How an epic gamble exposed the rot inside O. K. Lim's Hin Leong oil trading empire

SINGAPORE (BLOOMBERG) - The letters started to arrive in early April. One after the other, the titans of global finance, from JPMorgan Chase & Co to HSBC Holdings, demanded the immediate and urgent repayment of hundreds of millions of dollars in loans.

On the receiving end was Hin Leong, one of the most powerful and secretive names in oil trading. Founded in 1963 by a Chinese immigrant known to everyone in the industry as O.K. Lim, it was a giant in the world of shipping fuel from its base in Singapore.

Over the decades it had become one of the most fabled trading houses, the source of a billion-dollar fortune, and the subject of stories about legendary deals that made rivals sweat. But earlier this month, as oil prices collapsed in the fallout from the coronavirus, its foundations crumbled.

Banks had already been pulling credit lines, spooked by defaults at other trading houses. Smelling something wrong at Hin Leong, they started to ask for their money. When it failed to repay promptly, they called in their lawyers, and the game was up.

O.K. Lim, known formally as Lim Oon Kuin, has fallen on his sword, revealing he hid more than US$800 million (S$1.14 billion) in losses speculating in oil futures over the years. Worse still for the banks, Mr Lim said he had secretly sold some of the millions of barrels of oil inventories the company had pledged as collateral for its loans. The gap between the company's assets and its liabilities stands at US$3.34 billion (S$4.76 billion).

The Singapore police force is now investigating the company while the Monetary Authority of Singapore, the nation's financial regulator and central bank, has been in contact with Hin Leong's bank creditors, according to people familiar with the matter.

The closely knit trading community in Singapore, where players bet hundreds of millions of dollars every day on the price of oil, is in shock at the downfall of one of its biggest names. Hin Leong, which means "prosperity" in Chinese, sought protection from its creditors in Singapore on April 17. Having spent decades keeping the inner workings of his company secret, Mr Lim came clean in a startling mea culpa.

"I had given instructions to the finance department to prepare the accounts without showing the losses and told them that I would be responsible if anything went wrong," Mr Lim said in an affidavit seen by Bloomberg News. Although Hin Leong Trading (Pte) Ltd's official accounts showed a profit of US$78 million in its 2019 fiscal year, "in truth," Mr Lim explained, the company "has not been making profits in the last few years."

The rise and fall of Hin Leong is a tale of humble beginnings, business acumen, and luck. But above all, it shows that Mr Lim, a keen poker player according to those who know him, was willing to bet, and bet big, in the loosely regulated and opaque world of oil trading. This month, he lost his biggest hand.

"Hin Leong is a company that likes risk," said Jorge Montepeque, a veteran oil market executive who knows OK Lim. "But this time the risk became too big."

This account of the trading house and its founding family is based on interviews with business associates, rivals, bankers and consultants, plus presentations to creditors and affidavits made by the founder and his son in support of court applications. While some of the people spoke publicly, most asked not to be named because the sensitivity of the situation.

Multiple attempts by phone and email to reach Lim, members of his family or officials from his companies for comment were unsuccessful.

HUGE CONSEQUENCES

The demise of Hin Leong has far-reaching repercussions for a market that literally fuels global trade. Singapore is the world's biggest hub for shipping fuel. The trading house's bunkering unit was the third-largest supplier in the city last year, according to the Maritime and Port Authority.

Thanks to its unique position straddling the sea lanes that connect China to the rest of the world, Singapore has become one of the world's top commodity trading hubs, alongside Geneva, London and Houston.

"Hin Leong was instrumental in helping the growth of Singapore as an oil hub and bunkering location," said Jean-Francois Lambert, a commodity industry consultant and former trade finance banker with HSBC.

The crisis is the latest in a series of scandals to tarnish the reputation of the island-state, including multi-million dollar losses by some high profile Chinese and Japanese traders, the collapse of Noble Group, one of the biggest names in the industry, and the more recent implosion of Agritrade International.

This time, the trigger was a global calamity that nobody saw coming. World oil prices fell by two-thirds between early January and the end of March, crushed by plummeting demand due to the coronavirus outbreak and a price war between Saudi Arabia and Russia. They have since collapsed below zero in the U.S. for the first time ever.

NO HEDGES

Unfortunately for Hin Leong, it wasn't hedged against a price rout. In fact, Mr Lim had made the opposite bet, believing China would control the virus and oil demand would recover from its initial slump triggered by the country's virtual shutdown, according to people who discussed the outlook in meetings and phone calls.

Whether it was an attempt to get out of hidden losses, or something else, the fact is that Mr Lim bet that prices were about to rise. It was a gamble against all the odds, a wager that almost everyone else in the industry was wrong. In many ways, it was the quintessential Hin Leong play: bold and aggressive.

The tycoon was right to a degree; Beijing did manage to bring the outbreak under control and oil demand in China gradually started to recover in March. But what Lim failed to predict was how the disease would eventually become a global pandemic and bring the world to a standstill.

Brent crude, the global benchmark, plunged from more than US$70 a barrel in early January to just US$21.65 a barrel in late March. As prices crashed, Hin Leong's banks asked for more and more money to cover the bullish bets that it had placed. What's more, the value of the company's inventories was rapidly shrinking as prices dropped, meaning Hin Leong needed to mortgage more barrels to maintain its credit lines.

The situation unraveled as Hin Leong all but ran out of cash. When the company's bankers started to pull their credit lines, it could no longer function.

TRADING LIFEBLOOD

Bank financing in the form of letters of credit and other short-term loans is the cornerstone of the opaque world of commodity trading, enabling firms to buy, store and transport raw materials around the world. Traders use their cargoes and other assets as collateral for the credit lines and if they fail to repay, the bank can seize the goods. But in the case of Hin Leong, it appears most of the barrels are already gone.

The company now owes some US$3.85 billion to 23 lenders, including HSBC, Societe Generale, Standard Chartered and Deutsche Bank, according to people with knowledge of the matter. HSBC has the biggest exposure at about US$600 million while Singapore's three biggest lenders are owed a combined US$500 million or thereabouts.

The banks held a virtual meeting with the oil trader and its advisers on April 14, the people said. During the call, the company told them that its liabilities stood at US$4.05 billion as of April 9, while its assets were only US$714 million. The massive US$3.34 billion difference suggests banks may recover only 18 cents on the dollar, a staggering loss in the business of financing commodity trade.

The accounts that Hin Leong has provided also contain clauses that suggest more nasty surprises could emerge. "Figures obtained from the company are subject to verification," it warned in a presentation to its creditors, according to a screenshot seen by Bloomberg News.

RISKY BUSINESS

The legal documents filed by O.K. Lim also shed light on how risky the business model was. Most physical oil traders hedge their positions using derivatives such as futures, options and swaps. But Hin Leong didn't. As a matter of policy, the company "did not hedge aggressively," Lim said in his affidavit.

It's a business model the company has employed with gusto over decades. Often making money when prices moved in the right direction; but often also getting hurt, as the founder's son Evan Lim put it in a rare interview more than 25 years ago. "On one occasion we agreed to buy 800,000 barrels for delivery with a five-day pricing window," the younger Lim told Bloomberg News in 1994. "We got burned badly because the seller was in the market pushing prices up."

Hin Leong trades a range of oil products, makes lubricants and operates loading terminals and storage facilities. Its affiliated company has a fleet of more than 100 ships that supply fuel to commercial vessels at anchor offshore.

The company doesn't have to file financial statements because of its classification as "an exempt private company" with fewer than 20 members and does not have any corporations holding beneficial interest in its shares. It declared revenue of more than US$20 billion in its 2019 financial year.

HUMBLE START

The company has humble beginnings. Mr Lim started off with little more than a fishing boat supplying diesel to other vessels. More comfortable speaking his native dialect of Hokkien than English or Mandarin, he was one of the first traders outside China to start doing business with the mainland, shipping fuel to southern Chinese provinces since the 1980s.

Hin Leong grew in parallel with Asia's recovery after the 1997-98 economic crisis. As Indonesia, Malaysia and others rebounded, so did demand for diesel and fuel oil, the staples in which Hin Leong traded. When China's growth accelerated over the following decades, more ships stopped in Singapore to take on fuel, and Hin Leong became a giant of the industry, an empire with stakes in an oil terminal and tanks capable of holding millions of barrels of oil.

Its domination of the market gave rise to the quip that anyone wanting to start a ship fuel business in Singapore had better get an "OK" from OK Lim's company. His trading plays, often bullish, and more often than not targeting either fuel oil or diesel became the stuff of legend in the city. While others stumbled, Mr Lim appeared to always persevere.

LOW-KEY

Associates who've known Mr Lim for more than three decades described him as a humble, low-key businessman, who remained true to his origins. In Singapore, he is said to like dining at Putien, a chain restaurant named after his hometown of Putian in China's Fujian province, that serves his favorite fish dish, "100-second" stewed yellow croaker, for $14.90.

"A man of his mindset and character, I doubt whether he would sit and bury his head in the sand," said Robson Lee, a Singapore-based partner at Gibson, Dunn & Crutcher LLP, who is acquainted with business of the Lim family. "He will try to navigate his way out."

And perhaps that's what Mr Lim is now trying to achieve, according to two people involved in the talks involving the banks, consultants and the company. By taking all the blame on himself, he could be attempting to distance the collapsing business he founded and other assets controlled by his family, notably the giant oil tanker business Ocean Tankers (Pte) Ltd.

The trading house has appointed accounting firm PricewaterhouseCoopers LLP and Singaporean law firm Rajah & Tann as advisers. Lim told creditors he's already in talks with a Chinese entity for a deal to rescue his company. He resigned on Friday, but said he hopes his children, committed to rescuing the family company, will remain involved.

In his own affidavit, O.K. Lim's son Evan claimed he was unaware of his father's actions or the reason for its losses. A spokeswoman for Rajah & Tann, which is advising Hin Leong, said it's unable to comment because the matter is before the court. PwC didn't immediately respond to a request for comment.

Like other governments around the world, Singapore is trying to help businesses struggling from the effects of the coronavirus. In the past, the country has used the financial muscle of its investment agencies to bail out home-grown traders like Olam International when they were in financial distress. Whether it can or wants to engineer a solution for Hin Leong remains to be seen. The losses appear larger than before, and the foreign banks are unlikely to turn a blind eye to a company whose founder has all but admitted to cooking the books for years.