Embattled ZenRock Commodities Trading was granted judicial management yesterday, but the judicial managers have noted that any restructuring of the firm, which is under investigation by the Commercial Affairs Department (CAD), would "at best preserve only a fraction of its business".
KPMG Services' Martin Wong, Bob Yap and Toh Ai Ling, who were confirmed as judicial managers yesterday, said in a report filed last Thursday with the High Court that ZenRock was "unlikely to continue in the long term under its original three pillars of business".
But they added that there is value in a judicial management of ZenRock, even a short one, as it will give the managers time to complete a sale of inventory in storage tanks in Malaysia and consider a proposed management buyout of unit ZenRock Europe by joint venture partner Mark Papallo, among other things.
They noted that these efforts could be jeopardised if the oil trader is placed in liquidation.
The judicial managers have also been helping the CAD with its investigations into ZenRock after a police report made by principal creditor HSBC, which accused the trader of being "involved in a series of highly dishonest transactions".
KPMG has identified more than 200 questionable transactions dating back to January 2018.
These involved ZenRock allegedly using duplicate invoices to obtain financing through multiple letters of credit. The managers noted that the same sales invoices with identical sales contracts and invoice numbers were provided to two banks to obtain such funding.
"The only difference between the invoices presented to each bank would be the details of the bank account in the invoice which the buyer was instructed to make payment into. That way, ZenRock was able to obtain two sets of financing for essentially the same transaction," KPMG said.
It also found transactions where ZenRock "purported to sell the same cargo reflected in a single bill of lading to more than one party. In doing so, the trader was able to obtain financing for each sale transaction from separate banks, which meant that multiple letters of credit were obtained for a single cargo."
KPMG said in the report seen by The Straits Times that it also noticed unusually large cash transactions where buyers of cargo would pay sale proceeds directly to ZenRock's account with a neutral bank that did not finance any of the trader's transactions.
"The funds received would be co-mingled with other funds and used to pay off amounts owing to banks (which did not finance the said transaction) which were falling due," the manager said.
ZenRock owes more than US$165 million (S$229 million) to its institutional lenders. HSBC has exposure of US$50 million. Other creditors include Natixis Bank, Credit Agricole Corporate & Investment Bank, ING Bank, Bank of China and Banque de Commerce et de Placements.
The liabilities to bank creditors under the letter of credit facilities in the questionable transactions amounted to US$175.3 million as of June 30, KPMG said.
The managers added that they have had problems engaging with ZenRock president and founder Xie Chun, due to his meetings with the CAD and medical leave.
Further difficulties in understanding ZenRock's financial condition and historical transactions arose after chief financial officer Stanley Chan Chai Lai departed "under unusual circumstances at the start of 2020".
It also noted the "abrupt departure of finance manager Desmond Low Chin Hiong in April 2020".
KPMG said Mr Xie had suggested certain possible investors who might help restructure the firm, but despite "repeated chasers and follow-ups", the managers were unable to get more details from him.
"ZenRock's business is now at a minimal level, and many cost-saving measures, including reductions in the workforce... are being implemented," noted the KPMG report.
"Given the nature of the allegations in the judicial management application and the publicity... a large majority of counterparties and banks have understandably been reluctant to continue trading with ZenRock, and it is for this reason that all of ZenRock's trade contracts, (except) one term contract, have been terminated."
