Another non-performing loan deal may be brewing in Thailand, after DBS Thai Danu Bank auctioned off 77% of its bad debts to two investors.

The two investors were a fund owned by U.S. investment bank Lehman Brothers and a local finance company called National Finance, sources in Bangkok said. They paid an average price of 29 cents on the dollar, to purchase assets - a mix of retail, mortgage and corporate loans - with a face value of Bt31 billion ($754 million) for Bt8.4 billion.

Sources close to the deal suggested that Lehman Brothers bought only residential mortgage loans from Danu and is considering a securitization as a way to exit its principal position, though no decision would be made until the bank has got a feel for the assets in the first few months of servicing.

The possibility that securitization will be chosen as the way forward is increased because Lehman Brothers has already parceled non-performing Thai mortgage loans into a securitization, in a three-year private deal, called GT Stars, that launched in May 1999.

That deal was worth Bt4 billion and backed by 6,800 of the best quality mortgage loans out of a pool of roughly 18,000 that Lehman purchased from the Thai bad debt agency, the Financial Restructuring Agency (ASRI 5/31/1999 p. 11).

ABS pros in Bangkok said that National Finance is less likely to look to securitization, preferring just to work out the assets.

The auction has left Danu - which is owned by the Development Bank of Singapore - with the lowest level of NPLs among Thailand's 13 commercial banks.

The GT Stars transaction has been a great success despite being the first of its kind in Thailand's tricky legal and regulatory environment. So much so that Lehman is believed to be considering calling the deal, as it is close to paying down nearly two years ahead of schedule.

Market pros said that investors were pleased with the deal's performance and would likely be keen to buy more of the same, leaving the U.S. investment bank considering going back to the remaining loans in that pool to do a similar deal.

If that route is chosen, investors will benefit by the extra year's servicing that has gone into those loans, with many of them being turned round. Also, because it will be familiar with the loans' performance, Lehman will also allow the bank to pitch the level of credit enhancement and overcollateralization much more accurately.

Lehman's purchasing of non-performing mortgage assets in Asia is not confined to Thailand, however. The bank has plucked up the courage to start buying in Indonesia and here too a securitization may - eventually - be chosen as the exit strategy.

"There's no doubt that this is a high risk/high return strategy," said one banker.

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