(Beijing) -- Nanjing Tanker Corp., China's first state-owned enterprise to lose its stock market listing following four years of consecutive losses, has been withholding information about a massive amount of debt in the form of long-term, off-balance-sheet loans drawn between 2005 and 2008, research jointly conducted by British shipping industry journal Lloyd's List and Caixin has found.

Some US$ 1.3 billion in loans was funneled into Nanjing Tanker by 19 banks in 11 countries to fund the Chinese carrier's fleet expansion during the shipping market boom. Commitment to the borrowing, which financed 10 very large crude carriers (VLCC) and 10 medium-range product tankers, is one of the major reasons the company is facing insolvency.

The 20 vessels and the debt obligations to them amount to non-disclosed book – a kind of shadow balance sheet – worth at least US$ 3.5billion, overwhelming the size of the company's existing balance sheet.

However, Nanjing Tanker, 55 percent owned by state giant Sinotrans & CSC Group, never made a full disclosure to the Shanghai Stock Exchange regarding the 20 off-balance-sheet transactions, all of which were priced during a rising market and contracted on terms that carry non-negotiable payment obligations and cannot be cancelled.

Backed by a national mandate to serve crude imports, Nanjing Tanker leapfrogged to the top ranks among the world's tanker players in less than a decade. However, the company now appears to have over-extended itself and taken on obligations it cannot meet.

Nanjing Tanker, which recorded four annual losses between 2010 and 2013, is undergoing a 30-trading-day transitional period to settle its shares on the secondary market. Its last day on the exchange is slated to be June 4.

Nanjing Tanker is the world's sixth-largest tanker owner by fleet size, according to Clarksons, a shipping services company. The company operates some 87 vessels totaling 8 million deadweight tonnages (DWT), including 19 VLCCs, its website says.

It is controlled by China Changjiang National Shipping (Group), which merged with Sinotrans Group to form Sinotrans & CSC in 2009, the country's third-largest shipping and logistics conglomerate after China Ocean Shipping Group and China Shipping Group.

The string of losses has saddled Nanjing Tanker with debt. As of end-March, it reported negative 2.4 billion yuan in equity and 15.7 billion yuan in total liabilities.

The company, whose headquarters is in the eastern city of Nanjing, announced on April 29 that it had defaulted on 1.2 billion yuan in principal, interest and financing leasing hires, and that it was "negotiating with relevant parties for an appropriate solution to the (default) problems."

However, the company's true level of debt goes well beyond what is shown on its balance sheet and that even some of its creditors are in the dark about its true debt position.

Nanjing Tanker declined to comment on the story, citing sensitivity during the delisting settlement period.

The Off-Balance-Sheet Leases

Nanjing Tanker's roots date to 1993 when it was founded as a coastal and river carrier for crude, product and chemicals. An asset swap and private placement by its parent, Nanjing Changjiang Tanker Co. in 2007, transformed it into a VLCC and medium-range tanker operator.

Among the assets swapped from the parent company were 10 medium-range tankers and four VLCCs financed via syndicated loans to special purpose vehicles (SPVs), the function of which is to hold the legal title of the vessels and service the borrowing and repayment of loans.

But in Nanjing Tanker's stock exchange filings through the years it lists the SPVs registered in offshore tax havens only as counterparts in charter parties, which appear as long-term time charters on Nanjing Tanker's books.

The same model was copied in December 2007 and September 2008 in transactions that funded six more VLCCs and brought the total number of vessels off-balance-sheet to 20.

All of the 20 vessels are Hong Kong-flagged and held in 18 SPVs registered in Panama and the British Virgin Islands, records at the Hong Kong Marine Department and Companies Registry show.

Between 2005 and 2008, Credit Agricole Corporate & Investment Bank, Societe Generale Asia, Royal Bank of Scotland and BNP Paribas acted as facility agents for financing of the 20 vessels and as security trustees, or mortgagees, of these vessels after delivery.

Fifteen other banks, from China, Japan, South Korea, Singapore, Ireland, Netherlands, Canada, Sweden and Germany, also subscribed to the loans in different portions, which together amount to US$ 1.3 billion in principal, a compilation of company records shows.

While it is not mandatory to disclose the full contract prices for newly built ships with the Hong Kong Companies Registry, seven of the 20 vessels include this information. The two vessels at 29,700 DWT were contracted at US$ 116 million and two 31,000 DWT vessels at US$121.9 million, with the loan financing 80 percent of the building costs. For the other three 46,000 DWT ships, the price was US$ 40 million each and the loan covered 90 percent of the total cost.

The rest of the costs were funded by Nanjing Tanker, governed under a subordinated loan agreement and appeared as advance charter hire on the company's balance sheet.

The deals all bear unusual aspects in international ship finance practice.

CSC Oil Transportation (CSCOT), a Singapore-registered subsidiary of Nanjing Tanker, is shown as the original buyer of the vessels. The shipbuilding contracts were later novated between CSCOT and each of the SPVs, with the SPVs the buyer, and CSCOT, or in some occasions its parent Nanjing Tanker, as construction supervisor.

While novation is not unusual, CSCOT and Nanjing Tanker, and in some cases various Singapore-registered subsidiaries of CSCOT, were named as co-time charterers of the vessels in conjunction with management contracts. The contracts were signed between the SPVs, CSCOT and Nanjing Tanker, which stipulated CSCOT and Nanjiing Tanker as both technical and commercial managers of the vessels.

In addition, CSCOT and Nanjing Tanker each serve as sales agent and standby sales agent, obliged to sell the vessels for the SPVs, the registered shipowners, at the end of the charter period.

Footnotes to Nanjing Tanker's annual reports show the 20 vessels carry 10- or 12-year charter periods which are, in effect, the periods of the loan agreements.

The pre-delivery tranche of the loan was secured by refund guarantee in favor of the SPVs with the post-delivery tranche, payable upon delivery of the vessels, secured by 100 percent of the financed assets, or the vessels, together with the insurance coverage taken out for the vessels.