Singaporean commodity traders are facing a prospect of a severe credit squeeze, defaults, and bankruptcy after the downfall of one of the country’s oil traders. Hin Leong Trading, which claims to be Asia’s largest oil storage and terminalling hub, filed for bankruptcy protection and admitted to $800 million in undisclosed losses, which made the company under a police investigation.
Hin Leong, which owes about $3.85 billion to about 20 lenders, is the second commodity trader who ran into financial troubles in recent weeks as oil prices and demand collapsed amid the coronavirus pandemic. Following the fiasco, analysts expect lenders will cut exposure to the sector while requiring more collateral and rising their risk pricing. This is despite Singapore’s central bank urge against banks exiting the oil industry.
As a result, commodity traders, which depend on high doses of leverage to boost margins, will find difficulties to secure financing. According to Soo Cheon Lee, the chief investment officer of investment firm SC Lowy in Hong Kong, the business model of oil traders would not be feasible if interest payments went up to double digits. The players in the industry are expected to see a significant consolidation, with only the top three or four firms surviving, said Lee.
Hin Leong’s crash shocked Singapore’s business community amid the pandemic, which is expected to push the city-state into a recession. DBS recently forecast that the current downturn is Singapore’s worst recession in the industry. The credit crunch in the country’s oil sector can also trigger bankruptcies and job layoffs.
