Temasek subsidiary's loan to shipping company PIL

Recently The Online Citizen carried a short article that "Singapore-based maritime container line Pacific International Lines (PIL) received “previously unreported loans” from the Republic’s sovereign wealth fund Temasek Holdings in the form of hedge funds last year." TOC was rehashing from a report by shipping news platform Splash 24/7 which in turn cited from world maritime news platform Alphaliner.

"Unreported loans" and "hedge funds" are technically incorrect as were a few other inaccuracies, TOC should do well to beef up the quality of the post as an online media. Nevertheless, credit to them for raising public awareness. 

Not much information is out in the public sphere. From TOC-Splash 24/7-Alphaliner we know the following:

- Temasek made a loan to PIL which was having financial difficulties in the past 2 years.
- Loan was collateralised by 20.56% of shares in Singamas
- Singamas offloaded 5 box manufacturing facilities to Cosco for US$565mm.
- PIL owner is SS Teo, ex nominated MP in Singapore.
- PIL financials -- as at 30 Jun 2018 -- net loss US$141mm (6 months), US$3.46b debt, of which US$1.08b due within 12 months.

As regards TOC's 'unreported loans'. This serves to feed the paranoid of the public in light of the many investment losses by Temasek in the recent past. In the ordinary course of their business, is there a need for Temasek to report on loans extended, and if so, to report to who? It's a ridiculous supposition by TOC, Unless TOC meant that this loan has never been reported by the state media Straits Times.

The loan was actually extended by Seatown International Pte Ltd which is fully owned by Seatown Holdings Pte Ltd which itself is wholly owned by Temasek. Seatown International (SI) is a fund mangement company managing a US$4b fund seeded by Temasek in 2013. It is not known whether SI has managed to raise additional funds from other investors or are they simply managing Temasek's funds. TOC's is wrong here as the loan is not extended by Temasek directly, and SI is not a hedge fund operation.

This Temasek indirect 'investment' however, deserves, some scrutiny.

Singamas Holdings is listed in the HK stock exchange. It has businesses in container manufacturing and others . The company has been in financial difficulties. This month Singamas sold off 5 China-based subsidairies that manufacture standard containers to Cosco for US$565mm, of which US$300mm was used to pay off debts. A reason provided for the asset sale was to exit the standard box business and focus on customised container sector which has higher margins. PIL has controlling interest in Singamas.

PIL is Singapore-based, a private company owned by Singaporean businessman Teo Siong Seng. It is under financial difficulties due to the global challenges in the shipping industry. It's core shipping business is'nt pulling in the cashflows to service a huge debt of US$3.46b, of which US$1.08b is  due within 12 months. Recently, PIL took delivery of 28 new vessels with new technologies that the company says will improve cost competitiveness.

What is the quantum of the loan - we can only speculate. The collateral for the loan is 20.56% Singamas' shares.  In 2018 the total numer of shares issued by Singamas was 2,417,000,000. Based on market price @ HKD1.20 and US$/HKD rate of 7.69, the loan could be in the region of US$75m. 

The question arises as to whether the loan is a purely business transaction or is Teo (an ex-nominated member of parliament) a PAP insider that needs to be accommodated. The public, with a trust deficit to the non-transparent dealings of Temasek, may be inclined to believe in the latter. Let's take it that it's purely a business loan. There are questions of legality and whether the business part of it makes sense.

As a fund management company, SI is not in the business of lending. The loan is thus ultra vires both the company and directors under its Memorandum and Articles of Association. This is a breach of directors' duty chargeable under the Companies Act. SI is a capital market services licencee under the Monetary Authority of Singapore and commercial lending is in breach of this licence.

It is indefensible for SI, should they resort to, to claim that it is not a commercial but a friendly loan. A friendly loan is acceptable provided a relationship exists between the borrower and lender, such as subsidiaries or related companies, or where certain benefits accrue to the lender. No such relationship exists between SI or Temasek with PIL.

From the business point of view, US$75m is a drip in the ocean for the requirements of PIL. It points to a hurried injection of cashflow to assist the debt servicing of PIL. Why take a collateral whose valuation is going to be significantly depreciated with the sale of 5 subsidiaries by Singamas? Why give band-aid to a financially strapped company, good money after bad money. A good guess is there is a bigger game in play. PIL is the 10th largest shipping company in the world and there has been market talk of it being a takeover target although Teo has said the company is not for sale.

If and when the bigger play emerges, the same question arises as to the business decision. Is it a rescue mission, and if so, why play the white knight with PIL and not Hyflux? If it is an investment decision, why enter the shipping sector again after disposing of Neptune Orient Lines with huge humbling losses? 

TOC article