Singapore oil traders face credit crunch after Hin Leong fiasco

Singapore oil traders face credit crunch after Hin Leong fiasco

Financial Times·2020-04-22 12:32

The collapse of one of Singapore’s biggest oil traders has raised the prospect of a severe liquidity crunch in the city-state’s under-pressure commodities sector, threatening a wave of defaults and bankruptcies.Investors and analysts warn that banks are likely to cut their exposure to the industry after heavily indebted oil trader Hin Leong Trading filed for bankruptcy protection. The company has admitted to $800m in undisclosed losses and is the subject of a police investigation. It is the second Singapore commodities trader to run into financial difficulties in recent weeks as the coronavirus pandemic pummels crude oil demand and prices. “The key question is whether the big trading companies that rely on massive balance sheets can survive at these commodity prices,” said the founder of one macro hedge fund in Hong Kong. “We will probably see a big consolidation where only the top three or four trading firms survive.”The lockdowns across the world are disastrous for the oil sector”Richard Gorry, JBC Energy AsiaBanks both in Singapore and overseas have significant exposure to the city-state’s commodities sector. Hin Leong owes about $3.85bn to more than 20 lenders, including $600m to HSBC. Of Singapore’s three largest banks — DBS, UOB and OCBC — 5 per cent of their loan books is exposed to the energy sector, which includes commodities trading as well as support services such as oil rig maintenance. The trio are owed a total of more than $600m.OCBC said its exposure to the oil and gas sector had been “relatively stable” the past few quarters and that it continued to “proactively monitor” its credit portfolio for signs of weakness. It added it had “set aside allowances for this sector".DBS said it continued to support its long-term clients. UOB declined to comment. Jean-Francois Lambert, an industry consultant and former trade finance banker at HSBC, said the fallout from the Hin Leong scandal would result in lenders curtailing their exposure to all but the biggest traders. “Their reaction will be a flight to quality and quite restrictive on everything else,” he said. Singapore’s de facto central bank on Tuesday urged lenders not to “indiscriminately” exit its oil industry. But banks are “definitely” considering cutting exposure to the oil and gas industry, said Jonathan Cornish, head of Asia Pacific bank ratings at Fitch Ratings. Those lenders that do not pull back from the industry entirely may require more collateral, have loans refinanced elsewhere or adjust their risk pricing in an attempt to manage their exposure. “All those options are on the table right now,” Mr Cornish said.The withdrawal of commercial bank credit would threaten the business model of oil traders in the city-state, which rely on high doses of leverage to boost razor-thin margins. “Trading companies need leverage and for that they need cheap financing,” said Soo Cheon Lee, chief investment officer at Hong Kong-based investment firm SC Lowy. “If [interest payments] go up to double digits, it doesn’t make sense to be involved in this business.” Those that did not have sufficient cash balances could be forced to liquidate, he said. Hin Leong’s disclosures have rocked Singapore’s business community at a time when south-east Asia’s main commodities trading hub has also been hit by a soaring rate of coronavirus infections. Prior to the outbreak of Covid-19, the economy had been buffeted by the impact of the US-China trade war. DBS in a recent note predicted that Singapore faced its “worst recession ever on record”. Peter Lee, senior oil and gas analyst at Fitch Solutions, added: “More lay-offs and announcements of bankruptcies certainly look possible.”Other analysts said the commodities industry around the globe was likely to face a similar reckoning due to the coronavirus crisis.“The lockdowns across the world are disastrous for the oil sector,” said Richard Gorry, managing director at consultancy JBC Energy Asia. “We are in unknown water here.” Reporting by Daniel Shane and Henny Sender in Hong Kong, Neil Hume in London and Stefania Palma in Singapore

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