Following news that Lone Star Fund won the non-performing assets auctioned by the Korea Asset Management Company (KAMCO) in April, ASRI Associate Editor Vivian Chu spoke with Lone Star Japan Acquisitions Managing Director Ellis Short in Tokyo about the company's business and its plans in Asia.

What is Lone Star?

Lone Star Fund II is a discretionary private equity fund of approximately $1.25 billion. Its predecessor fund, Lone Star Opportunity Fund, was fully invested last year.

Lone Star invests in real estate-related assets and unsecured corporate assets. Its investment activity is focused in North America, Western Europe, Japan and Asia. An affiliated servicing and asset management company, Hudson Advisors, manages the assets that Lone Star purchases. Hudson has offices in the U.S., Canada, Europe, Japan and Korea.

When did Lone Star first get involved in buying Asian assets?

During the 1990's, we actively purchased assets located in the U.S. from Asian sellers. During 1997, we were invited to analyze the potential purchase of Japanese assets by a major Japanese bank interested in generating a market for Japanese non-performing loans.

Because we had been involved in that business early in the U.S. and Canada, the bank thought Lone Star would be a logical candidate for early involvement in the Japanese market.

We closed our first Japanese non-performing loan transaction in the fall of 1997. Since then, we have purchased approximately 1.5 trillion book value of Japanese assets in 30 transactions.

Aside from being the winning bidder in last December's KAMCO auction, what have been Lone Star's recent activities in Korea? Going forward, what are your future investment plans there?

Since we closed the last KAMCO transaction, we have been focusing on enhancing our understanding of the Korean market, digesting our first portfolio and attempting to identify sources of liquidity for assets in our first portfolio. We have also been preparing for our involvement in the upcoming KAMCO auctions.

Can you compare the recent KAMCO auction process with your experiences in other countries?

We were very pleased with the transparency, professionalism and efficiency of KAMCO's first auction, particularly since it was the first major NPL auction in that country. We thought it was very well run; KAMCO was well prepared and it was clear they had done their homework. Overall, the process compares favorably with other countries' efforts.

What are your ongoing plans in Japan?

We have a large appetite in Japan and would like to invest approximately $1 billion a year here. Over time, our investment appetite will evolve as the market changes, but we intend to be active in Japan over the very long term. To be a serious global investor, we believe you need to maintain a presence in Japan.

We are interested in buying loans and real property from the city banks, regional banks, trust banks, life companies, and corporations that are cleaning up their balance sheets.

Does Lone Star plan to invest in other Asian countries' NPLs over the next one to two years?

Yes. We're currently focused mainly on Japan and Korea but we're also looking at the rest of Asia, both for non-performing loans and real estate.

In the absence of reliable property market data and adequate public company disclosure in Korea and Japan, why are you investing in those markets and how do you make your investment decisions?

We're interested in Japan and Korea because both countries have some common important characteristics: both have large economies with developed financial systems and a sophisticated legal framework, which is important because it is difficult to buy debt in a country without a sophisticated legal system.

Also, the institutions in both countries have a large supply of non-performing loans that need to be sold before the economies can recover. Because of our access to capital and experience in understanding the loan workout process and its related risks, it is logical for us to be involved in these markets.

The lack of data and disclosure complicate the decision process, but understanding how to price the related risk is a skill we've had to develop over the years. In Korea, there is little information about post-IMF property values. We analyze as much information as we can find and ultimately, make the best property value assumptions that we can. Japan has a much bigger economy and therefore more comparable sales information is available.

Finally, does securitization of any of the distressed assets lie ahead?

Yes, when it is available, we will use securitization as an exit strategy. However, it's not as simple as bundling these loan assets together, rating them and selling securities. The assets we're buying now can't be securitized in their current state, and most will never be securitizable. Even then, a lot of solid restructuring and servicing work will need to be done first.

In Japan, the only real estate-related securitizations have been large single properties; and no real loan pool securitizations have been done. I think any kind of meaningful securitization is at least a year or two away in both Japan and Korea.

Lone Star also hopes to be active in the securitization market as it develops through the purchase of the below-investment-grade and unrated tranches of the securities that are ultimately sold.

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