Peregrine put 35% of its capital behind one borrower, then went into liquidation

Peregrine built a fixed-income business that was willing to take transactions large relative to the group's own capital. In May 1997, its fixed-income arm committed to finance up to $350 million for Indonesian transport company Steady Safe over five years, including open-ended bridge funding until longer-term debt could be sold.

The debt did not move off Peregrine's books as planned. By November, Peregrine held $269 million of Steady Safe exposure while the value of pledged shares had fallen from $166 million to $62 million. The Hong Kong government's inspector found that the exposure could exceed 35% of group capital; together with another large Indonesian exposure, it represented about three quarters of capital.

Peregrine had assumed trading inventory would be sold within three months, but its inventory reached $1.15 billion by October 1997 and proved less liquid than expected. The inspector found weak governance, optimistic valuations, inadequate provisions and suppressed or unfinished internal-audit warnings. A minimum $50 million Steady Safe provision should have been made by October, but management made none then.

By early January 1998, management proposed another $200 million of provisions to prospective investors Zurich and First Chicago. They withdrew. Emergency funding failed, and provisional liquidators took control of the holding company on January 13 and the fixed-income subsidiary on January 15.