DBS, OCBC, UOB faced with over US$600m total exposure to Hin Leong

Singapore

SINGAPORE's three local banks have a combined exposure of at least US$600 million to troubled oil trader Hin Leong Trading, sources familiar with the matter have told The Business Times.

Of the three, DBS Group Holdings has the highest exposure at around US$290 million; OCBC Bank is owed about US$220 million, and United Overseas Bank (UOB) had let Hin Leong draw down more than US$100 million as at early April, sources said.

Representatives from DBS, OCBC Bank and UOB declined to comment.

Hin Leong, one of Singapore's biggest shipping-fuel suppliers, was reported to be in talks with its lenders last week after the oil price crash blew a hole in its balance sheet.

In total, more than 20 banks have a combined exposure of at least US$3 billion to Hin Leong, led by HSBC with a US$600 million exposure. ABN Amro has the second highest exposure at around US$300 million, sources said.

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How serious a hit banks will have to take is not known yet, though the damage will vary from lender to lender.

Most of OCBC's exposure, for instance, is through letters of credit issued on behalf of Hin Leong to guarantee its ability to pay its suppliers, sources said. Letters of credit are a kind of contingent liability so banks are not required to make as large of a provision as for direct liabilities.

Industry watchers said Hin Leong will probably try to see how it can move forward without filing for bankruptcy protection, to preserve as much of the company's value as it can. But this will require consent from all its lenders, and fresh cash for working capital.

For now, the oil trader is still ascertaining how much cash, inventory and trade receivables it has. The firm is believed to have been profitable last year. Then this year, the oil price crashed.

It is difficult for Hin Leong to hedge oil price risks for its physical stock due to the fast turnover in its business, where it sources fuel from suppliers to ship directly to tugs and barges, one observer said.

Indeed, the company has survived past oil slumps because in those cases, it could still move its stock to manage cashflow. This time however, the Covid-19 outbreak created a demand vacuum.

A person in a separate commodities trading firm said: "Hin Leong does not hedge its physical stocks, hence it cannot weather the storm of low oil prices and poor demand. Inventory gets stuck... This event is an unprecedented demand destruction event and they are truly exposed."

With many firms under severe strain from Covid-19, analysts are bracing for more bankruptcies this year, especially among small and medium-sized firms faced with near-zero revenues.

Thilan Wickramasinghe, banking analyst at Maybank Kim Eng, said the impact will be felt by local banks: "We expect overall credit charges to be materially higher during this round compared to the oil and gas crisis (circa 2016-2017). At that time, the impact was isolated in one business segment of the economy. The current crisis impacts almost all segments."

Banking analyst Daniel Tabbush, who publishes on Smartkarma, added: "There is no way to know if the banks are provided for these loans. You have seen all the commentary from the International Monetary Fund and data from the US about this period being more like the Great Depression than the Great Financial Crisis. There will be a lot of bankruptcies at the corporate level, and at the consumer level, defaults."

But Eugene Tarzimanov, a Moody's senior credit officer, was more upbeat: "The immediate effect of a significant decrease in oil prices will be mostly manageable for the largest Singapore banks DBS, OCBC and UOB because they have extensively provisioned and cleaned up their exposures to the most vulnerable energy borrowers since the 2015-16 oil price drop. We expect that the residual risk in their energy books is small.

"Singapore banks have also large exposures to commodity traders, in line with the country's role as a regional financial hub. We understand that the vast majority of these exposure is to financially strong and diversified traders. Moreover, the facilities are collateralised."