The legal battle over metal financing deals between Citigroup Inc. (C) and Mercuria Energy Group Ltd still continues. On Wednesday in the London High Court, Cyprus-based commodities trader Mercuria Energy alleged that the New York-based bank tried to force Mercuria to make an early repayment of $270 million for the metals held at two scam-tainted Chinese ports.
In Brief
The case revolves around repurchase deals, or "repo" agreements, between the two parties. According to such deals, traders sell commodities to bank and purchase them back from the bank on a later date at a higher price. Citigroup entered in such contracts wherein it agreed to purchase metals from Mercuria Energy.
As a part of the deal inked in May 2013, stocks of copper and aluminum were stored at two Chinese ports – Qingdao and Penglai. After a year, potential frauds at these two ports were unearthed and investigations are underway by Chinese authorities. The authorities are examining whether Decheng Mining, a private metals trading firm, pledged the same stocks of metals held at these ports multiple times as collateral for loans.
The imposition of lockdown of these ports by the Chinese authorities, have restricted banks and traders including Citigroup, Mercuria from accessing the materials stored in the ports.
As Citigroup demanded early repayment of $270 million for the repurchase deals, Mercuria Energy initiated legal proceedings in Jun 2014. The bank claims that it had right to demand early repayment following the closure of the ports. Also, the bank claims handing over the warehouse receipts to Mercuria Energy in late July, confirming delivery of metals held in the Qingdao and Penglai ports.
Contesting such claims, Mercuria Energy argues that handing over of the warehouse receipts does not amount to delivery of the metal, particularly given the fact that there is ambiguity over the existence of the concerned metals. The commodity trader also mentioned in court that Citigroup was in a “state of panic” following the unearthing of the alleged fraud at the two ports.
Mercuria Energy, in the court document claimed that Citigroup contemplated to forward a default notice in the event Mercuria Energy fails to repurchase the metals in the concerned ports. Per the court documents “Essentially it seems from the disclosed documents that Citi hoped that it could use its commercial muscle to bring things to a head at the very early stage and coerce Mercuria into absorbing the loss.”
Citigroup denies such claims. In its court submission, the bank said “Mercuria’s strategy is, put bluntly, to refuse to honor its contractual obligation to repay Citi.” The bank further mentioned “Mercuria’s apparent goal is for it to be Citi, not Mercuria, which is left out of pocket pending clarification of the uncertainty in China.”
Bottom-Line
In recent years, many companies and investors in China have resorted to several alternative sources of securing loans including commodities financing deals, instead of traditional bank lending transactions. These have led to infusion of huge amount of capital in China.
Many Western banks provided huge amount of financing to commodity traders operating in China though repo deals. These deals are considered to be low risk as they are backed by physical stocks of metals. However, the discovery of the alleged fraud in the two ports has compelled banks to pull back their commodities-related lending activities in China.
The ongoing case between Citigroup and Mercuria Energy is expected to reach a conclusion early in the forthcoming week. It is still unclear when the Chinese authorities’ will remove lockdown imposition on the ports.
Litigation hassles seem to be never ending for Citigroup. However, we remain encouraged as the company is making gradual efforts in resolving issues including settlements with regulators and offloading questionable trading operations.
Currently, Citigroup carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the finance space include KKR & Co. L.P. (KKR), Monroe Capital Corp. (MRCC) and Ally Financial Inc. (ALLY). All three stocks sport a Zacks Rank #1 (Strong Buy).
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