in 2550 at
'A+(tha)'. The Outlook is Stable. The
ratings reflect the company's strong
ownership structure and support from
PTT Plc., secured long-term feedstock
supply and olefins sales agreements,
favourable feedstock price structure, cost-
competitive position, solid financial
position and natural foreign exchange
hedge from US dollar-linked revenue.
NPC is a joint venture between PTT and
downstream producers to operate the first
olefins plant in Thailand. PTT is the
supplier of NPC's main feedstock and its
largest shareholder (37.9%). More than
half of the company's olefins capacity is
sold through long-term agreements with
four downstream producers, which are
also its shareholders. As the only gas-
based olefins producer in Thailand, NPC
enjoys cost advantages from a favourable
feedstock agreement. NPC secures its
feedstock from PTT under a profit-
FITCH ASSIGNS ‘A-THA’ TO THAILAND'S NATIONAL FINANCE BONDS
Vincent Milton, Dusadee Srishevachart, David Marshall
On 10 March 2003, Fitch Ratings
(Thailand) assigned a Long-term National
rating of 'A-(tha)' to National Finance's
("NFS") Senior Unsecured debentures
totalling THB5 billion due in 2008 and
2010. NFS's Long- and Short-term ratings
are 'A-(tha)' and 'F2(tha)' respectively.
The Outlook is Stable. The ratings reflect
NFS's strong capital position and
improving earnings but take into account
the overhang of problem loans.
NFS is the largest Thai finance company
and one of the few to survive the
country's financial crisis in 1997, due to
sharing formula, which leads to less
volatile feedstock price movement. It also
indirectly allows NPC to backward
integrate to PTT's gas separation business.
Nonetheless, NPC's profitability is highly
sensitive to volatile petrochemical prices.
While the utilities operation provides
some buffer, the majority of NPC's
EBITDA comes from petrochemical
operations.
Despite a strong business rationale for
moving into the high-density polyethylene
(HDPE) market, there are some concerns
over NPC's ability to penetrate the
oversupplied domestic market quickly.
However, NPC's feedstock cost
advantages as well as sales contracts with
international traders should alleviate the
risks on the HDPE project, to an extent. In
the long term, this forward integration
should provide full utilisation of olefins
capacity, as well as cost efficiencies, and
should help to stabilise the company's
overall margins. NPC has so far invested
about 20% of the total cost of the HDPE
project, which is expected to be
commercially operative by August 2004.
Despite the average weaker olefins prices
and the 68-day plant shutdown during
2002, the company's financial position
its ability to manage severe systemic
liquidity pressures and independently
raise capital during the crisis. Since then,
NFS has broadened its business model
beyond investment banking and brokerage
towards a consumer and corporate
banking focus, and in early 2002 acquired
a bank licence for its subsidiary,
Thanachart Bank ("NBANK"). The group
is also actively developing its insurance,
distressed asset and fund management
arms.
NFS reported net income of THB1.7bn in
2002, a significant improvement from
36
has remained strong, with a consolidated
net debt to EBITDA ratio of 0.6x,
although this has risen from 0.3x in 2001.
Its EBITDA to interest expense ratio
strengthened to 9.1x in 2002 from to 8.0x
in 2001, due to the decrease in interest
expenses. At end-2002, the company had
total debt of THB5.1bn. As a result of
HDPE capex, NPC's financial leverage is
likely to increase moderately in 2003 to
about 1.0x. With the expected price
upturn and earnings contribution from the
HDPE project, NPC's financial leverage
should fall below 0.5x by end-2004, with
a net cash position projected in 2005.
A credit update report on National
Petrochemical Plc. is available on the
agency's web site, www.fitchratings.com.
Fitch's National ratings provide a relative
measure of creditworthiness for rated
entities in countries where the sovereign's
foreign and local currency ratings are
below 'AAA'. National ratings are not
internationally comparable since the best
relative risk within a country is rated
'AAA' and other credits are rated only
relative to this risk. They are signified by
the addition of an identifier for the
country concerned, such as 'AAA(tha)' for
National ratings in Thailand. 
THB550 million the prior year, due to
strong auto finance growth and lower
provisions. NFS's net interest margin
remained flat at 2.6% in 2002 due to price
competition and lingering asset quality
problems. Profitability has partially
recovered to 9.8% ROAE and 1.5%
ROAA, but further provisioning is likely
to continue to affect profitability over the
next two to three years. NFS has a
relatively low cost to income ratio of
about 45%, in part reflecting its small
branch network. While NFS has higher
funding costs, this should improve as it
FITCH ASSIGNS ‘A-THA’ TO THAILAND'S NATIONAL FINANCE BONDS (CONT.)
Continued from page 35
develops its banking franchise and
distribution network.
NFS's classified impaired loans have
fallen sharply since the crisis to
THB8.3bn, or 11% of total loans at end-
2002. Nonetheless, a large amount of
loans have been restructured and
transferred, to be managed separately in
its NFS asset management company,
which could pose some risk of further
losses. NFS set aside THB1.8bn in
provisions in 2002, after taking
THB2.0bn the prior year. As at end-2002,
loan loss reserves amounted to THB3.9bn
or about 48% of classified impaired loans,
a figure which, while improving, still
appears low by international comparison.
FITCH ASSIGNS SIAM CEMENT’S BONDS NATIONAL RATING OF ‘A-(THA)’
Wasant Polcharoen, Pimolpa Simaroj, Vincent Milton
On 27 February 2003, Fitch Ratings
Thailand assigned a Long-term National
rating of 'A-(tha)' (A minus) to the new
unsecured unsubordinated debenture of
the Siam Cement Public Company
Limited (SCC) No.1/2546 due 2550
(2007) totalling up to THB6.0 billion. The
proceeds of the debenture will be used to
refinance SCC's short- and long-term
debt. Fitch has also assigned a rating of
'A-(tha)' (A minus) to SCC's other
outstanding debentures, including SCC's
No.1/2542 due 2547, No.2/2542 due
2547, No.4/2542 due 2548, No.5/2542
due 2546, No.6/2542 due 2547 and
No.1/2543 due 2549, which were issued
in 1999 and 2000.
The rating reflects SCC's leading market
position in its core businesses – cement,
petrochemicals and paper and packaging
– as well as its well-established name,
extensive distribution network, and strong
ownership and management structure.
Having the Crown Property Bureau
(CPB) as its major shareholder is also a
credit positive for SCC. SCC's
diversification into petrochemicals and
paper and packaging as core businesses
has balanced its exposure to cement and
building material industries and has also
increased US dollar-based revenue. The
rating is underpinned by the continued
improvement in earnings of SCC's core
businesses, largely on the back of the
Nevertheless, as at end-2002, NFS's Tier
1 capital amounted to THB7.3bn or 12%
of risk weighted assets, providing it with a
reasonable buffer to absorb additional
provisioning if necessary. On a
consolidated group basis, capital is
effectively much stronger due to the
capital (deducted at the parent level)
invested in NBANK. While NFS may
face some capital depletion over the next
two to three years as it bolsters its
provisioning levels, earnings growth and
its strong capital position should
comfortably absorb the expected
additional provisioning.
recovery in the Thai economy, especially
in the construction sector.
As the last major divestment in the
company's corporate restructuring efforts,
SCC completed the merger of its two steel
companies with NTS Steel Group to form
Millennium Steel in November 2002. This
merger resulted in a THB2.3bn
extraordinary gain and a reduction of
SCC's consolidated liabilities of
THB5.3bn in 2002, while SCC's
contingent liabilities increased by a
similar amount. In January 2003, SCC
announced an acquisition of another
9.46% in The Siam Pulp and Paper Public
Company Limited (SPP) at a total cost of
THB2.9bn, resulting in an increase in
SCC's ownership in SPP to 96.87%.
Given SPP's relatively strong financial
position, Fitch believes that SPP will
continue to contribute positively to SCC
group's earnings. The rating also takes
into account SCC's relatively high debt
level, as well as its exposure to contingent
liabilities – mainly loan guarantees to
related companies. This exposure
increased to approximately THB14.5bn at
end-2002, largely as a result of loan
guarantees on debt transferred to
Millennium Steel. The agency's concerns
about current debt levels are mitigated by
SCC's commitment to continue to reduce
its debt, as well as its improved earnings,
high refinancing ability and the strong
37
A copy of the updated summary and full
report on NFS is available on the agency's
web site, www.fitchresearch.com.
Fitch's National ratings provide a relative
measure of creditworthiness for rated
entities in countries with sub- or low-
investment grade international sovereign
ratings. The best risk within a country is
rated 'AAA' and other credits are rated
only relative to this risk. National ratings
are designed for use mainly by local
investors in local markets and are
signified by the addition of an identifier
for the country concerned, such as
'AAA(tha)' for National ratings in
Thailand. Specific letter grades are not
therefore internationally comparable. 
qualitative support factors mentioned
above. Fitch expects to see SCC's debt
ratios decline to a more prudent level
during the next two years due to increased
earnings, although SCC may consider
further acquisitions in its core businesses.
SCC aims to reduce its consolidated net
debt to less than THB100bn and
consolidated net debt to EBITDA ratio to
3.0x by end-2004.
In 2002, SCC's consolidated EBITDA to
interest expense ratio improved to 2.7x
from 2.2x in 2001, while its consolidated
net debt to EBITDA ratio strengthened to
4.6x from 5.9x in 2001. Including
dividends from associates, its EBITDA to
interest expense ratio and net debt to
EBITDA ratio in 2002 improved to 2.9x
and 4.3x, respectively. SCC reported
consolidated EBITDA of THB27.4bn, an
increase of 9% year-on-year. Cement,
petrochemicals and paper and packaging
contributed approximately 77% of net
sales and 84% of EBITDA. At end-2002,
SCC's consolidated total debt was
THB130.1bn, of which 28% was short-
term and 72% long-term debt. SCC's
strengthening financial and liquidity
position and strong qualitative support
factors should continue to provide
refinancing flexibility.
Fitch's National ratings provide a relative
measure of creditworthiness for rated
FITCH ASSIGNS SIAM CEMENT'’S BONDS NATIONAL RATING OF ‘A-(THA)’ (CONT.)
Continued from page 36
entities in countries with sub- or low-
investment grade international sovereign
ratings. The best risk within a country is
rated 'AAA' and other credits are rated
FITCH ASSIGNS NATIONAL RATINGS OF ‘A-(THA)/F2(THA)’ OUTLOOK STABLE TO
THAILAND’S SIAM CEMENT
Wasant Polcharoen, Pimolpa Simaroj, Vincent Milton
On 13 February 2003, Fitch Ratings
Thailand assigned Senior Unsecured
Long-term and Short-term National
ratings to The Siam Cement Public
Company Limited (SCC) of 'A-(tha)' and
'F2(tha)', respectively. The long-term
rating Outlook is Stable.
The ratings reflect SCC's leading market
position in its core businesses – cement,
petrochemicals and paper and packaging
– as well as its well-established name,
extensive distribution network, and strong
ownership and management structure.
Having the Crown Property Bureau
(CPB) as its major shareholder is also a
credit positive to SCC; combined with
CPB's other investments (in particular
Siam Commercial Bank, the country's
fourth largest bank), this indicates a
strong level of intangible support that may
be relied upon if necessary. SCC's
diversification into petrochemicals and
paper and packaging as core businesses
has balanced its exposure to cement and
building material industries and has also
increased US dollar-based revenue. The
ratings are underpinned by the continued
improvement in earnings of SCC's core
businesses, largely on the back of the
recovery in the Thai economy, especially
in the construction sector.
As the last major divestment in SCC's
corporate restructuring efforts, SCC
completed the merger of its two steel
companies with NTS Steel Group to form
Millennium Steel in November 2002. This
merger resulted in a THB2.3bn
extraordinary gain and a reduction of
SCC's consolidated liabilities of
only relative to this risk. National ratings
are designed for use mainly by local
investors in local markets and are
signified by the addition of an identifier
THB5.3bn in 2002, while SCC's
contingent liabilities increased by a
similar amount. In January 2003, SCC
announced an acquisition of an additional
9.46% stake in The Siam Pulp and Paper
Public Company Limited (SPP) at a total
cost of THB2.9bn, resulting in an increase
in SCC's ownership in SPP to 96.87%.
Given SPP's relatively strong financial
position, Fitch believes that SPP will
continue to contribute positively to SCC
group's earnings. The ratings also take
into account SCC's relatively high debt
level, as well as its exposure to contingent
liabilities – mainly loan guarantees to
related companies – which increased to
approximately THB14.5bn at end-2002,
largely as a result of loan guarantees on
debt transferred to Millennium Steel. The
agency's concerns about the current debt
levels are mitigated by SCC's
commitment to continue to reduce its
debt, as well as its improved earnings,
high refinancing ability and the strong
qualitative support factors mentioned
above. Fitch expects to see SCC's debt
level decline to a more prudent level
during the next two years, although SCC
may consider further acquisitions in its
core businesses. SCC aims to reduce its
consolidated net debt to less than
THB100bn and consolidated net debt to
EBITDA ratio to 3.0x by end-2004.
In 2002, SCC's consolidated EBITDA to
interest expense ratio improved to 2.7x
from 2.2x in 2001, while its consolidated
net debt to EBITDA ratio strengthened to
4.6x from 5.9x in 2001. Including
dividends from associates, its EBITDA to
38
for the country concerned, such as
'AAA(tha)' for National ratings in
Thailand. Specific letter grades are not
therefore internationally comparable. 
interest expense ratio and net debt to
EBITDA ratio in 2002 improved to 2.9x
and 4.3x, respectively. SCC reported
consolidated EBITDA of THB27.4bn, an
increase of 9% year-on-year. Cement,
petrochemicals and paper and packaging
contributed approximately 77% of net
sales and 84% of EBITDA. At end-2002,
SCC's consolidated total debt was
THB130.1bn, comprising 28% short-term
and 72% long-term debt.
A THB12.0bn debenture is due in April
2003, half of which will be refinanced via
the issuance of new debentures. Another
THB6.0bn debenture is due in November
2003, for which the refinancing plan is
still pending. Nonetheless, SCC's
strengthening financial and liquidity
position and strong qualitative support
factors should continue to provide
refinancing flexibility. Fitch assigned a
Long-term National rating of 'A-(tha)' in
August 2002 to the unsecured
unsubordinated debentures of SCC
No.1/2002 due 2005 totalling THB7.5bn.
Fitch's National ratings provide a relative
measure of creditworthiness for rated
entities in countries with sub- or low-
investment grade international sovereign
ratings. The best risk within a country is
rated 'AAA' and other credits are rated
only relative to this risk. National ratings
are designed for use mainly by local
investors in local markets and are
signified by the addition of an identifier
for the country concerned, such as
'AAA(tha)' for National ratings in
Thailand. Specific letter grades are not
therefore internationally comparable. 
FITCH LOWERS RATINGS OF THAILAND’S SIAM PULP AND PAPER TO PARENT’S LEVEL
Wasant Polcharoen, Orawan Karoonkornsakul, Vincent Milton
On 31 January 2003, Fitch Ratings
(Thailand) Limited lowered the Long-
term and Short-term senior unsecured
national ratings of The Siam Pulp and
Paper Public Company Limited (SPP) to
'A-(tha)' (A minus)/'F2(tha)' Stable
Outlook from 'A(tha)' and 'F1(tha)',
respectively. The lowering of the ratings
is due to the announcement by The Siam
Cement Public Company Limited (SCC)
that it is to acquire a 9.46% stake in SPP
from SPP's second largest shareholder,
Yuen Foong Yu Paper Manufacturing of
Taiwan. This will increase SCC's stake in
SPP to 96.87%. SCC will also consider a
tender offer to buy the remaining SPP
shares. SPP's board of directors has
approved the de-listing of the stock from
FITCH ASSIGNS ‘A(THA)’ NATIONAL RATING TO UNSECURED DEBENTURES OF MBK
DEVELOPMENT
Wasant Polcharoen, Orawan Karoonkornsakul, Vincent Milton
On 7 January 2003, Fitch Ratings
(Thailand) Limited assigned a Long-term
National rating of 'A(tha)' with a Stable
Outlook to the THB2.5 billion (USD58
million) five-year Senior Unsecured
Amortising Debentures due in 2008 to be
issued by MBK Development Public
Company Limited ("MBK"). The
proceeds of the debentures will be used to
repay a THB920m (USD21m) short-term
loan, which funded MBK's recent
acquisition of a 28.58% stake in Bangkok
Intercontinental Hotels Co., Ltd.
("BIHC"), as well as to fund planned
additional investments in 2003 of
approximately THB1.5bn (USD35m) in
its core businesses.
The ratings reflect MBK's dominant local
market position in its three core
operations, namely a shopping plaza,
hotels and resorts, as well as a rice milling
and distributing business. MBK Center is
the largest cash flow generator for the
group, benefiting from its strategic
location and established name in central
Bangkok. MBK's 4-star Pathumwan
Princess Hotel, also located within the
Center, has assisted the plaza in
diversifying its customer mix from mainly
the Stock Exchange of Thailand, which is
expected to be completed by mid-2003.
Given SCC's planned 100% ownership of
SPP and its de-listing, the ratings of SPP
should now reflect its status as a wholly
owned subsidiary of SCC and are at the
same level as the ratings of its parent.
Fitch believes that SPP will continue to
maintain its strong operating performance
and solid financial position and will
contribute positively to the SCC group's
earnings in the foreseeable future. The
new Long-term rating also applies to
SPP's THB5.0 billion three-year
debenture No.1/2544 due B.E. 2547 and
THB5.0bn five-year debenture No.
local residents to include foreign tourists.
Nonetheless, there is some risk related to
MBK's increasing reliance on short-term
leases in the shopping plaza business.
Uncertainty as a result of geopolitical
risks also presents downside risks to
MBK's hotel and shopping plaza
businesses. The hotel industry in Thailand
also remains highly competitive while the
earnings outlook for the rice milling
business remains weak. MBK has a high
exposure to non-core investments.
The ratings also take into account the
benefits resulting from the company's
recent investment in BIHC and potential
new investments related to its core
businesses. MBK has indicated that these
new investments are likely to be
strategically important and positive for
the long-term development of its business
and should serve as the company's
earnings drivers in the medium term.
While the planned investments are likely
to result in a significant rise in MBK's
financial leverage in 2003 (from its
current very low level), financial leverage
and coverage ratios should remain
relatively strong.
39
2/2544 due B.E. 2549, guaranteed by
SCC.
Fitch's National ratings provide a relative
measure of creditworthiness for rated
entities in countries with sub- or low-
investment grade international sovereign
ratings. The best risk within a country is
rated 'AAA' and other credits are rated
only relative to this risk. National ratings
are designed for use mainly by local
investors in local markets and are
signified by the addition of an identifier
for the country concerned, such as
'AAA(tha)' for National ratings in
Thailand. Specific letter grades are not
therefore internationally comparable. 
Factoring in the additional investments,
Fitch estimates that MBK's pro forma net
debt to EBITDA ratio will rise to
approximately 3.4x, while its EBITDA to
interest expense ratio will fall to about
10.0x in FY2002/2003. Adjusting for the
prepaid rent, the company's pro forma net
debt to EBITDA ratio would be about
2.6x, while its EBITDA to interest
expense ratio would be approximately
8.5x in FY2002/2003, which, while a
significant increase in the company's
financial leverage, is still within the range
of the existing ratings. Earnings
contributions from the new investments
should see leverage ratios fall again over
the medium term. Nonetheless, as the
company's financial leverage will rise
substantially as a result of the new
investments, the ability of MBK to absorb
additional large investments or downside
risks on its earnings will be lower.
Consequently, in the event of any further
debt-funded investment or worse than
expected operating performance, it is
unlikely that MBK's credit metrics would
remain compatible with the current rating
level.
FITCH ASSIGNS ‘A(THA)’ NATIONAL RATING TO UNSECURED DEBENTURES OF MBK
DEVELOPMENT (CONT.)
Continued from page 38
A full rating report on MBK Development
Public Company Limited is available on
the agency's subscription web site,
www.fitchresearch.com.
Fitch's National ratings provide a relative
measure of creditworthiness for rated
OSPREY SERIES I COMPANY LIMITED
Pimolpa Simaroj, Orawan Karoonkornsakul, Vincent Milton, Edward Baker, Ben McCarthy
Summary
This transaction is a securitisation of Thai
residential hire-purchase receivables,
which is in turn financed through a
commercial paper issuance of Osprey
Series I Company Limited ("Osprey"). On
15 January 2003, Fitch assigned 'F1(tha)'
to the short-term debenture rollover
programme issued by Osprey. Unless
Fitch announces otherwise, all series of
short-term debentures (including
no.1/2003) of Osprey will carry the
‘F1(tha)’ rating as assigned. Fitch has also
affirmed 'A+(tha)' to the 10-year
Amortising Debentures (“the Bonds”)
issued on behalf of NHA SPV Company
Limited ("NHA SPV").
National Ratings
National
Type of Security Amount Ratings
Series of Short- Up to F1(tha)
term Senior THB1,496.2m
Unsecured
Debentures of
Osprey
Unsecured Up to A+(tha)
Amortising THB1,607.9m
Securitised
Debentures No.
1/2002 of NHA-
SPV due 2012
NHA SPV is a special purpose company
incorporated under the laws of Thailand.
The Bonds are backed by a pool of hire
purchase receivables ("Assets") originated
by the National Housing Authority
("NHA"). The book value of the Assets
was THB668.8 million as at the cut-off
date of 31 August 2002. Osprey is a
special purpose vehicle established under
entities in countries with sub- or low-
investment grade international sovereign
ratings. The best risk within a country is
rated 'AAA' and other credits are rated
only relative to this risk. National ratings
are designed for use mainly by local
investors in local markets and are
the laws of Thailand to issue short-term
debentures ("the CP") to fund the
purchase of the Bonds issued by NHA
SPV. Osprey may issue CP with
maturities of up to 270 days from time to
time as necessary or until the Bonds are
fully amortised.
The rating assigned to the Bonds is based
on:
• The buy back support of 75% of book
value of the Assets by NHA, rated
'A+(tha)' by Fitch, to cover defaulted
hire purchase receivables' default
payment (defined as over three months
overdue);
• The quality of the underlying pool of
receivables;
• The strength of the servicing provided
by NHA;
• 10% overcollateralisation of assets;
• The reserve fund sized at three months
interest, fees and expenses and a
retention fund sized at three months
tax; and
• A sound legal structure.
The rating assigned to the CP is based on:
• The quality of underlying assets, which
are the 'A+(tha)' rated Bonds and have
a short term rating of 'F1(tha)’;
• The 10-year revolving liquidity
facility, sized at 100% of the
outstanding CP or THB607.9m, to the
extent not exceeding the outstanding
40
signified by the addition of an identifier
for the country concerned, such as
'AAA(tha)' for National ratings in
Thailand. Specific letter grades are not
therefore internationally comparable. 
amount of the CP, to fund any shortfall
arising out of Osprey's obligations to
pay its CP holders, provided by Krung
Thai Bank ("KTB");
• The strong creditworthiness of the
liquidity provider, KTB, which is the
second largest and state-owned bank
and is rated short-term 'F1+(tha)' by
Fitch;
• The interest rate swap agreement with
KTB to hedge against its interest rate
risk; and
• A sound legal structure.
The Assets will continue to be serviced by
NHA, which Fitch believes has expertise
in managing its originated loans, namely
hire-purchase residential properties.
NHA, a wholly owned state enterprise, is
rated 'A+(tha)' by Fitch based on the full
government ownership and control of its
operations, its policy role and the strong
funding support as evidenced by annual
budget appropriations and government
guaranteed funding, although the rating
factors in its weak stand-alone financial
position and the lack of an explicit
government guarantee of full and timely
repayment of all NHA's liabilities. The
transaction administrator is Conduit
Management Services Limited ("CMSL"),
a company jointly established by
Devonshire Capital and Trinity
Information Company Limited, to act as a
Transaction Administrator for both NHA
SPV and Osprey. 
FITCH ASSIGNS IN-PRINCIPLE ‘AAA(IND)(SO)’ RATING TO SECURED NON
CONVERTIBLE DEBENTURES (NCD) OF TATA TELESERVICES LIMITED, FULLY
GUARANTEED BY DUTCH FINANCIAL INSTITUTION FMO
Rajat Saxena, Chetan Joshi, Sudhir Variyar
On 3 February 2003, Fitch Ratings India
assigned an in-principle rating of
‘AAA(ind)(SO)’ to the secured Non
Convertible Debentures (NCD) to be
issued by Tata Teleservices Limited
(TTL) with a full guarantee from the
Netherlandse Financierings Maatschappij
voor Ontwikkelingslanden NV or
Netherlands Development Finance
Company (FMO).
The NCDs have a door-to-door maturity
of seven years and are repayable in 12
unequal half-yearly instalments, after a
moratorium of one and a half years. The
NCD would be priced at a fixed rate on a
book-building basis, and pay interest in
arrears. The payout dates would be 1 July
2003 and at the end of six months
thereafter. The proceeds of the issue are to
be used for the part-financing of the basic
telephony project in Andhra Pradesh.
The rating is based on the irrevocable and
unconditional guarantee extended by
FITCH ASSIGNS IN-PRINCIPLE ‘AAA(IND)(SO)’ RATING TO THE SECURED NON-
CONVERTIBLE DEBENTURE (NCD) PROGRAMME OF TAMIL NADU ROAD
DEVELOPMENT COMPANY LIMITED (TNRDC), CREDIT ENHANCED BY GUARANTEE
FROM IL&FS
Chetan Joshi, KV Narayanan, Sudhir Variyar
On 27 February 2003, Fitch Ratings India
assigned an in-principle ‘AAA(ind)(SO)’
rating to the INR250 million secured Non
Convertible Debenture (NCD)
programme of Tamil Nadu Road
Development Company (TNRDC).
TNRDC has issued Senior NCDs
aggregating INR410m (Tier I - INR250m,
Tier II - INR160m) and Subordinate
NCDs of INR100m. The current
transaction envisages the sale of
INR250m secured non-convertible
debentures (‘Tier I NCD’) issued by
TNRDC. The Tier I NCDs are credit
enhanced by an unconditional and
irrevocable guarantee from IL&FS
FMO. The guarantee covers the full
principal and interest accrued and due
until the instrument is fully redeemed.
The rating is supported by the financial
structure, which ensures due and timely
payment of debt service, and by the legal
opinions provided by the transaction
counsel. In addition to the guarantee, the
debenture holders also enjoy a
comprehensive security package of the
type common in project finance
transactions, with a clearly defined Trust
and Retention Agreement (TRA) for
receipt and utilisation of all project cash
flows, a covenant package and a
monitoring mechanism. This is coupled
with ringfencing of the AP project assets
and cash flows from those of other
telecom circles.
Tata Teleservices Limited (TTL) is the
basic telephony service (BTES) operator
in the states of Andhra Pradesh, Delhi,
Gujarat, Karnataka and Tamil Nadu. The
company is 100% owned by the Tata
covering payment by TNRDC of the
entire par value of principal and the
accrued interest payable thereon. The Tier
I NCDs are repayable in nine equal
annual instalments, after a moratorium of
three years from the date of allotment.
The tier I NCDs were allotted on 13
November 2002 and the repayments
commence from 13 November 2006.
The rating is supported by the financial
structure, which ensures due and timely
payment of debt service, and by the legal
opinion provided by the transaction legal
counsel. The legal opinion relates to the
provisions of SICA, 1985 not being
applicable to TNRDC.
41
Group. The company’s revenues have
grown to INR1,478 million in FY2002
from INR842m in FY2001, and it
achieved positive EBITDA of INR42m in
FY2002 against an EBITDA loss of
INR7m in FY2001.
FMO is a leading European development
finance institution that is 51% owned by
the Dutch government. FMO is the
primary vehicle of the Dutch government
for providing private sector investment in
developing economies. FMO’s credit
strength reflects the Dutch government’s
support for the entity and is based on the
legal obligation of the Dutch government,
as per an agreement executed in 1998, to
ensure timely payment of FMO's debt.
Fitch does not rate FMO, but has a ‘AAA’
sovereign long-term local/foreign
currency rating outstanding on the
Netherlands. Fitch believes that the credit
quality of FMO is consistent with the
rating assigned to this transaction. 
The debenture trustee can accelerate the
servicing of NCDs and require TNRDC to
prepay all outstanding principal along
with accrued interest in the event of
default by TNRDC. Such acceleration
would necessarily require the consent of
at least 75% of the NCD holders. The
premature repayment of NCDs by
TNRDC would be subject to terms
specified by the debenture holders. Fitch’s
rating does not address the probability of
prepayment or acceleration, and any
consequent gain/loss from such an event.
Tamil Nadu Road Development Company
Limited (TNRDC) is a 50:50 Joint
Venture between Infrastructure Leasing
and Financial Services Limited (IL&FS) IL&FS is a niche player in the financial through its affiliates and subsidiaries.
and Tamil Nadu Industrial Development services industry focusing on value-added IL&FS, with an asset base of
Corporation (TIDCO), set up for products and solutions to corporate clients INR41,870m, recorded income of
catalysing private sector participation in and government agencies. Its areas of INR5,224m in FY2002. IL&FS is rated
the road sector and for the operation include fund-based investment ‘AAA(ind)’ with Stable Outlook by Fitch
commercialisation of operations and banking and financing for infrastructure Ratings for its senior secured debt. 
maintenance of road assets in the State of projects, venture capital finance, asset
Tamil Nadu. management, and retail distribution

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contained herein is based on information obtained from issuers, other obligors, underwriters, and other sources which Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of
any such information. As a result, the information in this report is provided “as is” without any representation or warranty of any kind. A Fitch rating is an opinion as to the creditworthiness of a
security. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. A report
providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities.
Ratings may be changed, suspended, or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to
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