Chief aims to create simpler, safer bank

BILL WINTERS is questioning whether a private equity arm fits his vision for a simpler and safer Standard Chartered. An investment at a Nigerian energy firm shows why.

The chief executive and his board last month discussed the potential sale of Standard Chartered Private Equity (SCPE) to its managers, according to people familiar with the matter who requested anonymity as the talks were not public. The bank was leaning toward spinning off the unit, said one of the people, while the other said a range of options to scale back were being considered.

SCPE, run by Joseph Stevens, manages $5 billion (R70bn) and has about 80 investments across Africa and Asia.

Seven Energy International, a Lagos-based oil and gas producer that missed bond payments last week, is a small fraction of SCPE’s fund. Yet it illustrates the types of risks that Winters is seeking to avoid as part of a broader push to rein in losses at the bank. Those included financial, regulatory and reputational risks, people familiar with the unit said.

The Seven Energy wager “illustrates that private equity investing, certainly in emerging markets, is rather risky and entire investments can prospectively be lost”, said Joseph Dickerson, an analyst in London with Jefferies with an underperform rating on the shares. “Winters will seek to de-risk Standard Chartered, making it a simpler bank focused on core activities in commercial banking.”

The company’s financial performance has suffered as commodity prices slumped, militant attacks closed a key pipeline and Nigeria’s currency collapsed. The company has denied allegations by a former central bank governor of ties to state corruption, an area of concern for a bank that is still operating under a deferred prosecution agreement from a 2012 settlement for violating US sanctions on trading with Iran.

Seven Energy has also used Standard Chartered as a lender. This type of arrangement concerned bank executives, because it opened the potential for conflicts of interest, the people said. On top of that, new capital rules have made private equity investments less profitable for all banks.

SCPE makes up the bulk of the bank’s principal investing unit, which posted losses of $272 million in the 12 months ended in June after producing more than $600m of revenue for 2013 and 2014 combined. The unit managed about $5bn, including $2bn of the bank’s cash and another $3bn for external investors, including Goldman

The company has denied allegations by a former central bank governor of ties to state corruption.

Sachs Group and Coller Capital, the people said.

Shaun Gamble, a spokesman for London-based Standard Chartered, declined to comment or make Winters available for comment. Bloomberg reported on September 16 that Winters was considering selling SCPE to its managers. The bank said at the time it was “looking at noncore businesses, or those that do not sit within our tightened risk tolerance”.

SCPE bought a minority stake in Seven Energy for $48m in early 2010, when oil was trading around $80 a barrel and Nigeria’s economy was booming. It invested more funds earlier this year as part of a $100m fundraising. The oil and gas producer this month missed payments on $300m of bonds, which had already slumped to 28 cents on the dollar, as a two-year slump in commodities prices was compounded by unique obstacles.

Attacks from militants have closed the Forcados oil pipeline, leading to a 54 percent drop in revenue for the first half of 2016, according to company reports. Amid currency controls imposed by the government, Seven Energy was struggling to convert sales made in naira into US dollars it needed to service much of its debts, and it faced “intense pressure” on its liquidity, the company said on August 26.

The company had approval from creditors to restructure some of its debts, and “remains confident of its ability to weather the storm”, Patrick Handley, a spokesman for Seven Energy, said.

The company is a viable business, but is experiencing liquidity issues, documents show.

“Seven Energy continues to adhere to the highest corporate governance and ethical standards, and regrets that the actions of former employees, taken since they left Seven Energy, have brought so much controversy to legitimate contractual arrangements,” Handley said.

Standard Chartered, which frequently lends money to SCPE’s investments, was a key lender to Seven Energy until at least 2014 as its debts ballooned to more than $800m, company documents show. While the bank was not a current creditor, the two parties had an “ongoing relationship”, spokesman Handley said.

Deals where Standard Chartered is an investor and a lender introduce potential conflicts of interest, especially since SCPE doesn’t manage just the bank’s money, as equity and debt holders can have different priorities in times of financial stress.

“If Standard Chartered were to hive off or sell its private equity division, that would be a very good indicator that it is addressing these potential conflicts of interest,” said Sandy Chen, an analyst with Cenkos Securities. – Bloomberg