China Aviation Oil (Singapore) Corp’s losses, announced by the company late on Tuesday, equal its market capitalisation of $549 million and raise serious questions about its future.
It is the largest amount a company in Singapore has lost by betting on derivatives, since rogue British trader Nick Leeson bankrupted Barings Investment Bank when he blew more than $1 billion in the 1990s after getting the bond market wrong.
In a statement, China Aviation Oil (CAO) said its high-flying chief executive officer, Chen Jiulin, had been suspended from duty pending an independent audit of the firm’s losses by PriceWaterhouseCoopers.
It said it had also sought help from Singapore’s High Court to work out a repayment scheme with its creditors while its Chinese government-owned parent, China Aviation Oil Holding Co (CAOHC), had established a task force to oversee its daily operations.
The Singapore government’s investment vehicle, Temasek Holdings, which has a 2% stake in the company, said on Wednesday it too would play a role in helping the company recover, and indicated it may increase its holding.
“At the invitation of CAOHC, we are prepared to evaluate CAO’s business from an external perspective and explore the possibility of participating as an investor in CAO’s proposed restructuring efforts,” Temasek said.
The first signs of trouble at China Aviation Oil surfaced last month when its parent company scuttled its bid to take a stake in Singapore Petroleum Company, sparking speculation about the company’s true financial condition.
China Aviation Oil admitted the huge losses came through “speculative oil derivative trading”, blaming the situation on record high oil prices in October, which it called wrong, expecting them to fall instead of rise.
“As the prices of crude oil were at an all time high at above $55 per barrel, the company faced significant margin calls on its open positions and did not have the resources to satisfy the margin calls,” it said.
To help cope with the situation, it turned to its parent firm, which provided an emergency loan of $100 million.
“As the prices of crude oil were at an all time high at above $55 per barrel, the company faced significant margin calls on its open positions and did not have the resources to satisfy the margin calls“
“This loan quickly proved to be insufficient to satisfy the company’s requirements … a more complete rescue proposal would be required,” the statement added.
Derivatives allow an investor to take what can be a highly leveraged position in an underlying security or asset, based on its likely price in the future. If the market behaves as expected, the returns can be spectacular, as can be the losses if it does not.
Analysts said the losses racked up by the company reflected its poor level of corporate governance.
“They gambled on the wrong side, so they lost,” said Eswaran Ramasamy, director for Asian oil markets at energy information provider Platts.
“What I am very concerned about is the lack of transparency in the company.”
Ong Eng Tong, an independent oil consultant with almost 40 years of industry experience, said the sorry state of the company exposed its lack of management control.
“Their business is the jet fuel business … they should have concentrated on that,” Ong said.
China Aviation Oil supplies one third of China’s total jet fuel needs and has a monopoly on such imports into the mainland.
The fallout from the disaster at China Aviation Oil, formerly regarded as one of the leading Chinese firms to list in Singapore, was being felt on Wednesday by other mainland firms that are publicly traded there.
Most Chinese-listed stocks were taking a beating as investors bailed out on worries about their corporate governance, dealers said.
“It’s really shocking… It reflects weak corporate governance and will hit sentiment in other Chinese stocks,” a local research analyst said.
Several Chinese stocks were among the top 40 losers on the local exchange.
Among them were China Petrotech, which fell three Singapore cents or 6.2% to 45.5 Singapore cents, and Hongguo International, which lost one Singapore cent or 4.5% to 21 Singapore cents.
Trading of China Aviation Oil (Singapore) shares have been suspended since Monday.