Northeast Asia Financial Hub: Niche Market In Cheong-La, Incheon FEZ

1. Northeast Asia Financial Hub: Niche Market In Cheong-La, Incheon FEZ Soo-Ryong Kim Commissioner Presidential Committee on Northeast Asian Business Hub

2. Financial Hub in Northeast Asia • Foster development and common prosperity of the region. • Advanced financial services needed by MNC’s of the • FEZ engaged in Transportation/Logistics, IT/BT, R&D, • and other businesses. • Competitive financial services industry further • enhances competitiveness of Transportation/Logistics, • IT/BT, and other businesses of the FEZ. • Competitive financial services industry enhances South • Korea’s ability to absorb exogenous shocks and minimizes • the chance of another financial crisis. 1

3. Financial Hub in Northeast Asia • Cost of building a financial hub is relatively small. • Returns are substantial due to the creation of high • value added. • What it takes is not a huge magnitude of capital outlay • but the enhancement of regulatory environment and • supervisory system. 2

4. Needs for Northeast Asia Financial Hub • A financial hub necessary to support the robust growth • expected for the economies of Northeast Asia. • Majority of FX reserves of the three countries of • Northeast Asia exceeding $1.2 trillion currently invested • in New York market. Need to induce some of them back • to where their owners live. • Fund requirement for Russia’s vast natural resources • development, China and North Korea’s infrastructural • development, South Korea’s pursuit of Northeast Asia • Business Hub, construction of the Trans-Siberia railway • linking Europe and Northeast Asia, etc. • Fund raising out of its own market is more effective. 3

5. Northeast Asia Financial Hub • Seoul (Myung-dong and Yoido) could become a hub • through accelerated internationalization, liberalization of • regulatory environment and enhancement of supervisory • system for the following areas of business where it is • gaining international competitiveness : Stock Market, Local Currency Bond Market, Options & Futures Market, FX Market, Derivatives Market, Life Insurance Market, Real Estates Finance and IT’s Consumer Finance 4

6. Northeast Asia Financial Hub • Propose to develop Cheong-La Area of Inchon FEZ as a • world-class resort (a la Disney or MGM Entertainment) • and a niche financial market specialized in the following • high value added areas of financial services: Project Finance(Infrastructural Finance, ABS) Restructuring, Private Equity (IT/BT/M&A), Asset Management, Properties Management, Back-up Processing Center for financial institutions, Consultancy, Legal Services, Accounting Firms 5

7. Niche Finance Market Offshore Finance Benchmark Singapore, Zurich, Bahrain, and Hong Kong as successful niche markets Induce foreign banks to Cheong-La by depositing a portion of Korea’s FX reserve with their new operations in Cheong-La No reserve requirement from the Bank of Korea Tax incentivations such as exemption of corporate income tax, acquisition tax, and registration tax for dividends Portion of domestic liquidity, currently estimated at $350 billion, will be induced to the project bonds issued by the multiplicity of project consortia consisting of world-class MNC’s and South Korean conglomerates pursuing projects in and out of the FEZ’s 6

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9. Why Cheong-La? • More than $180 billion is expected to be invested in Cheong-La, • New Songdo City and Yongjong-do to develop a hub for transportation • and logistics, IT and BT, R&D centers, financial services, and tourism. • The Government’s plan is to induce regional headquaters or • bridgeheads of hundreds of MNC’s to these FEZ areas. • This includes the plan of The NSC Development Company, a JV • of POSCO and Gale Company, which has launched its effort to induce • $20 billion into the development of the New Songdo City. • These MNC’s regional HQ’s and bridgehead operations need high value • added financial services as well as conventional banking services well • suited for their expansions and ventures in Northeast Asia. • Geographic distance away from the Seoul Market is not a matter of • concern at all thanks to South Korea’s super speed IT infrastructural • capacity. 8

10. Project Finance • In funding massive capital needs for the development • of Northeast Asia Business Hub, the Korean Government • plans to minimize the use of fiscal fund by maximizing • inducement of FDI. • The Government plans to induce MNC’s to tap Korea’s • abundant domestic liquidity (estimated at $350 billion) to • partially finance their projects in this region. • Liquidity in both the Korean and international markets • need to be brought into participating in not only the project • equity but also debt financing such as project bonds, • ABS bonds or infrastructural bonds to be issued by project • companies of both MNC’s and Korean businesses. • The Government will want to balance the application of • local capital and foreign capital on a 50:50 basis from the • standpoint of her risk management. 9

11. Project Finance • PF bonds (both dollar and won denominated) need to be • rated as investment grade securities by rating agencies • such as S&P, Moody’s, etc. • At the initial stage, the dollar-denominated PF bonds • need to be funded via 144A private placement execution • in the US market. Eventually, some of these bonds need • to be funded partially by South Korea’s FX reserve and • international liquidity induced on to Cheong-La market. • The won-denominated PF bonds also need to be • structured based on project cash flow and risk profile. 10

12. Project Finance • Investors in both dollar and won tranches need to feel • comfortable with intercreditor agreements wrapping up • the collateral packages designed to minimize incremental • external debt of South Korea and to eliminate the need • for financial guarantees of the central and municipal • governments. • Hundreds of PF bonds issued in both Korean and US • markets issued this way will develop yield curves and • derivatives originations, which in turn will help accelerate • the development of a financial hub. 11

13. Project Finance • When rating new PF bonds, induce rating agencies such • as S&P and Moody’s to work with the Korean local credit • rating agencies in order to help upgrade the Korean credit • ratings industry. • The multiplicity of PF bonds would induce law firms, • consultancy, and accounting firms to Cheong-La as well. 12

14. Project Finance • Korean banks have a total of 20 PF professionals and • 64 supporting staffs. As PF receives attention of senior • management as a focus area of business, capability • upgradation of the Korean banks will be accelerated: • A lot of foreign banks having presences in Korea have • begun to recognize the strong potential of the Korean • PF bonds origination and distribution markets and are • expected to compete to take the lead: Citigroup, Deutsche Bank, JP Morgan Chase, BoA,UBS, Mitsubishi Tokyo, HSBC, ABN AmRo, BNP Paribas, Morgan Stanley, Goldman Sachs, Merrill Lynch, CSFB, etc. 13

15. Project Finance • As the entities issuing PF bonds and loans are the project • companies established by consortia of the world class • MNC’s and Korean businesses, investors at home and • abroad would feel incentivated to be part of the action. • A lot of foreign banks and institutional investors will be • vying for opportunities to arrange attractive project • finance packages for a number of projects such as • Gales’ NSC, Cheong-La theme parks, Trans-Siberia Railway, • toll bridges, ports, LNG Gas pipelines, etc. • As activities increase in this area, foreign banks and • institutional investors will be incentivated to consider the • possibility of setting up their regional offices here. 14

16. Restructuring • The financial crisis was a blessing is disguise in that it • brought the level of knowledge and skills of the Koreans • in a broad swath of sectors up to the level of advanced • countries. The skill sets and know-how of professionals • of many Korean institutions such as KAMCO have been • greatly enhanced in the area of corporate restructuring • advisory, mergers and acquisition advisory, asset backed • securitization, etc. • South Korea will be able to compete effectively with • foreign investment banks on the looming business • opportunities in the area of restructuring advisory and • purchases of distressed assets. 15

17. Size of NPL (in billion dollars estimated at end 2002) China 337.3 Japan 410.0 Taiwan 60.0 Restructuring • Potential restructuring market in Northeast Asia • is substantial: 16

18. Restructuring KAMCO Its capability is world class. Needs to be converted into an investment bank specialized in high value added business such as restructuring-oriented investment banking, purchases of distressed assets in foreign countries, underwriting and brokeraging ABS bonds, restructuring advisory, etc. • Higher yielding assets and securitized products • repackaged out of restructuring opportunities would • attract international liquidity and part of FX reserve • of Northeast Asian countries. 17

19. Restructuring • As more Northeast Asian transactions are originated, • potential will increase for private equity firms, • vulture funds, real estate developers and investors • to move their regional offices to Cheong-La. 18

20. Asset Management • Asset management market needs not be in an urban center. • Rather, fund managers prefer to be located in or near • pristine resort areas remote from cities. • In the case of New York, asset management firms, hedge • funds and asset management divisions of insurance • companies are located in the suburban New Jersey and • Greenwich, Connecticut. 19

21. Asset Management • Select three or four funds out of top 15 of the world. • Offer part of our National Pension Fund to be managed • by them in return for setting up their regional • headquarters here. • Enhance regulatory environment and infrastructures • Encourage local pension funds and insurance companies • to make strategic alliances with those select foreign asset • management funds in order to maximize learning • experiences. 20

22. Asset Management • The sharply increasing number of wealthy individuals in • China and Taiwan, continuously rising interest of Japanese • and Korean individuals in making foreign investment: • sufficient incentives to attract major investment funds of • the world to this part of the world. Bold steps to take • the initiative ahead of competition will pay off. • The Government plans to develop Cheong-La area as a • world class resort complex a la Disney World, • MGM Entertainment, or a combination of the likings of • fund managers of the world. 21

23. Asset Management Korea’s Competitive Advantages • The second largest bond market in Asia • The third largest stock market in Asia • The most advanced IT infrastructure in the world • Korea holds one of the largest FX reserves in the world, • three times larger than Singapore’s • Comparatively better climate than Hong Kong and • Singapore due to four distinct seasons 22

24. Private Equity • Private Equity investors seek high returns on their • investments similar to the PE funds hunting for bargains • in the restructuring markets. • PE funds undertake investments that are either in risky • new Firms pursuing complex new technologies or in • troubled mature companies with numerous organizational • pathologies and potential legal liabilities. • Many features of PE funds can be understood as • responses to this uncertain environment, rife with many • information gaps. • Asset managers and pension funds hire only sophisticated • PE funds with well-defined objectives as “gate-keepers” • and invest their capital in those PE funds. 23

25. Private Equity • Global IT/BT industries established in the New Songdo • City of the Inchon FEZ would bring about brisker recovery • of venture firms. • Four critical factors prohibit venture firms from borrowing • bank loans to meet their financing needs: • Most pension funds and assest managers have very small • staff. Meanwhile, PE funds undertake investments by • analyzing responses to the four critical factors above in • order to generate incremental returns independent of • how the broader markets were performing. ① Uncertainty ② Asymmetric Information(Information Gaps) ③ Nature of Firm Assets ④ Conditions in Product Markets 24

26. Private Equity • Pension funds and asset managers have a “leap of faith’ • in PE funds with strong track records and continue to • invest their capital in those PE funds. • Many PE funds are skeptical about sustainability of • attractive returns in venture capital and LBO investments • in many developed nations. They are looking for new • areas of growth such as IT-oriented Korea. • Thanks to innovations in information and communication • technologies, investors in developed countries can better • monitor their investments abroad. • New Songdo City’s IT/BT hub would attract global PE • funds. 25

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28. Private Equity • Strategy to induce global PE funds. As a first step, offer • a portion of Postal Bureau insurance assets and Korea’s • FX reserve to be managed by five or six PE funds out of • Top 30 of the world. In return, they shoud establish their • presences in Cheong-La. • Just like the Silicon Valley and Boston, the development • of NSC and Cheong-La would bring about immediately • related service industries such as local venture capital • firms, law firms, industrial and financial consultancy firms, • and accounting firms. • PE fund’s eventual exit activities such as IPO’s and private • divestitures woud help enhance the competitiveness • and sophistication of the Korean financial industry in a • global scale. 27

29. Issues Enhancement of Regulatory System Positive System Negative System Converted into • Use of English as an official language in FEZ. • Encourage local banks to hire professionals of global • markets in the area of project finance, M&A advisory, • asset management, derivatives structuring, and private • equity. Addition of these professionals would help • accelerate the growth of competitiveness of the Korean • financial industry. 28

30. Northeast Asia Financial Hub: Niche Market In Cheong-La, Incheon FEZ - The End -