London’s High Courts play host to yet another stand off in the metals warehouse scene but this time it is in Asia rather than the USA. CitiBank, ranked number 3 in the USA and 21st in the world by Banker’s Almanac is facing up to Mercuria, founded in 2004 by former Phibro executives and focused more in energy and oil than metals but still a major player and one of the big 5 Swiss-based trading firms.
The dispute is over a deal involving metal-backed loans, $270 million worth of loans to be exact, that Citi lent to Mercuria against metal held in Qingdao and Penglai ports in China. See where we’re going now? This is the first major case hitting the courts where a bank or financial institution is calling in loans on metal supposedly held in one of these Chinese ports but over which huge question marks remain as to who owns it.
A client of Mercuria’s, Dezheng Resources, is reported by the Financial Times to have loaned the same metal multiple times to different parties and in the process secured loans from multiple sources. Of course only one firm can really own the underlying metal, the question is who. The FT reports Mercuria started legal proceedings against Citi in June after the US bank demanded the early repayment of $270 million lent under a “repo” agreement. Under these arrangements, a trader sells metal to a bank with an agreement to buy back at a later date the same or equivalent metal for a higher price. Citi then launched a counterclaim for repayment of $270 million plus interest after it redelivered the warehouse receipts representing the metal that underpinned the repo agreements.
Citi said in a statement that it is asking the Court to uphold its contractual right to seek early repayment of all outstanding repo transactions with Mercuria. Doesn’t sound unreasonable, the contract probably has a clause whereby the bank can ask for early redemption if they return the asset, in this case the metal, to the borrower in good order. The issue here is Mercuria maintains that Citi have not properly delivered ‘Equivalent Metal’ and are therefore not entitled to receive payment for it.
Who’s fault is this? Mercuria, or their client, originally loaded the metal into the warehouse and secured a warehouse receipt. If that warehouse receipt was considered a sufficiently solid right of ownership to the metal when the loan was made, the bank is probably fair to say the same document should be considered good delivery of equivalent metal in return. With the warehouses in both ports in lock down you can understand Mercuria is less certain of how well these warehouse receipts can be considered to give them legal ownership of anything and are trying to stall the process until some clarity can be achieved. Meanwhile, the Chinese authorities are investigating the proceedings and various individuals have been questioned and detailed company records and assets have been seized but no resolution has been arrived at.
This is unlikely to be the end of the legal cases. Quite the contrary, other banks will be watching the outcome anxiously to understand their relative legal positions. The case is only expected to take 3 days according to the FT, but the ramifications could last for years. Banks have already tightened up loan arrangements around metal financing and if it goes against Citi another round of reviews could tighten trade finance even more.