The Hascol fiasco appears to be a hopeless case of malpractice. All actors must take responsibility for the collective failure. It is a combination of governance failure – from the banks to the board of directors of Hascol and fiduciary malfeasance on the part of management. Loans worth Rs 58 billion granted by 18 national banks have gone badly. Pakistan Stock Exchange (PSX) investors have reportedly lost tens of billions of rupees. Given the existing dynamics, there is no way for banks to even partially recover money without restructuring and strengthening the franchise value of the business. With the Federal Investigation Agency (FIA) and others probing the company, there is a slim chance that lenders will be able to collect their loans. It seems like a mega scam, and it is likely to be treated as such.
Hascol’s rise began with a “smart and opportunistic” management team that took over the reins of the company in 2009. Hascol received a Petroleum Marketing Company (OMC) license in 2005 and was a small operator. Its market share was then less than one percent in WTO activity. In 2013-14, aggressive expansion began and its market share peaked at 12% in 2017-18, overtaking Attock Petroleum and Shell Pakistan. It was second behind Pakistan State Oil (PSO) in the market.
The company is said to have carried out unusual transactions. The market share was growing too fast. It was reported to offer a substantial retail and sub-distribution discount in an industry that operates on very thin margins. The meteoric rise was too good to be true. Still, the board was happy because the company was making money. Banks were happy to lend because bank spreads were too lucrative. The company was listed on the PSX in 2014. Its share price has risen significantly over the course of a few years – investors were thrilled. In 2015, Vitol Dubai Limited (VTL) – a global energy trading giant – bought 15% of the company’s shares and then increased its stake to 25% in 2016.
The company’s finances flourished with Vitol on board. It integrated the main supply chain. Everyone was happy and making money. But overall, the business model was unsustainable, which was overlooked by investors and lenders. The business was growing too fast. He was acquiring new locations / sites by bidding higher. New storage depots have been created.
During its early years, Hascol made money importing and selling heating oil (FO). FO sales jumped again after Vitol’s investment. She bought FO on credit and was able to extend credit to her customers. This is how it increased its market share and used that money to expand its franchises and storage capacity. In 2018-19, FO sales fell at the industry level as new power plants based on RLNG and other fuels began to come online. The advantage of Hascol was to import FO with Vitol on board. The business found itself in a tough spot with other costs starting to hurt the business.
Vitol began to take more control of the company by acquiring shares in the then CEO and bringing in new management who revealed to banks that the company’s loans needed to be restructured to avoid failure to pay. However, the story is not that simple. Vitol could probably try to get their money back by charging a higher amount in commerce and other businesses. There are allegations of transfer pricing and abuse of power by the previous management team.
For example, Hascol Terminal Limited (HTL), a joint venture of Hascol and Vitol, was commissioned in 2019. A 24% stake in HTL is held by another company called Fossil Energy. According to a whistleblower (in April 2020), Hascol paid a debit fee to HTL at Rs 1.3 per liter on an annual volume of 1.2 million metric tonnes compared to the industry average of Re 0.3 per liter. liter. How can a business pay half of its total margins to its terminal handling company and survive?
Then there were other problems. The interest of Vitol is in the trade. The higher the volumes traded, the more it pays. Hascol is a marketing company, and it supposedly operates on low margins. The economic model was rigged. For example, Hascol granted unsecured credit to a Punjabi subcontractor to the tune of Rs 10-12 billion, including Rs 8-10 billion in default. Usually the industry will give a credit of 5-10 days for 1-2 loads of tankers. But Hascol decision-makers would be more interested in transaction volumes than anything else.
It is relevant to mention here that the allegations of financial irregularities predate Vitol’s investment. It is said that the alleged modus operandi was to make sales on credit to gain market share in gasoline and diesel sales. Insiders suggest that several methodologies were used. They insist that credit sales were partly funded by higher FO margins; by selling fuel near the port while reserving sales in remote areas to pocket the Inland Freight Equalization Margin (IFEM). Additionally, the company is said to have sold fuel to retail franchises of other companies. While there is no concrete evidence for these claims, however, it does not make sense for a company to sell fuel at Rs 3 per liter of discount when the gross margin on the products is regulated and is less than 3 Rs per liter.
The question is how these elements were not observed by the board of directors at the time, the banks and Vitol (which bought its stake in the company in early 2015). The company opened usance (deferred payment) LC (letter of credit). OMC activity needs higher working capital (WC) financing, which is extended to LCs. It is a high margin business and the banks were happy to lend and make money easily.
In usance LC, the company is exposed to currency risk. The price is blocked in dollars and payment is made later. The usual OMC cash cycle is 15-30 days (higher on FO and lower on gasoline / diesel). Hascol issued letters of credit for 90 days which excessively increased its currency exposure.
In 2018, when the PKR started to depreciate, the situation started to deteriorate. At the same time, FO sales also started to decline, exacerbating financial stress. In the quarter ending December 18, the company recorded a loss for the first time. And the loss started to increase in 2019 and 2020. The Covid pandemic hasn’t helped either. In June 2020, all MOCs were under pressure when international oil prices fell, and the government passed on the benefits to consumers while companies held inventory (as sales were low in April and May due to the foreclosure). ) and they suffered inventory losses.
The fall was too steep for Hascol. Their high overheads were becoming visible. The higher debit fees and the substantial unsecured credit made matters worse for them. There was no FO sales cushion. The time for reckoning had come, the company defaulted on its loans and has not published its latest accounts – and is therefore on the list of defaulters on PSX.
During this time, the company issued rights shares. Vitol increased its participation. At present, 40 percent of the shares are held by VTL, with the remainder in multiple hands. Control is with Vitol and the banks have formed a consortium to negotiate with the company. Now it is in the best interest of the banks to revive the business or else they will not be able to recover anything – especially as more losses will pile up as the company recently said that Rs7.5 billion of bogus purchases have been registered. against its fixed assets.
OMC’s business is based on the value of the franchise. It operates on high volumes and low margins. Fixed assets have a lower share. According to OCAC in 2020, there were 531 Hascol outlets in Pakistan out of 9,113 in total. The current number is 675. About 95 percent of these are franchise owners while the remainder are operated by a business. Some storage facilities are also rented. The company has a good retail network with pumps at key locations.
For the business to revive, these outlets must survive and thrive. However, with the arrival of investigative agencies, the value of the Hascol brand will decrease. Consumers can stop buying gasoline / diesel. Franchises can go to other WTOs because all they have to do is make a new deal and change the billboards and branding. But if that happens, the business will die. Banks will not even be able to recover Rs 10 billion of their Rs 58 billion in circulation.
The consortium of banks is negotiating with the new management. Banks need to understand that they need to have their hair cut. They will live in a fool’s paradise if they expect a full recovery. The other problem with banks is that each bank tries to undermine the other by insisting that they have a first charge. Each bank wants to get their full amount back, but in the process everyone would lose. It happened in the past, and it can happen now. In game theory, we talk about the prisoner’s dilemma.
The other problem for banks is to trust Vitol. The company must restructure. Banks will convert part of their debt into equity and part into long-term financing. The business would then need working capital to revive. For this to happen, banks would have to invest more money in the business. They are considering the option of putting money into evil in anticipation of turning evil into good.
The banks want Vitol to fully disclose long-term contracts. The banks expect Vitol to invest more capital in the company. In addition, Vitol, in principle, should not be the company’s sole fuel supplier. There are too many ifs and buts. Considering the past, it is in the best interests of the financial system to find a new buyer for Hascol and to let Vitol opt out.
If Pakistan had strict bankruptcy laws, this change of direction might be easier. Yet it can happen. But with the FIA (and possibly the NAB) in the picture, no new player would want to burn their hands. That is why it is important to treat the matter as a corporate default and fraud. Here, the role of SBP-SECP is essential. But SECP is toothless and has no track record or ability to spot and deal with corporate fraud. It is high time SECP got its act together and did its job.
Copyright Business Recorder, 2021