By Juliet Samuel And Max Colchester
LONDON--A remote iron-ore mine in Sierra Leone helps explain
Standard Chartered PLC's recent struggles.
Four years ago, the British bank agreed to lend $60 million to
London Mining PLC, whose mine in central Sierra Leone is one of the
company's main assets. The loan was part of Standard Chartered's
efforts to increase its exposure to fast-growing, but risky,
markets in Africa and Asia.
Last month, London Mining filed for bankruptcy, hit by tumbling
prices for iron ore and the spread of Ebola, which inflated the
company's costs and hurt production. The company's debt, which had
ballooned to $225 million, had to be restructured, according to a
person familiar with the matter, likely meaning that, at best, the
loan won't be as profitable for Standard Chartered as the bank
originally hoped.
The fate of the London Mining loan is emblematic of the problems
recently afflicting Standard Chartered. After a decade of rapid
expansion in risky markets, the bank's pile of troubled loans has
grown quickly. Impaired loans in the third quarter nearly doubled
from a year earlier. Standard Chartered's shares are down 38% over
the past year and some investors are pushing to replace the bank's
management, led by Chairman John Peace and Chief Executive Peter
Sands.
A Standard Chartered spokesman declined to comment on specific
customer loans but said the bank hadn't lowered standards or taken
on riskier loans. In a recent presentation to investors, the bank
said it had been "active and early in managing the risks in the
hotspots of India, China and commodities" and that internal "stress
tests" on its commodities loans have revealed "no additional
vulnerabilities."
With roots tracing back to 1853, Standard Chartered has long
touted its emerging-markets presence. It was this focus that helped
the bank weather the financial crisis in far better shape than
competitors. And while other Western banks cut their exposure to
far-flung countries during the financial crisis, Standard Chartered
grew. Since 2007, its total loans to customers have nearly doubled
to $306 billion. Of that, 82% is in Africa or Asia. The bank has
$61 billion of credit exposure to commodities.
The expansion fueled a decade of earnings growth until 2012,
making Standard Chartered a darling of investors.
But a combination of increased competition from local banks and
slowing growth in its core markets forced Standard Chartered to
make riskier loans to sustain its fast expansion, said Chirantan
Barua, an analyst at Sanford C. Bernstein. Its push into mining
loans was especially aggressive, even as China's economy slowed,
the commodity cycle turned and many of the world's top mining
companies suffered multibillion-dollar losses.
Now Standard Chartered is paying the price. The bank said the
86% jump from a year earlier in third-quarter impairments to $539
million, which was larger than analysts expected, is partly due to
"weak commodities markets." Over the same period, impairments at
the Asian business of HSBC Holdings PLC, a competitor, increased
20%.
In addition to writing off more loans, Standard Chartered has
revised the terms of other loans to help borrowers avoid
defaulting. In 2012, the bank reported $2.5 billion of
"renegotiated and forborne loans" to financially stressed
customers, representing 0.9% of its total customer loans. In 2014,
that category of renegotiated loans had risen to $7.1 billion, or
2.3% of its total.
After analyzing the accounts of 10,700 companies that operate in
the same markets as Standard Chartered, analysts at Jefferies LLC
concluded that about half of the companies are struggling to pay
the interest on their loans and that rising interest rates could
lead to "significant further deterioration."
The deterioration is already evident among Standard Chartered's
commodities-industry borrowers, ranging from small outfits to giant
multinationals.
Classic Diamonds India, a small Mumbai diamond trader, defaulted
on a 120 million rupee ($1.9 million) loan from Standard Chartered,
according to its auditor, Nikesh Jain, a partner at JMR Associates.
Classic Diamonds couldn't be reached for comment.
The Singaporean unit of Varun Shipping Co., an Indian
gas-transport company, missed $2.25 million in loan payments to
Standard Chartered this year "due to liquidity constraints,"
according to Varun Chairman Yudhishthir Khatau, who says he plans
to repay the debt by year-end. Standard Chartered sued the Varun
unit in August.
PT Borneo Lumbung, a coal company controlled by Indonesian
tycoon Samin Tan, borrowed $1 billion from Standard Chartered in
2012. This spring, Standard Chartered agreed to suspend cash
interest and principal repayments and to extend the loan to 2019,
according to Borneo Lumbung CEO Alex Ramlie. In lieu of a
restructuring fee, the company offered to give Standard Chartered a
4% equity stake. (It isn't clear if the bank accepted that
offer.)
Straits Resources Ltd., an Australian-listed mining company
whose largest shareholder is Standard Chartered's private-equity
arm, had borrowed money from Standard Chartered and agreed to repay
the bank with copper, not cash. The $39 million loan had to be
restructured last year to reduce the burden on Straits
Resources.
In the case of the Sierra Leone iron-ore mine, Standard
Chartered in 2010 lent $60 million to London Mining, which had just
acquired a 25-year license to operate the huge mine, filings
show.
The following year, the bank enlarged the loan to $90 million,
with an interest rate of 5.5 percentage points above a benchmark
rate. That loan was restructured twice in 2013, ultimately replaced
by $200 million of new loans from Standard Chartered and other
banks with interest rates at 8.5 percentage points above the
benchmark.
In August, Standard Chartered and another bank lent London
Mining an additional $25 million.
Two months later, London Mining filed for bankruptcy protection,
citing "a lack of liquidity." Standard Chartered was the biggest
creditor, according to a person familiar with London Mining. The
Sierra Leone mine was sold, and the debt was transferred to the new
owner.
During the third quarter, Standard Chartered shrank its loan
book from the previous three months. The bank has had consistent
annual loan growth dating back to at least 2000. Its chief
financial officer, Andrew Halford, recently told analysts that
Standard Chartered is now focusing on less-risky clients.
"Yes, it will take some money out for the moment," he said. "But
hopefully we'll find opportunities to redeploy into better areas or
more productive accounts."
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