Poor oil states struggle to repay loans to commodity traders
KINSHASA: Some of the world’s poorest oil-producing countries are slipping behind on payments for billions of dollars in oil-forcash loans from commodity trading houses, putting them at risk of default.
The so-called prepayment deals, in which a trading house advances a nation money to be repaid with future oil shipments, have been popular among some African and Middle East oil nations as the only way to raise funds. But they have also proved controversial: in some cases they create an opaque source of debt that governments find hard to pay back when oil prices plunge.
The Kurdistan region of northern Iraq is now struggling to repay a Us$500mil loan from commodity giant Glencore Plc, according to documents reviewed by Bloomberg News.
Glencore and rival trader Trafigura Group Ltd are also in talks to restructure oil-for-cash loans of about Us$1.5bil with the Republic of Congo, according to people familiar with the matter. And Chad, one of the poorest countries in the world, is using a clause in its oilfor-cash contract worth more than Us$1bil to reduce payments.
Global Witness, a non-governmental organisation, has called the loans a “gamble on the future oil price”, warning countries that they can become an “open-ended liability for future governments and generations.”
As the loans are repaid with cargoes of oil, when the market price plunges, countries need to divert more barrels to keep up with the payments. In a worst-case situation, like in 2016 for Chad, it could mean devoting a country’s entire petroleum output to repaying the loans.
While commodity traders thrive on price volatility, rather than on whether prices are high or low, they are also exposed to declines in commodity prices through these loans.
In most cases, they offload the risk by syndicating the loans to banks, buying credit insurance, and -- in at least one case -- selling notes to institutional investors like pension funds. That would mean losses elsewhere in the financial system if the deals are restructured.
Oil prices have collapsed this year after dozens of countries closed their economies in an effort to stop the spread of coronavirus, sharply reducing energy demand. .
In the case of Kurdistan, global investors including US pension funds are on the hook for potential losses as they bought $500 million worth of five-year notes known as Oilflow SPV 1 DAC linked to the loans. Glencore has told noteholders that it would soon present “a formal proposal” to restructure the deal, according to a notice posted on the Cayman Islands Stock Exchange.