Hong Kong oil and gas trader NewOcean Energy is fighting a new petition to wind up the company as it negotiates with creditors over hundreds of millions of dollars in overdue debt.
The company, which is focused on the Chinese market, said in a stock exchange filing earlier this month that it has hired lawyers to thwart a winding-up petition filed by Kuwait’s state petroleum company because of overdue payments for the supply of liquefied petroleum gas (LPG).
NewOcean, which is listed on the Hong Kong Stock Exchange and specialises in LPG, has been in financial strife since mid-2020, when it says the collapse of oil trader Hin Leong and a slew of fraud scandals involving other Asian energy traders prompted banks to severely restrict lending to the commodities trading sector.
The retreat of commodity and trade finance banks has particularly battered small and medium traders, industry sources say, in a phenomenon referred to by larger traders as a flight to quality.
NewOcean’s disclosures to the market are a rare insight into the difficulties faced by some traders since the flight to quality accelerated during the pandemic, with most privately-held traders staying tight-lipped about their dealing with lenders.
The business, which has just over US$1bn in total assets and is domiciled in Bermuda, recorded a net loss of HK$170mn (US$21.6mn) in the first half of 2021, a significant improvement on the HK$1.35bn loss in the same period in 2020.
The company remained solvent as of the end of last year, with assets exceeding liabilities by about US$124mn, but “is experiencing a severe maturity mismatch – or liquidity crunch – with respect to certain of its debt facilities”, according to a written judgement handed down by a Bermuda court earlier this year.
At the end of June 2021, HK$4.7bn of the company’s HK$6bn in bank borrowings were overdue, according to the company’s interim report.
In the same period the company also broke a number of debt covenants, causing HK$1.2bn in bank loans to become immediately repayable. The company interim report disclosed that “the existence of material uncertainties… may cast significant doubt on the Group’s ability to continue as a going concern”.
Shares in the company were suspended from trading on April 1 due to the late publication of its 2021 annual results. The company blamed “the departure of a considerable number of Hong Kong management and account staff”, the relocation of its office in China, and China’s strict Covid-19 lockdowns for the overdue accounts.
Calls by GTR to NewOcean’s head office were not answered and the email address provided on its website does not work. A lawyer representing the company in Bermuda was unavailable when contacted.
Credit lines revoked
The Kuwait Petroleum Corporation (KPC) filed the wind-up petition in Hong Kong on April 12, according to a NewOcean stock exchange filing published on May 13.
Under sale and purchase contracts signed in 2019 and 2020, NewOcean was to pay KPC for LPG supplies through a letter of credit. According to the filing, however, “the company’s bankers abruptly terminated credit lines to the company and its various subsidiaries, causing the company to default in paying KPC the penalties for breach of contracts as it was unable to issue letters of credit”.
NewOcean says it will challenge the petition at a Hong Kong High Court hearing on June 15.
“The company would like to reiterate that winding up is not the best option for the Group, shareholders and creditors as a whole and the company will vigorously oppose the petition and take all other appropriate actions as deemed necessary to protect the interests of all parties in concern,” it says in the filing.
The trader is also battling a separate winding-up petition filed in Bermuda by HSBC.
The bank, which had extended credit to NewOcean and its subsidiaries through multiple facilities, argued in the petition that the company was unable to pay its debts and should be put in the hands of liquidators from FTI Consulting.
According to a judgement following the winding-up hearing, the bank said it is owed some US$71.3mn and that the petition has the support of multiple other creditors, which are unnamed in the document. HSBC submitted that the creditors backing the petition are owed almost two thirds of the company’s debt.
But Judge Larry Mussenden declined to wind up NewOcean and instead appointed the liquidators on a “soft touch” basis to attempt to restructure, rather than liquidate, the company.
The decision will also allow time for the company to gather support of creditors for a scheme which will involve NewOcean paying down its debt to HSBC by September this year or March 2023.
Justice Mussenden adjourned the wind-up petition until April 8, which has since been extended to July 8, according to the company. A spokesperson for HSBC declined to comment.
In the 2021 interim report the company said it was in negotiations for a new debt scheme for approval by a court, and that its assets exceeded the debt that would be repayable under the scheme.
Since mid-2020 the company “has been financing its ongoing operations by solely relying on the use of its own capital”, according to the interim report.
The company’s executive director, Shum Chun, and the company secretary, Cheung Man Kin, both resigned in late 2021 because the company relocated its office to mainland China, the trader said in regulatory filings.