Failed Hedging Positions by Bunker Provoke Investor Rebuke

PFA Pension, Denmark’s biggest commercial pension fund and an investor in OW Bunker A/S (OW), says the ship fuel provider’s risk management failure may be a bigger concern than the fraud allegedly committed by senior employees.

After being valued at almost $1 billion in an IPO just eight months ago, OW Bunker on Friday declared bankruptcy and reported two Singapore employees to police amid allegations of fraud it says cost it $125 million. Separately, OW Bunker says it lost a further $150 million on bad risk management.

Jesper Langmack, chief investment officer at PFA in Copenhagen, says he spent a lot of time trying to understand OW Bunker’s risk policies before its initial public offering in March. PFA, which invested 100 million kroner ($17 million), wanted assurances the company was hedging to guard against losses and not to chase profits, he said.

“The risk management and hedging policy was a very important topic during the IPO process, so a loss of this size is a catastrophe,” Langmack, who oversees about $60 billion in assets, said in a Nov. 7 phone interview. “If there’s been a case of fraud it’s extremely regrettable, but the matter of risk management is very worrying as it’s something we kept asking questions about during the entire IPO.”
Allegations Denied

Arvid Andersen, defense lawyer for the two employees who were reported to the police by OW Bunker, declined to identify his clients. The two reject the allegations, he said by phone on Nov. 8. He said the company had been familiar with the hedging practices of its Singapore unit, which he described as legal, since before the March IPO.

“It was part of the business model,” Andersen said by phone on Nov. 8.

The head of listings at Nasdaq OMX in Copenhagen has referred to the case as “poison” for the stock market. The banks that helped bring OW Bunker to market all say they’re shocked by the company’s revelations. For Langmack at PFA, the case hinges on how the company used its hedges.

“We kept asking them if the hedging was a profit center or just clean hedging, and then it turns out they’ve been taking up massive market positions,” he said. “When we asked before the IPO, we were left with the impression all they did was more or less clean hedging and now it turns out they were gambling.”
Risk Officer

The company said it fired Jane Dahl Christensen, its chief risk officer, as a result of the risk management losses. Per Bech Thomsen, a spokesman and investor relations contact for OW Bunker until quitting the company last week, declined to provide her phone number and said he wasn’t able to pass on any comment from her. He also declined to comment on the company’s hedging practices.

Niels Henrik Jensen, chairman of OW Bunker, said in a Nov. 6 interview that a Singapore employee behind the alleged fraud, which the company says is separate from the risk management loss, “turned up at the company’s office and told his manager” what he’d done. Jensen declined to provide more details and the company hasn’t made its chief executive officer in Singapore, Lars Moeller, available for comment.

“I can’t speculate on how long this has been going on,” Jensen said Nov. 6. “We’re still not sure whether this was actually illegal — that’s being investigated.” Calls and e-mails to Jensen’s phone number since Nov. 7 have gone unanswered.
Dynamic Trading

Soeren Johansen, deputy chairman at OW Bunker and partner at Altor Equity Partners — the private equity fund that brought OW Bunker to market in March — said he didn’t learn of any of the breaches that were revealed last week until Wednesday.

For the banks, the decision to stop providing credit followed OW Bunker’s announcement of alleged fraud, Johansen said today by phone.

“No deal was struck, and by Friday afternoon it had become clear to management that restructuring proceedings in combination with banks closing credit lines on Wednesday made it very difficult to identify a going concern,” Johansen said. “Things move very fast for this type of entity when it’s no longer able to order oil and can’t deliver to clients.”

Dynamic Oil Trading, the Singapore unit at which the alleged fraud took place, wasn’t specifically mentioned in OW Bunker’s IPO prospectus. Sales from the company’s Singapore operations accounted for $4.8 billion of its revenue last year, up from $2.5 billion a year earlier, according to the sale document.
Police Work

Dynamic Oil’s listed directors are its CEO Moeller, OW Bunker Chief Executive Officer Jim Pedersen, Executive Vice President Gotz Lehsten, and Head of Strategic Development Morten Skou. Nobody answered calls to Dynamic Oil and Moeller’s office and mobile phone.

Police in Denmark are trying to establish the jurisdiction of the case and whether fraud was actually committed, Inspector Michael Kjeldgaard said by phone on Nov. 7. His office isn’t aware of any case having been filed with police in Singapore, he said. OW Bunker said in its Friday statement that it filed charges under the Danish penal code.

“We’re collecting information about what happened now before deciding whether to take further steps,” Langmack said. “For now, it’s just information gathering.”

OW Bunker’s March IPO gave the company a value of 5.33 billion kroner ($900 million), making it Denmark’s largest initial public offering after cleaning services provider ISS A/S (ISS), which went public in February in a 21.9 billion-krone listing.
Source: Bloomberg