U.S. banks were moving last week toward a longer-term solution to South Korea's crisis that may include a $20 billion debt-for-bond swap combined with fresh funding for the troubled country.
The proposals were under discussion Friday at Chase Manhattan Corp. Participants represented Chase, J.P. Morgan & Co., Citicorp, Bankers Trust New York Corp., BankAmerica Corp., Bank of New York Co., First Chicago NBD Corp., and Merrill Lynch & Co.
"Banks' willingness to restructure this debt is very strong," said Darin Narayana, president of Banc One International Corp., the international banking arm of Banc One Corp. "South Korea will probably wind up having more options than originally thought."
Friday's session underscored the prominent role U.S. banks have seized in the South Korea bailout. The Asian nation owes foreign banks over $100 billion. Of that, more than $70 billion is in short-term borrowings of one year or less, which were the prime focus of conversations earlier in the week.
Knowledgeable sources said Friday that no decisions were made on the proposals, which were put forward by J.P. Morgan. They resembled multibillion-dollar loan-for-bond swaps that U.S. banks arranged for financially troubled Latin American countries and the Philippines earlier this decade.
The sources were unable to say how the proposal would reconcile with a $9 billion bond issue suggested by Goldman, Sachs & Co. and Salomon Smith Barney Inc. The two investment banks were retained as advisers by the South Korean government but did not participate in Friday's meeting.
Exchanging short-term loans to South Korean borrowers for longer term bonds would help ease a worsening liquidity crunch in as short-term loans come due. The bond issue of up to $20 billion would also include several billion dollars in new funding.
According to some estimates, up to $40 billion in loans to South Korean borrowers will come due by the end of March. Banking sources dismissed news reports that a general agreement among banks worldwide last week to extend the maturities on short-term loans has been stalled by smaller banks' resistance.
"Let's just say that the rollover is expected to work and indications so far are that it is working," said one banker.
"Most people are on track," added another source.
Sources said it is up to each bank to make its own decision. But they added that even if a minority of banks decline to go along with either the rollover or the proposed bond issue, it will not make a difference so long as banks holding at least 80% of the debt are on board.
U.S. banks extended close to $22 billion in combined credits to South Korean borrowers as of December, Federal Reserve Board figures indicate. About 70% of more than $10 billion in cross-border bank loans to South Korean borrowers is held by the six biggest U.S. banks.