• Hin Leong Trading (Pte.) Ltd. (HLT) filed for bankruptcy on 17 April after it was discovered the company failed to report US$800mn worth of losses arising from derivatives trading.
• HLT has a total of more than US$3.6bn in secured debt owed to 23 different lenders with only US$700mn in assets.
• Local lenders DBS, OCBC and UOB each have exposure of US$290mn, US$240mn and US$140mn to HLT respectively.
• Earnings of local banks will be impacted by up to 7% as a result of additional provisioning.

Background

On 9^th of April, there were news that Hin Leong Trading (HLT) was refused borrowing from two lenders, as rumours of the company facing financial difficulties began to spread.

Over the following week, it was reported that HLT owed upwards of US$3bn to 23 separate lenders while assets stood at only US$700mn. The company had also failed to report US$800mn worth of losses from derivatives trading over the years.

It was later revealed that HLT had sold a substantial part of the company’s inventories, despite them being used as collateral for bank loans.

Currently, the company is reported to only own US$141mn worth of oil products inventory, with only US$50mn in cash.

HLT eventually filed for bankruptcy on 20 April, and is seeking a 6-month moratorium as the company undergoes debt restructuring procedures.

Impact on local lenders

All three local lenders were among the 23 lenders disclosed to have exposure to HLT. DBS, OCBC and UOB each have respective exposure of US$290mn, US$240mn and US$140mn to HLT in secured lending which is likely to be impaired. We expect the allowances to be booked in either 2Q20 or 3Q20, which will have impact on the local lenders’ earnings of between 4 – 7%.

The extent of the impact on the banks’ earning will be contingent on the allowances already set aside in the aftermath of the 2016 – 2017 oil price meltdown. Bank exposure to the oil and gas industry is estimated to be around 2% of the loan book.