Singapore’s Hin Leong has undeclared losses, major debt

Hin Leong Trading (HLT) has encountered "severe financial difficulties" because of falling oil prices, moves by bank lenders to reduce their exposure to the commodity financing industry, and a drop in demand for oil and bunkers caused by the Covid-19 pandemic, its shipping arm Ocean Tankers said in a 17 April filing to the Singapore high court seen by Argus.

Ocean Tankers' filing, which seeks court protection against creditors, calls into question the accuracy of Hin Leong's financial statements.

Hin Leong declared a net profit of $78.1mn in the financial year to 31 October 2019. "In truth, however, HLT has not been making profits in the last few years. HLT has suffered about US$800mn in futures losses over the years, but these were not reflected in the financial statements," according to the filing, which was signed by Ocean Tankers' chief executive Lim Chee Meng. Lim is the son of Lim Oon Kuim, who founded Hin Leong in 1963.

Lim Chee Meng said he was not personally aware of how or why the losses were not reflected as he was not involved in the finance function, which was supervised by his father.

HLT also sold a "substantial part" of its inventory and used it for general funds, leaving a large shortfall of inventory against what had been used to secure bank financing, the filing said.

Lim Oon Kuim planned to resign on 17 April from his position as managing director at Ocean Tankers, as well as from all executive roles at HLT and other related companies, according to the court filing.

Hin Leong and Ocean Tanker did not respond to requests for comment. Both companies are owned by the Lim family.

The filing hinted at a potential investment to support Hin Leong. A China-based company described as "one of the world's largest oil refining, gas and petrochemicals conglomerates" is in preliminary talks to invest in Hin Leong and Ocean Tankers.

Hin Leong has also received expressions of interest from at least two other unnamed companies in the industry.

Credit crunch, price collapse

Hin Leong had assets of $714mn but total liabilities of $4.05bn as of 9 April. Its inventory of marine fuel oil, marine gasoil, jet fuel and gasoline was valued at $141mn on the same date.

The company's business started to come under pressure in recent months, when defaults by other, unnamed oil traders prompted several of its lenders to cut their exposure to the commodity financing industry or pull out entirely. This led to Hin Leong's credit lines being withdrawn or reduced, straining its liquidity, the court filing said.

Hin Leong's oil trading and blending business model is capital intensive and heavily dependent on trade facilities and inventory financing from banks. It buys oil on a fob basis from around the world and charters Ocean Tankers' vessels to ship the cargoes. It then either sells the cargoes on a cfr basis or puts them in storage at terminals run by Universal Tankers in Singapore, which Hin Leong owns in a joint venture with Chinese state-controlled energy firm PetroChina.

Hin Leong's "blend and sell" and "hold and sell" business model means it can be 60 days or more between the time it buys cargoes and when it receives funds from their eventual sale. This leaves the company vulnerable to any sudden slump in the price of oil, as happened in early March when Saudi Arabia and Russia started an oil price war. Margin calls from banks prevented Hin Leong from holding cargoes until spot prices rose again, leading to "severe stress" on its finances, the filing said.

Hin Leong's hedging policy also exposed it to price risk. The company did not hedge aggressively in the paper swap market, instead selling substantial quantities of bunker fuel in the Singapore market on a fixed-price basis, which it said provided a "natural hedge" against price falls. Hin Leong's Ocean Bunkering Services (OBS) arm was the third largest bunker fuel supplier in Singapore last year.

Hin Leong has appointed PriceWaterhouseCoopers and law firm Rajah & Tann as financial and legal advisors respectively on a debt restructuring exercise. Ocean Tankers said the restructuring is likely to comprise two parts – raising additional capital through debt, asset sales or a strategic investment, either jointly with Hin Leong or otherwise; and debt restructuring of the two firms by a scheme of arrangement