Banks tighten credit on Asia oil traders amid Hin Leong losses

Banks and trading companies are scaling down activities in Asia following the oil price collapse and financial problems at three companies including major Singapore trader Hin Leong Trading (HLT), according to sources yesterday.

The problems are threatening commerce in Singapore, Asia's commodities trade hub, the banking and trading sources said.

Billions of dollars of physical and derivative commodities change hands in the city state in a supply chain that links financial institutions with traders and logistics companies that deliver fuel to the Asia-Pacific region and beyond.

The revelation of hundreds of millions of dollars of losses at HLT, one of Asia's largest oil traders, came months after Agritrade International entered into judicial management to restructure a US$1.5 billion (S$2.1 billion) debt, and Hontop Energy (Singapore) went into receivership.

Scorched by losses at these companies and the crash in oil prices since the start of the year, several banks are tightening credit and have also stepped up scrutiny on existing loans to oil trading firms, according to the sources.

All existing and new credit lines to commodities traders in Asia are being put under stringent review by banks' senior management following HLT's losses and the crash in oil prices, two senior bankers told Reuters. They represent leading global trade finance banks that are two of HLT's top 10 creditors.

One of the bankers, from a European lender, said there was concern there could be further defaults in the region as oil prices plunge.

The trader's problems were "a trigger" for some banks to cut credit lines significantly, said a third commodities banker.

"Banks have become more selective and are making cautious decisions on trading companies," he said, adding: "It doesn't help that oil prices are volatile and continue to be volatile."

A source with direct knowledge of the matter said the Australia and New Zealand Banking Group (ANZ) has decided to service only its current commodity trading clients and will not take on any new business in commodity finance after getting stung by the HLT collapse. ANZ declined to comment.

Banks have also cut more risky credit lines to some companies that do not require letters of credit from counterparties, a Singapore-based oil trader said.

Risky credit lines are usually provided to bigger companies that have been in the business for a long time, he added.

Financiers have also become wary of deals to finance oil inventories after the founder of HLT said the company had sold "a substantial part of inventory" being financed by banks to raise cash after it ran into cash flow problems.

A fourth banker said lenders were re-evaluating how to finance the commodities trade, especially when it came to pure trading firms without oil production or refining arms, and that they wanted to have a clear understanding of trade flows before offering finance.

A fifth banking source said: "What happened with HLT and (Tuesday's) negative WTI (West Texas Intermediate) price effectively invalidated the very foundations commodity trade financing are built upon."

He added: "When you can't trust the client or the value of underlying commodities, there is nothing to be financed. The industry will have to change."

Faced with tighter credit and rising counterparty risks, trading companies have also scaled back their activities, the sources said.

Unlike previous oil price crashes, fuel demand has taken a big hit because of measures by governments to curb the coronavirus pandemic, heightening fears of defaults among oil firms, the sources said.

"Counterparty risks are very high. Who would dare to trade with anyone?" said a senior executive at a Singapore-based trading company, adding: "The economy won't recover as fast as before. The aviation sector is also unlikely to recover this year."

The Singapore Government said on Tuesday that its oil trading sector remained resilient despite the drop in global energy demand and that it was monitoring developments related to HLT and the oil trading and bunkering sectors.

The Monetary Authority of Singapore said it was in close contact with banks and had told them "not to de-risk indiscriminately from the bunkering and oil trading sectors".

REUTERS