SemGroup’s $3.2 billion failure shocks backers

SOURCE:

Reuters

2008-07-25 11:04:55

SemGroup’s $3.2 billion failure shocks backers

NEW YORK (Reuters) –

The dramatic collapse of energy trader

SemGroup LP shocked the privately held firm’s backers who until

last week had little idea of the extent of the oil trading

losses that sank it, sources said this week.

As late as June a banker at Bank of America (BAC.N), one of

SemGroup’s main lenders, described the fast-growing company as

one of his best clients, two sources said this week.

The Tulsa, Oklahoma-based company filed for bankruptcy on

Tuesday after suffering $3.2 billion in losses on energy

futures and derivatives trades that SemGroup says were designed

to protect its physical oil trading business.

SemGroup creditors said this week they had little idea of

the extent of the firm’s losses and were surprised by the much

larger than expected size of the hedging program.

Some creditors suggested on Wednesday the possibility that

fraudulent trades may have caused the collapse.

“Last week was the first that we heard of this level of

losses and at the same time heard the need for more money,”

said Keith Wafford, a lawyer for 11 SemGroup lenders in a U.S.

bankruptcy court hearing on Wednesday.

Due to the larger than expected hedging losses, SemGroup

creditors will likely recover only half of the more than $7

billion they are owed, Moody’s Investors Service said on

Thursday.

Shareholders including private equity giants Ritchie

Capital Management, Riverstone Holdings and the Carlyle Group

are expected to be wiped out.

Founded in 2000, SemGroup grew rapidly through dozens of

acquisitions, becoming the 12th-largest privately held company

in the United States last year, according to Forbes.com.

SemGroup told investors its operating cash flow could reach

$600 million this year before the cost of hedging its physical

oil trading business which bought or sold more than 500,000

barrels of oil a day, two sources said.

But on a July 15 conference call with lenders, SemGroup

revealed its massive bets that oil prices would fall had gone

spectacularly wrong and that it was out of cash, sources said.

The next day, Bank of America, the administrative agent for

three secured loan facilities totaling $2.55 billion, issued a

default notice to SemGroup, bankruptcy court documents show.

“These guys were supposed to be the straight arrows. They

had smart, veteran traders and everyone is shocked by what has

happened,” said one source close to the bank lending group.

DEFAULT CASCADE

The Bank of America default notice triggered a cascade of

bad news for SemGroup. The company suspended its co-founder and

chief executive Thomas Kivitso and was forced to recognize $2.4

billion in losses on NYMEX crude oil futures when it

transferred its trading position to Barclays Plc (BARC.L).

Included in the losses was $290 million owed to SemGroup by

Kivitso’s personal trading company.

By July 17, counterparties to SemGroup’s over-the-counter

energy derivatives trades began terminating trades, resulting

in a further $850 million loss for SemGroup.

“People had no idea about these over-the-counter trades and

absolutely no idea that Kivitso was running his own NYMEX book

within the company as well,” said a source close to the

lenders.

That same day, shares of SemGroup Energy Partners LP

(SGLP.O), SemGroup’s publicly traded subsidiary, plunged by 52

percent despite the fact that SemGroup’s mounting financial

problems, which were by then well-known among lenders and

trading counterparties, had not yet been made public.

SemGroup Energy Partners, which is not part of the

bankruptcy filing, disclosed its parent’s problems in a press

release issued hours after the market closed on July 17. The

U.S. Securities and Exchange Commission has opened an inquiry

into SemGroup Energy Partners’ disclosure practices.

(Reporting by Robert Campbell, editing by Matthew Lewis)

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