It has been a month since the collapse of OW and although the dust may not have settled, all eyes are already focusing on the best way to capitalise on new opportunities whilst protecting themselves from becoming the next victim. A few weeks back I wrote my first views on the situation and now I believe a new catastrophe may be on the horizon, but why?
Since my last blog I have received numerous questions and I have chosen the most popular ones trying to answer them as best I can.
Q. The collapse of OW Bunkers came as a surprise to many observers. Why was there so little warning things were going wrong?
A. It was a surprise but not a big surprise as there were already a number of credit professionals who expressed concerns over how much the business was over-valued, how it was run at the height of aggressiveness and poorly implemented credit policies as well as the misuse of the risk management tools such as derivatives. I cannot comment on the fraud matter at this stage. I think that the credit approved for companies such as Tankoil is just one of the examples of poor judgments. All of us including myself were blinded with the sheer size of that machine and couldn’t immediately see beyond that balloon even though I shared my concerns with a number of people when I spotted negative cash balance of more than USD 400 million on OW's cash flow statement as of 31 December 2013 and on their balance sheet, cash and cash equivalents stood at USD 13.8 million which was less than 1% of its current assets. I truly believe that if they had held above USD 200 million cash and cash equivalents, they would probably been alive now. It would seem apparent that most senior industry people knew the model was not really sustainable indefinitely and, at some point, would start demonstrating weaknesses. It happened suddenly: that was the unexpected part. I must say that I failed this time as opposed to 2008 when I was one of the few people in the market who was able to estimate the exact time of the global shipping market crisis half a year before it hit the sector and I was only a junior analyst with 2 months work experience at that time.
Q. How was the work of credit analysts changed following the OW bankruptcy?
A. I believe that the people working within bunker credit management no longer have room for the archaic back office attitude of focusing on dated and estimated financial figures. It’s obvious credit is going to be less available to the sector in the future due to lack of trust between counter parties. This means they must be chosen after extremely careful credibility assessments. For me credit analysts working in bunker companies now need to work in two ways- to continue to asses and monitor their customers and keep in touch with their credit insurers as well as to make sure that their companies hold sufficient credit lines from their suppliers and bankers. I am not sure if all of the credit analysts in the bunker companies are trained to look after supply credits. However, an organisation like Peninsula Petroleum with a well-diversified credit team, which is having a designated supply credit manager, will most likely enjoy a healthy relationship with its suppliers. Some quite large bunker players with substantial transactions surprisingly operate with only one designated credit manager. In my opinion they must change this kind of attitude for credit as it is not a joke and they must employ skilled credit professionals and set up well-diversified credit teams. Bunker credit risk management is not a one man job anymore, there is an old Turkish saying “if a person does everything it means he or she achieves nothing”. Credit is a serious matter and there should be a multidisciplinary team approach for this. Bunker companies must have well diversified credit team with expertise in supply credits, customers credits, bank credits and insurance company relationship management. I think Peninsula is a good example for that. Integr8 Bunkers also appears to be investing in bunker credit professionals at present. WFS also has a strong and well diversified marine fuel credit team at their offices in London.
Q. Has there been any increase in demand for reports on bunker companies?
A. Absolutely, we have been bombarded with orders from oil majors and large independents since the OW case. Ocean Intelligence, for some time has been providing 'supplier check' reports, which analyse the operational and financial safety of bunker suppliers along with the quality of the fuels they offer. We have also expanded into enhanced due diligence reports.
Q. What is your view on the bunker market?
A. The bunker market has always been quite competitive and profit margins haven't been so great, and since 2008 has usually been less than 1% as a large number of owners and operators left the freight market or their financial situations and payment abilities have deteriorated significantly due to poor earnings. At the end of the day, there have been much less credit worthy customers available for bunker suppliers/traders, which resulted in higher competition with less margins and although this has been a vicious cycle the OW fiasco may give people the foresight to break out.
Q. What is going to be the primary challenge for bunker companies in the future?
I believe the most significant problem for the sector is the nature of the bunkering transactions which are almost always based on account receivables/payables. The balance sheets for the bunker companies show current assets that largely comprise of account receivables while cash and cash equivalents mostly constitutes less than 10% of bunker companies' current assets. Most bunker companies report working capital surplus. However, does it mean they have good liquidity? ABSOLUTELY NOT, and the ratio of cash and cash equivalents should be at least 25-30% of their total current assets in any financial year. The current situation constitutes a real danger for the bunker industry as after the OW case, oil majors and local suppliers started cutting out their credit lines partially or completely and also reduced their payment terms from 30 to 21 or even to 14 in some instances. On the other hand, the customer's standpoint does not look so rosy due to continued poor earnings as a result of speculative ordering supported by cash rich owners and private equity funds. If bunker companies do not have enough cash and cash equivalents, the situation will keep going from bad to worse.
Some people may argue with this statement and say 'OK, but those companies have cash rich principals'. This may be a true argument. However, we do not know for sure if those cash rich principals would have the willingness to inject cash into their businesses if and when necessary. Secondly, I am not sure how reliable and sustainable it is to rely on ' credit matter of trust in principal' as your modus operandi.
Q. Who will win, who will lose?
A. Some independant players, especially small and medium sized, will most definitely come last. The ones to benefit from all this are those companies which form part of a large commodity trading house and are involved in both physical supply & worldwide trading as these kind of structures would have easier access to cash support. Cockett, Bomin, WFS, Mercuria and Chemoil are examples. However I feel that Chemoil parent Glencore may not want to be exposed to the bunker sector in the future. Bomin needs to have a stronger business development policy and possibly a more aggressive trading strategy and also needs to expand its credit team. Cockett has been taking right steps by employing ex OW personnel in quite key locations although I wonder if there will be any chemistry issues as these companies would have had different trading cultures. Cockett should also increase its credit team to cope with the expansion in trading volumes. Integr8 has an interesting structure, being part of the well diversified shipping group, they have a dynamic management team and I think they will be benefiting the post OW situation.
i think, it is not only matter of money lost, collapse and/or fraud or commercial/legal issues out of this case, this should be "turning point" ; this has to be the renaissance of our industry. we have to sit all together and talk about how we want to see this industry, how we see the future, what should be rules, dynamics and values, how we should educate our people and buyers, i hope your nice studies lead market players this direction, this may open new platforms for better world in bunkering & shipping
You are correct, at Peninsula we were the first large independent physical supplier to have a Credit Manager in 2005. Since then we have recognised this credit analyst skill set to launch other roles within the company. Head of Commercial Development emerged in 2012 closely followed by Business Research & Development Manager, which was (and still is) a first in our industry. Following that we have Vice President, Supply Credit Management and, of course, the Credit Manager role remains at the core of Peninsula. So four of the management ranks of one of the largest companies in the sector are occupied by former credit analysts from three agencies Ocean Intelligence, Lloyds List Intelligence and Infospectrum. This ably demonstrates the evolution, I think, and you are right on how credit is not a back office function anymore; going forward it will be even less so.
I hope you translate into Turkish also
First of all very good point from your side.
I agree with your good thoughts.
I think its time for 'Survival of the fittest' .
Strong and reliable players will continue to be in the sector, others will be barred by the statute of limitations.
It will be 'Natural Selection of the Market' .
after reading your article blog. Well done.