Hontop fraud allegations add to Singapore trading woes

More details are emerging about the collapse of Singapore-based Hontop Energy earlier this year, adding to pressure on the country's embattled commodity trading sector.

Malaysian bank CIMB filed an application to the Singapore high court last week for trading company Hontop to be placed under judicial management — a form of debt restructuring. CIMB provided trade financing to Hontop for crude and products cargoes, court documents show.

Hontop is one of four Singapore-based trading companies to have collapsed this year, together with oil traders Hin Leong and Zenrock and coal trading firm Agritrade. Hontop, which went into receivership in February, is fully owned by Chinese private-sector firm Wanda whose group assets include the 100,000 b/d Tianhong independent refinery in Shandong province.

Hontop blamed its problems on the impact of the Covid-19 pandemic on Chinese oil demand, as well as moves by banks to tighten credit lines to Chinese independent refineries following a default by a large copper smelter, Fangyuan, in December. It had outstanding liabilities of around $473mn to banks and about $60mn to other unsecured creditors as of the end of February, according to a filing for court protection that was made in early March and included in the CIMB court documents.

Suspicious transactions

Hontop laid out a plan to restructure its debts as part of the filing. But CIMB, which the court records show is Hontop's biggest creditor at $105mn, said it has a "complete loss of confidence" in the company's management. It accused Hontop of engaging in "suspicious transactions" involving two cargoes of Russian ESPO Blend crude late last year, the court documents show. Both cargoes were bought from Singapore trading firm Sugih Energy, now known as Aeternum Energy, and sold to BP.

The first cargo, of around 476,000 bl, was shipped on the Aframax tanker Green Attitude to Yosu in South Korea, while a second 1mn bl cargo was shipped on the very-large crude carrier Gem No.5 to Shandong. CIMB issued letters of credit (LCs) to Hontop for both transactions.

CIMB paid Sugih under the LC for the first cargo, but after approaching BP to collect payment was told that the cargo was subject to a separate framework agreement between BP and Hontop. BP said it had not received payment from Hontop and so was not obliged to pay CIMB for the cargo, according to the court filing.

CIMB also provided financing for the second cargo. BP later informed CIMB that it had not entered into any contract with Hontop for the cargo and so was not required to make payment.

BP told CIMB through its solicitors in March that the purported contracts between it and Hontop appeared to be "fabrications" and that CIMB is "apparently a victim of Hontop's fraudulent conduct", according to a letter included in the court filing.

BP declined to comment. CIMB did not reply to a request for comment, while Hontop could not be reached.

Fraud allegations

The allegations against Hontop mean that all three of the Singapore oil trading companies that have collapsed so far in 2020 have now been accused in court documents of fraudulent activity relating to cargo financing.

Hin Leong overstated the quantity of inventory on board vessels when obtaining inventory financing, and secured financing by pledging cargoes that it did not own or did not exist, according to a court filing last month by its judicial manager PricewaterhouseCoopers. The company also concealed derivatives trading losses of over $800mn in the past 10 years, the filing shows.

UK bank HSBC has accused Zenrock of dishonestly obtaining multiple sources of financing for crude cargoes, according to a separate court filing.

Bank losses

The details in the Hontop court filing also take to around $4bn the amount that banks and other creditors stand to lose as a result of the company collapses. China's Citic Bank and France's Natixis and Societe Generale are the next-biggest creditors to Hontop, at $82mn, $81mn and $63mn respectively, according to the court filing.

Banks are on the hook for the majority of the $3.5bn that Hin Leong owes to its creditors, while Zenrock owes around $165mn to lenders.

Dutch bank ABN Amro booked an impairment charge of €225mn ($253mn) related to Hin Leong in May and warned that it was not confident of recovering its losses.

Singapore banks said this month they are working with the government to review financing standards for the commodity sector.

By Kevin Foster