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Oil traders increase risky lending even as some deals go bad

Published 13/10/2016, 16:42
© Reuters.  Oil traders increase risky lending even as some deals go bad
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By Libby George and Dmitry Zhdannikov

LONDON (Reuters) - Trading houses' lending to distressed producers and refiners is booming and cheaper than ever even though many are owed hundreds of millions of dollars after the collapse of some risky pre-financing deals.

The suspension of production at Morocco's oil refinery Samir last year cost a string of trading firms and oil majors a total estimated at close to $1 billion (£0.82 billion), and similar arrangements this year have come under stress in Nigeria.

But executives from trading houses speaking at the Reuters Commodities Summit this week said appetite for such deals was rising as the levels of distress in the industry from a more than two-year price rout intensifies.

"That's maybe the sweet spot for us," BB Energy Chief Executive Mohamed Bassatne said. "Where we are willing to take the risk, get a foothold and develop that business."

BB Energy had roughly $120 million tied up in Samir when it collapsed, and it is unclear whether it will recoup that.

Pre-financing is an arrangement under which those with money or access to it – such as oil trading houses - can give cash in advance to companies and countries who need it in exchange for oil, refined products or another form of payment.

When they go well, companies can get exclusive access to crude or oil products to trade on international markets.

But the deals are dicey. Those seeking money enter into such deals often because more traditional finance deals are unavailable for them or are more expensive due to higher risk.

"Every time these things happen, we look at ourselves and say we have to price risk more aggressively...correctly. And then we turn around and somebody else has cut the risk premium dramatically in terms of some other trade," Vitol Chief Executive Ian Taylor said. "The market is very competitive."

Vitol, the world's largest trading house, also has dozens of millions of dollars trapped in Samir.

HIGHER RISKS

Part of the drive for risk is the cost of finance - with interest rates at multi-year lows, banks and others with capital are hungry for any investments that could bring a better return.

"Our view is...the risks are higher now, rather than lower, compared to a year and a half ago," Gunvor Chief Executive Torbjorn Tornqvist said.

But financing costs, even on what would fall into the higher risk category, had not increased. "Generally we are living in a world where capital is less of a problem than it has ever been," Tornqvist said.

Trafigura Chief Financial Officer Christophe Salmon said even though more banks are asking questions about commodity exposure before lending money to trading houses, the cost of borrowing has fallen over the past year. Global interest rates remain exceptionally low.

All trading executives said they had beefed up their compliance teams and examined deals more closely to ensure they are not caught out, although mistakes would still be made.

"We have seen defaults before and we will see more in the future," said Glencore's (L:GLEN) head of oil Alex Beard, whose company is one of Samir's large creditors.

"That (pre-financing) has been a core part of the business, it's been a good part of the business," Beard said.

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