Hin Leong forged documents to mislead banks, has 'no reasonable prospect of being restructured on its own': PwC

INSOLVENT oil trader Hin Leong Trading has "no reasonable prospect" of being rehabilitated as a standalone company, though it may have a shot at survival if its owners support the process by committing their other family assets to the restructuring.

This was the recommendation put forth by interim judicial manager (IJM) PricewaterhouseCoopers (PwC) Advisory Services in a report on the company's current financial state. The report was submitted to the High Court on Tuesday.

Hin Leong has liabilities of US$3.5 billion that is mostly owed to banks, and assets of only about US$257 million, PwC noted.

The company also faces fraud allegations; PwC spent the past two months investigating various irregularities in the company's affairs.

"The scale of the irregularities uncovered in just the financial year ended Oct 31, 2019 (FY2019) alone is highly troubling, and suggests that the company had, possibly for many years, been carrying on its business by presenting a picture of financial health that was a far cry from the underlying reality," PwC wrote.

"The company's audited financial statements for FY2019 grossly overstated the value of its assets by an astonishing amount of at least US$3 billion. This overstatement comprises US$2.23 billion in accounts receivables, which have no prospect of recovery and US$800 million in inventory shortfalls. The overstatement existed to conceal significant losses that the company had accumulated over the years," the report added.

Hin Leong's officers also "fabricated documents on a massive scale" and used forged documents to mislead banks into extending financing to the company, PwC found. "Documents that have been forged or are at least of dubious authenticity include bank remittance advices, bank statements, bills of lading, sales contracts, sales invoices, swap-trade confirmations, swap-trade tickets, deal-settlement slips and inter-tank transfer certificates.

"The scale and regularity of the fabrication suggests that the practice was routine and pervasive."

PwC added: "As constant liquidity was needed to conceal accumulated losses, the company obtained financing from banks through a variety of financing schemes structured around the sale and repurchase of cargo at a loss. Not only did these schemes appear to have no commercial benefit for the company apart from the generation of additional liquidity, some of these schemes also involved the use of forged documents, non-existent inventory, or the sale of the same inventory to multiple parties. This has led to competing legal claims being asserted by the implicated parties."

Evidence further suggests that Hin Leong may have fabricated fictitious derivatives gains and trading profits to conceal accumulated derivatives trading losses of about US$808 million over the past 10 years. "On this assumption, it follows that the cumulative overstatement of profit in the company's financial statements in the past decade amounts to US$2.1 billion," PWC wrote.

Hin Leong was audited by Deloitte & Touche. Deloitte said in April that it stands behind the quality of its work. Hin Leong is also under investigation by the police.

All things considered, PwC's preliminary assessment is that "the company on its own has no reasonable prospect of being restructured or rehabilitated", it said.

"As a standalone company, Hin Leong is an oil trading company whose principal business is that of the sale and purchase of petroleum products. These oil trading activities have ceased as at the time of the appointment of the IJMs and all of its banking facilities have been frozen.

"The company's oil trading business is mainly run by O.K. Lim and (his son) Evan Lim. With the negative publicity in the market in relation to the irregularities admitted by O.K. Lim, it is unlikely that any counterparty would trade with the company. It is also uncertain whether the company on its own will be able to raise funds through bank loans or equity investments from sources other than the Lim family."

For these reasons, PwC believes that the Lim family should bring their personal assets to the table for any viable restructuring to be carried out.

The Lims own Ocean Tankers, which charters and manages over 150 vessels, including very large crude carriers (VLCCs) and is one of the world's largest oil-tanker operators. They also own the Xihe Group, which owns most of the vessels that Ocean Tankers bareboat charters from. Oil storage terminal Universal Terminal is also 41 per cent owned by the Lim family through Universal Group Holdings.

Hin Leong Trading should be put together with these assets as an integrated petroleum trading platform, since the operations of Hin Leong (and hence its value) is interdependent on these other companies, PwC said.

Some investors have expressed interest in injecting equity into the Hin Leong Group as an integrated downstream trading platform, PwC noted. "The IJMs have not come across potential investors who are interested to inject equity purely into Hin Leong as a standalone company, though there are parties who have expressed interest in acquiring shares in or assets owned by Ocean Tankers and or the Xihe Group, and shares in Universal Terminal."

A person close to the Lim family told The Business Times that the family is considering all options. The family hired Davinder Singh Chambers and nTan Corporate Advisory as its legal and financial advisers in May, and is in direct dialogue with creditors, this person said.

PwC noted in the report that it had not been able to interview founder O.K. Lim; his lawyers have stated that he is unfit to be questioned for prolonged periods of time.

Hin Leong Trading was placed under the management of a court-appointed supervisor, or IJM, on April 27. Its application for judicial management will be heard before the High Court on July 27. Rajah & Tann is the legal adviser for Hin Leong Trading and Ocean Tankers.