Carson Block, the short-seller who runs Muddy Waters LLC, said he’s betting against the debt of Standard Chartered Plc because of “deteriorating” loan quality, triggering a 13.5 percent jump in the cost of insuring against losses on the debt of the British lender.
“We think the market misunderstands the amount of risk that’s presently in the book,” Block said at a conference in Las Vegas on May 10.
A $1 billion loan to Samin Tan, chairman of Bumi Plc, the coal company at the center of a dispute between co-founders Nathaniel Rothschild and Indonesia’s Bakrie family, and loans to Far East Energy Corp. were “red flags,” he said. Standard Chartered makes most of its profit in Asia.
Block said he’d bought five-year credit-default swaps on Standard Chartered at 85 basis points. The cost of CDS insuring against losses on the bank’s debt jumped to 102.75 basis points today, according to data compiled by Bloomberg. The shares fell 1.9 percent to 1,552.5 pence in London trading.
In a short sale, a trader sells borrowed securities to bet on a price decline.
Block is turning his focus to Standard Chartered after targeting Singapore commodity trader Olam International Ltd., which became more responsive to investors and won increased backing from Temasek Holdings Pte. A slowdown in China’s economy will lead to “considerable stress” at the British lender, Block said.
“Carson Block is outside of the bank and does not have access to the bank’s loan files,” said Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia Ltd. “He has very little ammunition in his gun to shoot at Standard Chartered at this point. He’s got one example of a large loan that appears to be something that possibly would not have been prudent to book.”
Standard Chartered has been “stepping on the gas in mining,” increasing its loan book to the industry by about 22 percent, compared with 6 percent growth in its total wholesale book, Block said.
The world’s second-largest economy has grown less than 8 percent from a year earlier for four straight quarters, the longest streak in at least 20 years, reaching 7.7 percent in the first three months of this year. GDP may expand 8 percent in 2013, according to a Bloomberg survey of economists. The government has set a target of 7.5 percent growth.
Block said that while Standard Chartered’s business is diversified across various emerging markets, when China’s economy slows the correlation in the London-based bank’s loan books will be very high.
“We think this is a very nice way to play the eventuality of the China unwind,” Block said at the SkyBridge Alternatives Conference.
Julie Gibson, a spokeswoman for Standard Chartered in New York, declined to comment on May 10. Doris Fan, a Hong Kong-based spokeswoman at the lender, also declined to comment.
The yield on Standard Chartered’s $2 billion of 3.95 percent notes due 2023 has risen 11 basis points to 3.804 percent since May 10, the highest in more than three weeks, prices quoted by Maxim Group LLC on Bloomberg show.
Block’s reports starting in 2010 triggered $7 billion in losses for Chinese stocks in two years. Tree-plantation operator Sino-Forest Corp. plunged 74 percent before eventually filing for bankruptcy. Block says Chinese government officials have hindered his analysts and “tattooed gangsters” came looking for him.
Olam International slumped 20 percent after Block questioned its accounts in November. It later recouped those losses as the company scrapped its $1 billion 2016 earnings target and said it would cut capital spending to reduce debt. Olam dropped a lawsuit against Block last month after investor feedback.
Block said he didn’t understand why Standard Chartered lent Tan $1 billion, in what looks like a “very messy situation.” Bumi shares plunged 69 percent last year in London amid an investigation that started in September into “alleged financial irregularities.”
“Who knows what the truth really is, but I do think that’s a real red flag,” Block said.
Standard Chartered’s loan of $30 million to Far East, which has a market capitalization of about $42 million, “seems off,” he said.
Mizuho’s Antos said Standard Chartered is one of the world’s best capitalized banks and the possibility of defaulting on its debt “is not a question.”
The lender had a Tier 1 capital ratio of 13.4 percent, according to its latest regulatory filing.
Block reiterated that he thinks Chinese Internet company Qihoo 360 Technology Co. is a “fraud,” though he said he wasn’t currently betting against the stock. John Burbank, founder of $3.8 billion San Francisco-based hedge-fund firm Passport Capital LLC, said at the Las Vegas conference that his firm likes Qihoo.
Block said he has a “small position” on Vipshop Holdings Ltd., which he said “isn’t a fraud, but we think it has a fairly terminal business model in the medium to long term.”
U.S.-traded shares of the Guangzhou, China-based company fell 5.9 percent to $31.77 in New York on May 10.