Banks nervous over fraud losses as Singapore oil traders collapse
Banks are being urged by regulators not to withdraw
financing for Singapore’s beleaguered commodities trade sector, despite a
string of high-profile company collapses and allegations of fraud.
The city state’s oil trading industry has been rocked by the
sudden downfall of Hin Leong. Founded in 1963, the company grew to become one
of Asia’s largest fuel trading houses, until founder and chairman Lim Oon Kuin revealed
to investors in April it had suffered US$800mn in undisclosed losses in the
futures trading market. He added that oil set aside as collateral for lending
had also been sold.
Just over a fortnight later, news emerged of difficulties at
ZenRock, another of Singapore’s independent fuel traders. HSBC filed a court
application to have the company placed under judicial management, while
accusations of fraudulent activity led to a police raid on its Marina View
headquarters.
Though Hin Leong and ZenRock’s demise was propelled by a
historic crash in oil prices and the Covid-19 pandemic, concerns have not been
limited to the fuels sector. Notably, in March, lenders were left with
exposures of US$600mn after the collapse of commodities trader Agritrade.
With banks at risk of having to write off loans –
particularly where single trades were financed several times over – firms are
finding it increasingly difficult to access fresh lines of funding.
“Financing is effectively coming to a halt across commodity
types,” says Baldev Bhinder, managing director of Singapore law firm Blackstone
& Gold. “I don’t think that is helpful for anyone – the banks or the
economy.”
“The oil crisis has sucked up liquidity from the market, and
cumulatively the banks appear to be quite jittery in their lending patterns,”
Bhinder tells GTR.
Regulators in the country have sought to reassure lenders
that the oil trading sector remains resilient, despite the twin pressures of
low oil prices and a significant decline in global demands.
The Monetary Authority of Singapore (MAS) is urging banks
not to take a blanket approach to the sector, and continue lending wherever
safe to do so.
“In their credit risk management, banks are expected to
apply judicious credit assessments on individual borrowers and not rely on
broad-based sector de-risking,” a spokesperson for the regulator tells GTR. “We
note that banks in Singapore continue to lend to firms in the oil and gas
sector.”
The plea follows an MAS statement issued on April 21
reminding banks “not to de-risk indiscriminately”.
But for banks active in the country, the situation is not
necessarily that straightforward. A source familiar with the Hin Leong collapse
says some banks are already responding by carrying out a review of how their
commodities facilities work across the globe.
“You learn a lot from a fraud crisis,” says the source, who
requests not to be identified. “There’s been a temporary halt on everything
except the most necessary lending – not because banks can’t afford to fund
traders but because a lot of these shocks may not have worked their way through
the supply chain, and so there are still worries about companies’ financial
health.”
Of the international banks with exposure to Hin Leong, the
three largest are believed to be HSBC, ABN Amro and Société Générale.
ABN Amro said in its Q1 financial results that “a potential
fraud case in Singapore” was one of two exceptional files accounting for €460mn
in impairments.
“The corporate loan book is diversified and exposures to
high-risk sectors such as offshore, diamonds and trade and commodity finance
have been reduced in recent years, although more de-risking is clearly
necessary,” it said.
A bank spokesperson says it never discusses individual
client situations nor discloses client names, but adds a review is ongoing into
the activities of its corporate and institutional banking activities.
HSBC’s Q1 filings report that its expected credit loss was
US$3bn, a year-on-year increase of US$2.4bn, due to “a significant charge related
to a corporate exposure in Singapore” as well as the impact of
coronavirus-weakened oil prices. The bank declined to comment when contacted by
GTR.
A spokesperson for Société Générale confirms it is a lender
to Hin Leong, but says it has no exposure to ZenRock. They add the bank “will
remain committed to the trade commodity finance sector, including in Asia”.
What went wrong?
Though the initial impetus for Hin Leong’s collapse came
from its admission of undisclosed losses, brought to a head by the oil price
crisis, the source says several examples of fraudulent practices have since
emerged.
They say it is now apparent the company inflated its figures
and built up leverage by creating fake trades alongside its legitimate
activity.
“We’ve also seen multiple sales of the same cargo,” they
add. “You end up with a bunch of banks all trying to lay claim to the same
assets, like oil that’s still in storage tanks. In some cases, these sales are
fictitious, where the cargo doesn’t exist in the first place.”
Hin Leong has since ceded control to PwC. Its exposure to
HSBC reportedly stands at an initial US$600mn, with ABN Amro lending US$300mn
and Société Générale lending US$240mn. Local banks DBS, OCBC and United
Overseas Bank are exposed by around US$680mn in total.
In the case of ZenRock, the company issued a statement
shortly after the Hin Leong incident saying it was not facing financial
difficulties itself, despite the oil crisis and pandemic. It claimed to be
profitable while dismissing rumours it was “under statutory
restructuring/insolvency protection”.
However, in early May, it emerged that HSBC had applied to
Singapore’s High Court for the company’s management to be removed. The request
was granted last week, despite efforts by ZenRock to restructure liabilities
itself.
According to FT reports, HSBC’s court documents included
allegations of “dishonest practices” and “shams”. Examples included the issuance
of duplicate invoices, enabling ZenRock to raise funding from multiple lenders
for the same transaction.
One incident cited in court documents was the use of a
letter of credit to facilitate the purchase of nearly 1 million barrels of
crude oil from Azerbaijan’s Socar, for sale to Total. HSBC says it expected to
receive a deposit from Total, but when no funds arrived it discovered the
payment had already been made to the Bank of China in order for ZenRock to pay
off another loan.
The court documents add that these “extremely suspicious”
practices came to light after ZenRock was unable to raise fresh financing.
HSBC’s filing added: “The company’s conduct displays a
wanton disregard for its contractual obligations and a willingness to fabricate
documents in order to support its attempts at raising financing.”
For Blackstone & Gold’s Bhinder, such collapses may be
triggered by events such as the oil and Covid-19 crises, but should not be
viewed as unique to the fuels industry. Instead, banks should pay closer
attention to financing arrangements sought by commodities trading houses across
the board.
“If you look across the many defaults over the years, they
cut across different commodity types and the common theme tends to be an
over-concentration of liquidity in the hands of a few select trading
companies,” he says.
“Once that liquidity is drawn out of the market, for micro
or macro reasons, that’s where a lot of things unravel.
“Some of the trades are commercially questionable in the
first place. As long as the music plays, no one is going to find out, but the
problems happen when there is a break in the chain. Then, two or more banks
show up with the same claim, that they haven’t been paid.”
What’s next for banks
For banks caught between pressure from regulators to keep
financing commodities trade and expectations from boardrooms to cut exposure to
risk, there are steps that could be taken.
Eric Chen, investment director for trade finance at
Singapore-based asset management firm EFA Group, says lenders should respond by
“strengthening their due diligence, collateral monitoring and management
practices so as to plug the loopholes that may have been exploited by these
three commodity traders”.
Chen suggests banks consider carrying out physical site
visits or spot checks, for example when providing inventory finance for oil
products in a tank terminal.
They could also ensure majority shareholders or management
have “skin in the game” by requesting personal guarantees, such as private
assets they hold. Chen adds that EFA’s rigorous approach to underwriting helped
it steer clear of any exposure to the Hin Leong, ZenRock and Agritrade
defaults.
For Bhinder, banks should “start asking the difficult
questions to their borrowers”. He says lawyers investigating cases tend to
probe whether trades are commercially justified, how reliable firms’ balance
sheets are, and if there is any likelihood of duplicate trades.
Those questions would be better served if raised while
on-boarding new customers, rather than after wrongdoing has already emerged,
the lawyer says. “I understand the pressure of a deal scenario, they have to do
that quickly, but there must be a better way of testing balance sheets and
understanding trade flows,” Bhinder adds.
“That doesn’t mean banks should stop carrying on financing;
the world needs financing to go on. We just need to be a bit more sensible and
sustainable about it. If you finance someone to the hilt by a checklist it’s
not really sustainable.”
Looking further ahead, Jean-François Lambert, founding
partner of consultancy firm Lambert Commodities, says it is too early to say
whether banks are likely to hasten de-risking from Singapore’s commodities
market.
“Clearly Singapore needs the banks and especially
international banks to keep
financing commodity trades, which is a
key sector for the city state,” he tells GTR. “For now they are in the middle
of the storm, and it is rather difficult to undertake pulls-out unless for
compelling reason such as frauds.
“Banks should stand by their customers in these difficult
moments – and they probably do.”
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