Merrill May Fail to Sell Bad Loans to Korea Asset

By Bomi Lim

Sept. 4 (Bloomberg) -- Merrill Lynch & Co.'s talks to sell a ``significant'' amount of bad loans to Korea Asset Management Corp. are faltering because of a dispute over price, the Korean firm's chief executive officer said.

``We have yet to reach an agreement because of differences in assessing the value of assets,'' Lee Chol Hwi said yesterday in an interview in Seoul. ``We have been seeking to buy a significant amount, but a deal may be difficult at this rate.''

Failure to strike a deal may indicate Merrill, the third- largest U.S. securities firm, and Lehman Brothers Holdings Inc. might have to cut prices for assets they're trying to sell as mortgage-related losses widen. Lee, 55, said state-run Korea Asset can afford to be patient because the U.S. financial crisis will probably push prices lower.

Merrill CEO John Thain, who took over in December, has sold assets and subprime-linked investments as the third-largest U.S. securities firm was battered by more than $50 billion of credit market losses.

``The U.S. companies including Merrill need whatever capital they can get, even at the cost of making deals that may be less favorable to them,'' said Yun Chang Hyun, professor of business administration at University of Seoul. ``Those with money definitely have the upper hand right now.''

Korea Asset, created in 1962 to help clean up delinquent loans, set up a 1 trillion won ($871 million) fund with local partners to buy bad debts in the U.S., Lee said. The firm made its first overseas investment in December last year, leading a group of South Korean companies in buying 133.4 billion won worth of bad debts in China.

CDOs at Discount

Lee also said Korea Asset may buy non-performing loans from Lehman and other companies. Yi Kyung Ju, a spokesman for the fund, subsequently said there have been no formal talks with Lehman. Merrill spokesman Rob Stewart declined to comment, as did Lehman spokesman Matthew Russell.

Korea Development Bank said Sept. 2 it's in talks about buying a stake in Lehman, as the country's companies seize on a collapse in stock prices to purchase U.S. assets on the cheap. Korea Investment Corp., the nation's sovereign fund, put $2 billion into Merrill this year.

Lee declined to give the size of the potential transaction, which would be Korea Asset's first U.S. deal. It will be within the 1 trillion won fund, he said.

`Buyer's Market'

Merrill sold $30.6 billion of collateralized debt obligations, the mortgage-linked securities that caused the bulk of its losses, at a fifth of their face value in July to Lone Star Funds, a Dallas-based investment manager. Thain, 53, at the time said the sale was necessary to reduce Merrill's risk.

The credit crunch has produced more than $500 billion of credit losses and writedowns at the world's biggest banks and securities firms. Merrill, with $51.8 billion, ranks second after Citigroup Inc.'s $55.1 billion, data compiled by Bloomberg show.

The calamity has created opportunities for Asian firms with deep pockets. Temasek Holdings Pte, Singapore's $130 billion sovereign wealth fund, plans to boost its stake in Merrill to between 13 percent and 14 percent from 9.4 percent. Citigroup and Morgan Stanley are among other U.S. firms that have gotten cash infusions from Asian companies and sovereign funds.

``The U.S. market desperately needs capital,'' Lee said. ``It's practically a buyer's market there.''

Lee said he's also considering investing in Japan. He worked at the Finance Ministry before joining Korea Asset in January. His key posts at the ministry included a position at the South Korean embassy in Japan between 1997 and 2001.

The return on the investment in China ``has been much higher than expected,'' Lee said, declining to elaborate.

Daewoo Sale

Korea Asset played a key role in liquidating distressed assets in South Korea in the aftermath of the 1997-98 Asian financial crisis, when the government sought $57 billion in loans from the International Monetary Fund to help businesses repay overseas debts.

The agency has so far recouped 42.8 trillion won by selling stakes in assets bailed out since the crisis, more than the 39.3 trillion won it paid for those holdings. Korea Asset expects to earn at least 3 trillion won more by 2012 by selling stakes in companies like Daewoo International Corp.

Preparations for selling Daewoo International, a Seoul-based trading company, may begin as early as this year, Lee said. Daewoo International was created from a former trading arm of Daewoo Group, which collapsed under swelling debt after the 1997- 98 crisis.

``We will watch the market conditions to sell Daewoo International soon,'' Lee said. Korea Asset owns 35.5 percent of the company.

To contact the reporter on this story: Bomi Lim in Seoul at blim30@bloomberg.net