Trafigura below scrutiny after scandals hit earnings

Commodities dealer Trafigura is dealing with elevated scrutiny from a few of its lenders after a collection of scandals hit earnings and dented the corporate’s worth.

The non-public group this yr found a “large downside” in its Mongolian oil division, which value it $1.1 billion and contributed to a pointy decline in earnings and dividend funds. That is the second such downside to hit Trafigura in two years after it reported in 2023 that it was the sufferer of a $600 million nickel fraud.

Bankers say the unrest in Mongolia was important sufficient to immediate questions from the chance committees of some Trafigura lenders, though it didn’t result in a suspension of credit score strains.

In an indication of the industrial impression, banks have requested Trafigura to incorporate a proof of the occasions in Mongolia and its remediation plan within the presentation of its upcoming European revolving credit score facility which might be launched subsequent month.

“We don’t anticipate Trafigura to expertise any type of liquidity difficulties, however this shouldn’t be used as an excuse for complacency,” one banker mentioned.

As Trafigura prepares to reshuffle its high administration, its annual outcomes printed on Friday underline the financial toll repeated failures of controls. The Mongolian scandal in addition to heavy fines imposed by regulatory authorities value the group greater than $500 million this yr, bringing internet revenue to $2.8 billion over the interval.

New managing director Richard Holtum, who presently heads the gasoline and electrical energy division, will take up his new position on January 1, whereas managing director Jeremy Weir will grow to be chairman.

Weir’s time period involves an finish on the finish of a troublesome yr, dealing not solely with the Mongolia scandal, but in addition with a high-profile corruption trial which has lasted for 2 weeks in Switzerland and a collection of settlements with American regulators.

An individual near Trafigura mentioned the corporate had addressed points “hanging on” the enterprise so as to give Holtum a clearer enjoying subject when he takes over.

Trafigura reached a $127 million settlement with the U.S. Division of Justice in March, pleading responsible to a bribery scheme in Brazil between 2003 and 2014. Two months later, it reached a settlement of $55 million with US regulators over fees of fraud and market manipulation. Trafigura neither admits nor denies these accusations.

The corporate, the most important impartial metals dealer alongside rivals comparable to Vitol and Mercuria, has additionally launched into a recruitment drive to strengthen its danger division below Ignacio Moyano, who has been named chief danger officer. final yr.

Trafigura blamed the issues in Mongolia on “gross misconduct,” saying its staff colluded with its enterprise companion to hold out the deception for 5 years. She mentioned she noticed the issue because of tighter danger controls following the nickel fraud.

The incident compelled Trafigura to submit a lack of $358 million this yr, restate earnings from the earlier two years and restate its fairness worth on the finish of 2023 to $15.8 billion, down from 16 .5 billion {dollars} initially.

The repeated scandals have raised questions amongst bankers about why danger controls failed.

“From a financial institution’s perspective, the important thing query is: ‘Is it punctual or not?’ mentioned Jean-François Lambert, a former banker who specialised in financing commodity commerce and who now runs a consulting agency.

“The banks didn’t prefer it, nobody likes it. However what issues is that this can be a one-off phenomenon and that it doesn’t undermine the monetary energy of the corporate.”

Bankers are sometimes the hardest masters of impartial commodity buying and selling corporations, as they depend on strains of credit score to finance the trades that transfer commodities world wide.

Trafigura has credit score strains value $77 billion with round 150 completely different banks. That is a slight enhance from final yr’s $75 billion.

Financial institution danger committees are sometimes extra conservative than the buying and selling homes themselves. Because the nickel scandal started to realize momentum, Citi was among the many first to identify the disaster, reducing off the credit score facility that Trafigura was utilizing for the trades.

Trafigura claims it was duped into buying greater than 1,000 containers of purported nickel, which didn’t truly include the fabric, and is suing counterparty Prateek Gupta and his associates within the London courts. Gupta’s attorneys accuse Trafigura of being complicit on this fraudulent scheme.

The corporate says the compliance overview it undertook following the nickel fraud led to the invention of the issues in its Mongolia oil division.

The $1.1 billion writedown recorded by Trafigura is appreciable relative to the scale of the Mongolian oil market, which is likely one of the smallest on this planet, with round $1 billion value of oil and merchandise traded. tankers per yr.

“We’re assured that these points are restricted to a standalone operation in Mongolia,” Weir, the outgoing chief govt, mentioned within the firm’s annual report.

He added that Trafigura was responding to the challenges by urgently increasing its work “to overview, check and enhance our end-to-end management framework, programs, danger and governance constructions”. An exterior audit of the incident in Mongolia is underway.

As new leaders take the reins, Trafigura will search to make sure that the compliance measures put in place might be ample to keep away from comparable losses sooner or later.

“They [Trafigura] appear to have taken the best steps,” Lambert mentioned. “The one downside for them, after all, is their fame.”

Extra reporting by Malcolm Moore in London