This record is a partial extract of the original cable. The full text of the original cable is not available.

090421Z Feb 06

UNCLAS SECTION 01 OF 02 TAIPEI 000401 
 
SIPDIS 
 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP 
 
USTR FOR WINTER AND WINELAND 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/LMOGHTADER 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON PINR TW
SUBJECT:  Foreign Stake in Major Taiwan Finance Firm 
 
REF: 05 TAIPEI 3287 
 
¶1.  SUMMARY.  Foreign investors plan to acquire 27% equity 
in Taishin, Taiwan's eighth largest financial holding 
company (FHC), for NT$31 billion (US$970 million at NT$32 
per US dollar).  As part of the deal, Taishin increased its 
2005 reserves for bad debt, thereby changing a profit to a 
loss in its annual report.  The additional capital and 
increased debt reserve significantly improves the credit 
standing of Taishin and will enable it to increase its stake 
in the formerly state-owned Changhwa Commercial Bank, in 
which Taishin gained controlling interest in July 2005, 
reftel.  END SUMMARY. 
 
Foreign Investment through Private Placement 
-------------------------------------------- 
 
¶2.  Newbridge Capital (NC), a San Francisco-based buyout 
company, recently struck a deal to acquire a little over 23% 
ownership in Taishin through a private placement to buy 
NT$27 billion of Taishin equity.  The equity includes NT$8 
billion in common shares, NT$12 billion in preferred shares, 
and NT$8 billion in convertible corporate bonds.  The deal 
stipulates that the corporate bonds can be exchanged for 
5.6% equity in common stocks one month after issue, and that 
the preferred shares can be exchanged for 10.5% equity in 
common shares three years after issue.  There is no deadline 
for converting either the bonds or the preferred stock. 
 
¶3.  Meanwhile, on February 6, Taishin accepted an offer from 
Nomura, a Japanese securities firm, to purchase NT$4 billion 
of Taishin equity, including NT$2 billion in common stocks 
and another NT$2 billion in preferred stocks.  When the 
preferred shares are converted to common shares, Nomura will 
have 3.9% ownership in Taishin. 
 
¶4.  When the two foreign investors complete their 
subscriptions, NC will control two of the nine seats on 
Taishin's board of directors (Nomura will not control any 
seats). 
 
Large Bad Debt Reserve 
---------------------- 
 
¶5.  As part of its deal with NC, Taishin increased its 2005 
bad debt reserve by NT$19.1 billion to NT$39.1 billion. 
This nearly doubling of reserves contributed to an 
accounting change from after-tax profits of NT$11.08 billion 
to after-tax losses of NT$3 billion in 2005. 
 
Better Credit Reputation 
------------------------ 
 
¶6.  The accounting losses have not hurt Taishin's credit 
reputation or its share price.  Taishin's bad debt reserve 
increased to 60% of its total non-performing loans (NPL), up 
from 54.5% before the injection of new capital, and will 
reach 107.5% of its credit card and cash card NPLs. 
Taishin's debt-asset ratio will decline to 37.5%, and its 
capital adequacy ratio will increase to 121.9%, according to 
Taishin President Chen Hwai-chou.  Taishin's share price has 
risen steadily from NT$17 per share in early January to 
NT$18.3 in late January and NT$20.9 on February 6 and NT$21 
on February 7.  Foreign investment banks such as Merrill 
Lynch and Credit Swiss First Boston expect Taishin share 
prices to rise to NT$22 per share in the near future. 
 
¶7.  Local media has speculated that despite NC's acquisition 
of over 20% ownership in Taishin, it may not be interested 
in operating the firm over a long term, but rather will 
likely re-sell Taishin after improved operations and 
management push up Taishin's share prices.  With the 
additional capital from NC and Nomura, Taishin will acquire 
another 17.5% of ownership in Changhwa Commercial Bank 
(CCB). 
 
¶8.  In July 2005, Taishin purchased 22.5% equity in CCB 
(reftel), and since then, Taishin has written off enough bad 
debt to reduce CCB's NPL ratio from 5.45% in July to 1.67% 
in December 2005 and has increased the CCB's bad debt 
reserve ratio from 25.49% to 99.84%. 
 
COMMENT 
------- 
 
¶9.  In addition to providing needed capital, the deal gives 
Taishin an opportunity to learn from NC's and Nomura's 
experiences in business strategy and corporate governance, 
and possibly to expand cooperation with both companies 
across markets and products.  NC and Nomura both have a 
strong presence in regional finance and offer the 
possibility of a China play: NC has a controlling stake of 
18% in the Shenzhen Development Bank, Nomura is a major 
provider of asset management and portfolio investment 
services in China. 
 
¶10.  The fact that Taishin needed to double its reserves to 
make this deal with NC indicates that the acquisition of 
Changhwa brought in a lot of bad debts, however, the fact 
that Taishin's deals with NC and Nomura took place also 
indicates that Taiwan's better banks are attractive to 
foreign investors. 
 
DAVISON