The lending curbs that triggered the liquidity crisis among several Singapore-based commodity traders through April-May were already troubling China's independent private refiners several months earlier, much before oil prices fell below $30/b in March, according to court filings and oil traders.

Many of the smokestack refiners in the northeastern province of Shandong used questionable credit practices like cross-guarantees, and when oil prices tanked and COVID-19 ravaged markets, cautious banks accelerated their withdrawal from financing oil purchases of several independents.

The curbs soon spread to the commodity trading hub of Singapore, where Hontop Energy (Singapore) Pte Ltd., the trading arm of Tianhong Chemical, an independent refiner based in Shandong's Dongying city, accumulated over half a billion US dollars in unpaid debt and became one of the first oil traders to collapse this year.

Hontop Energy laid out the sequence of events in a March 20 affidavit filed in Singapore's High Court for debt restructuring.

International banks first started curtailing trade finance after Shandong-based metals company, Shandong Fanyuan Nonferrous Metals Group, defaulted on over $300 million of syndicated loans in December 2019.

Shandong Fanyuan did not reply to emailed queries.

In mid-January, when China's coronavirus lockdowns were at their peak and fuel demand had disintegrated, Tianhong Chemical suspended operations and stalled payments to Hontop Energy, impacting the oil trader's cash positions.

Meanwhile, oil prices had already started falling below $60/b and banks were reigning in open credit lines to refiners.

On January 20, Singapore-based DBS issued a letter demanding repayment of $33.2 million under a credit facility; and on February 18, Hontop Energy went into receivership as DBS Bank, which had a charge on two assets, named KPMG as liquidator, corporate filings showed.

This was followed by Macquarie Bank, which also had a charge on Hontop's assets, demanding a repayment of $57.5 million on February 24, for the purchase of a cargo of Brazilian Lula and Iracema crudes.

In its affidavit, which proposed the scheme of arrangement for restructuring the company, Hontop said its outstanding debt to lenders amounted to $473.1 million and unsecured debt was $60 million.

It had trade receivables of $611.8 million and other receivables worth $109.7, which had to be recovered to repay the debt but was constrained by the lack of liquidity. As of February 29, 60% of the trade receivables were due from Tianhong Chemical alone, according to the affidavit.

Hontop could not be reached for comment.

ARREST OF VLCC MIRACLE HOPE

Hontop Energy was mired in other disputes as well.

On March 12, the VLCC MT Miracle Hope was arrested in Singapore waters for nearly two months, on the request of Natixis bank, court documents showed.

Brazil's Petrobras had sold 1 million barrels of Lula crude to Hontop, and was paid with a letter of credit issued by Natixis for $65.13 million on the basis of a letter of indemnity instead of the original bills of lading.

But Hontop did not reimburse Natixis leading to the arrest of the vessel until the bank was compensated. Miracle Hope changed hands several times after it was first time chartered on April 26, 2019, and intermediaries in the trade included commodity trader Trafigura and Clearlake Shipping, a subsidiary of Gunvor.

Miracle Hope left Brazil's Porto do Acu on September 17, 2019, and discharged its oil cargo at Dongjiakou port in China on November 13, 2019, according to shipping fixtures seen by S&P Global Platts.

Natixis and Trafigura declined to comment. Gunvor said it was not involved in matters between Hontop and its bankers.

Hontop has regularly procured Brazil's Lula crude, Russia's ESPO and Azeri Light for Tianhong, often with help from an oil major, in addition to some trading business of its own, according to market sources and traders.

SURVIVING THE SQUEEZE

So far, Hontop Energy has proposed that its restructuring could be backed by a rescue package from parent company Wanda Holding Group.

Tianhong Chemical's throughput of 10,000 mt/day had mostly recovered by late March. It has been importing its own crudes recently and benefits from strong refining margins, oil traders have said.

In mid-April, Tianhong issued corporate bonds to boost its finances, and in the past it has also sold its crude import quotas to generate revenue, sources said.

However, its debt remains high and it still suffers from previous cross guarantees to its peers. In the past, the refinery presold oil products and it still has about 200,000 mt of undelivered products to account for, sources said.

China's independent refineries, meanwhile, still have access to a wide range of financing options that keep them flexible and versatile, although China's local banks are reporting a surge in defaults and non-performing assets in a contracting economy, which could narrow their options.

Reports of troubled Shandong-based refiners keep cropping up, but despite credit risks they still have trading companies and oil majors supplying crude to them, and they also have access to state-level and national banks, although credit limits do keep getting tighter.