Jan 27, 2009 (LBO) – Sri Lanka’s Supreme Court has ended a freeze on payments by state-run Ceylon Petroleum Corporation to commercial banks on derivatives of nearly a million barrels of crude and refined products. In November 2008 Sri Lanka’s Supreme Court halted payments by CPC on oil derivatives struck with Citibank, Standard Chartered, Deutsche Bank, Colombo-listed Commercial Bank and state-run People’s Bank.
Commercial Bank said in a stock exchange disclosure that CPC owed it about 8.9 million US dollars. People’s Bank had bought a derivative from Commercial Bank and re-sold it to CPC. The state bank also halted payments to Commercial Bank.
CPC has not disclosed the marked-to-market value of the derivatives which were based on the target accumulation redemption note (TARN) model, but estimates ranged between 500 – 800 million US dollars.
Sri Lanka’s central bank was also probing the deals on court orders and submitted a confidential interim report to court.
Soon after the original court order state-run People’s Bank suspended payments to its counterparties, though the original freeze on payments only affected CPC. It also went to court to stop Commercial Bank taking over a deposit.
Private banks continued to pay their counterparties.
Citibank had sold contracts worth 400,000 barrels, Standard Chartered 300,000, Deutsche Bank 100,000, People’s Bank 100,000 (including 50,000 bought from Commercial Bank), and Commercial Bank 20,000 direct (and 50,000 via People’s Bank).
The original contracts were at half the volumes, but under the terms of the contract, volumes doubled when prices collapsed.
Public listed Commercial Bank valued its direct deal with CPC at 8.9 million US dollars in a stock exchange filing in December and its exposure to People’s Bank at 21.6 million US dollars in January.
Court originally said the deals were ‘iniquitous’ and petitioners also alleged corruption.
Court also ordered Sri Lanka’s government to reduce the price of petrol (gasoline) on a price formula, as one of the interim orders.
But Sri Lanka’s government failed to implement the price formula, leading to a stand-off between the executive and the judiciary.
State counsel said Tuesday, that the government needed further time to consider the court order and suggest an alternative formula.
Chief Justice Sarath Silva said the state should first comply with the order and file objections, if any.
At the last hearing two petitioners had indicated their willingness to terminate the cases if the government did not carry out court orders.