Is it really safer to bypass a trader and deal direct with a physical supplier?
27th January 2016 17:44 GMT

At KPI Bridge Oil we have followed the recent debate on Bunkerworld concerning the focus on different lender styles in the industry in the wake of the OW collapse. We have also discussed the matter with one of our esteemed lawyers, who is heavily involved in some of the complex cases going on right now in the aftermath of OW.

The discussion about pledging of invoices and its possible consequences is certainly a sound and very vital discussion to have in the current shipping and bunkering climate. Therefore KPI Bridge Oil would also like to contribute to the discussion and hopefully throw some light on some of the confusion still prevailing as we see it.

The article 'Buyers wary of traders with OW/ING style lender arrangements' published on 15.01.2016 clearly illustrates some of this confusion. Two independent buyers are quoted as saying that they are refraining from using traders and instead only deal with a company when they act as physical supplier. In our view these buyers may be seeking a safe haven which is in fact no safer than the one they are trying to steer away from. You might even argue 'on the contrary'.

So, how is that?

Well, if a physical supplier is pledging their invoices to a bank, the bank and the bankruptcy estate may both be pursuing the same claim in the event that the physical supplier goes bankrupt. In other words this financial model presents an added potential risk to the buyer. There seems to be a general misconception amongst the buyers that the pledging issue does not apply when a company is acting as a physical supplier and this is not necessarily the case. It may be worth noting that OW also acted widely as a physical supplier and this did not prevent their bank ING from chasing the debts along with the estate.

On the other hand, if a buyer is dealing with a trader who is not pledging his invoices, there are two potential claims if the trader goes bankrupt: One from the physical supplier and one from the bankruptcy estate. So, a physical supplier who is pledging his invoices represents the same amount of potential claims as a trader who is not pledging, namely two – i.e. not necessarily less than the trader. You can then further argue that a trader who does not have to pledge his invoices has stronger support from his banks and hence should be a safer bet to deal with from a buyer’s perspective.

So why would anyone pledge their invoices if it presents a potential risk to their buyers?

Well, first and foremost because this may be a condition from their banks in order to provide the financing in the first place, as the pledging represents collateral. Secondly the industry has not paid attention to this issue prior the OW collapse, so no-one really thought of it as a potential risk until now.
Even today, approximately 14 months after OW’s demise, there are numerous ongoing legal cases, where buyers are defending themselves as there is no clarity on whom to pay as a result of the lending style of OW.

George Chalos, a well renowned US-based lawyer also spoke to Bunkerworld on the subject. He said: "The OW bankruptcy has created many legal questions; most of which remain unresolved with finality nearly a year and a half after the collapse of the conglomerate. Vessel owners having nothing to do with the underlying transactions have increasingly found their ships becoming the target of arrests around the globe on the basis of a purported lien claim."

It was believed by some that the commencement of interpleader actions; a complicated legal process whereby a debtor seeks to deposit its payment obligation in to the Court and allow the competing interests to fight for their rightful slice of the prize, would streamline the process of determining competing claims to the payments. However, this has proven to be disproportionately expensive, grossly uncertain and painfully slow in the U.S. with no end in sight as to when a final decision will be issued by the court of first instance. Regardless of the result that will follow, it is a near certainty that complex and expensive appeals will be pursued.  Add to the mix a number of confused decisions from other jurisdictions; some of which provide clear guidance, while others suggest the way forward – however inequitable - is that the buyer has to pay twice, and the picture gets even more confused.

It is a virtual certainty that the chaos will continue for the foreseeable future and will keep going until the money to pay the bankruptcy lawyers runs out.  If there is a lesson to be learned, there is great value to be had in knowing your supplier and, more specifically, knowing not only your supplier’s financial stability, but also their financing arrangements (if any). By knowing who else may be standing beside your counterparty to pursue claims, should it all go wrong for the supplier allows you to make an informed decision about whether the risk is within acceptable tolerances (or not).  

In addition to showing a solid balance sheet, at KPI Bridge Oil we are proud that our syndicate of banks granted us bigger loans at cheaper rates after the O.W. Group collapse. Not only did they provide us larger and cheaper lending facilities, they also did it without security in our invoices (pledging). This demonstrates the massive level of trust and confidence that our banks have in us. Something they would only have gained after looking into our organization very thoroughly.

The fact that we do not have to pledge our invoices to third parties is something that significantly minimizes the risk for our clients and suppliers. Indeed, it is something that the industry in general could benefit from understanding more about as there is, and has been, a massive amount of confusion in the market in the wake of O.W. and Dynamic Oil where the banks, led by ING, have chased the same money as the Bankruptcy Estate for a period of time, and where the law in various jurisdictions is not always crystal clear.


Carsten Ladekjaer,
27th January 2016 17:44 GMT

Comments on this Blog
Mustafa Muhtaroglu - Enerji Petrol Denizcilik ve Ticaret A.S (Energy Petrol)
29th January 2016
Dear Carsten
I read your artical very carefully
I think this is very good situation for our industry that all parties put their position openly and discuss

What suppliers expect ?
What buyers expect ?
What traders / brokere expect ?

We all can talk about it and improve our industry
Now we also have very good platform at IBIA, commercial working group has been established, we can bring matters there and discuss

We will have better future, we just have to listen to each other and cooperate
Frederic Vazzoler - Total Marine Fuels Europe
17th March 2016
The most important thing is to highlight what is the real added value of bunker traders when they are not physical supplier or handling bunker barge fleet ?
The fast expansion of bunker traders the last 20 years is because majors/producers even cargo-traders didn't care about shipping outlet because scared about credit and never focus on long term relationships.
If today their mind change and they see the marine segment as the only outlet for heavy Fuel Oil it should be really interesting to see how bunker traders will be able to face or bring their added value. Majors moved and improved a lot in term of product range, pricing intelligence and credit management..
As Mustafa said : let's discuss and debate also when we see Singapore imposing for 2017 Mass Flow Meters as compulsory.
Regards
Frederic VAZZOLER
Head of Total Marine Fuels Global Sales and Development.
Fuel Bird
6th May 2016
Well written, intelligent thought-out and smartly worded MARKETING stunt.

Lets get some definitions clear:
- Pledging:
An asset is used for collateral for a loan, in this case cash receivables. The asset is pledged to the lender (the Banks) until such loan is repaid. Should the borrower default on the loan the lender assumes ownership of the asset (the receivables).
- Factoring:
Is the sale of receivables usually to a financial institution at a discount. The original invoice issuer forfeits all rights the receivables.

In either case, and as illustrated in the agreements made between ING and the OW estate here http://www.pwc.co.uk/assets/pdf/owbunker_26nov14.pdf , the rights to the receivables is transferred regardless if an organization factored (sold) or pledged their invoice. Now immediately after the OW default (7th Nov 2014) there was little clarity between PWC, Banks and the Bankruptcy estate – so multiple claims arose and scared the market into believing that both ING, the OW Estate and physical suppliers with a maritime lien could claim the receivables – this ofcourse proved incorrect pretty quickly.

SO – if a fully integrated supplier where to pledge or factor an invoice and then subsequently declare bankruptcy then the right to the receivables would transfer to the financial institution. And there would be no party behind holding a maritime lien for an additional claim.

HOWEVER – if a middle man, trader, reseller, etc purchases fuel and resells it to an end buyer then there will always be the possibility of double claims as the underlying supplier has a maritime lien. It does not matter if the invoice is sold, pledged or otherwise used as collateral - this is inherent in the trade and can not be avoided. This is regardless of how you finance the transaction.
As each link in a traded/resold bunker fuel transaction possibly could hold lien and with the BunkerHolding Group known for trading between companies perhaps adding multiple liens to each transactions - how would you then possibly argue that your organization provides a safe haven?

While on this subject, why not be upfront and communicate how your loan facility incl the factoring that it includes is constructed.

Finally is it really still necessary to use others failure and catastrophic events to promote your organization? – its repulsive.
Carsten Ladekjaer - KPI Bridge Oil London Ltd
6th May 2016
Dear “Fuel Bird”,

Thank you for your comment to my blog. My incentive for placing the blog initially was to create a debate and to raise awareness about the much overlooked issue of ‘pledged’ invoices within the bunkering industry. I am pleased that you are contributing to this debate – even though we seem to see things differently.

In principle I agree with your definitions of Pledging and Factoring respectively. However, in the real world things do not always turn out the way it was intended to work in theory. So, let’s look a some facts related to the Pledging issue:

1) After the OW collapse the bank syndicate led by ING had to make agreements with 29 different bankruptcy estates each representing the 29 different OW subsidiaries individually. This is of course a very slow and bureaucratic process. While it is going on, ships are at risk of being arrested anywhere suitable. In future cases there is no guarantee beforehand that banks which have invoices assigned to them will be able to make similar agreements with the estate(s). And if they can not – buyers will be exposed to an extra claim – even if they buy from a physical supplier who has pledged their invoices!

2) In spite of the fact that these agreements were made and are now in place, the various estates are still fighting against the bank syndicate led by ING in the many Interpleader cases filed in the US. The reason for this is that each individual estate is targeting to win as much money as possible for themselves and the individual estate they represent. Again this is why the cases are dragging – the law is not clear in many jurisdictions. In the meantime the fate of the buyers is unclear.

3) In the event that a court ruling would go against the bank syndicate led by ING, saying that only suppliers should receive money from the buyer, no-one can guarantee that the banks will not try to arrest the ships in more favorable jurisdictions afterwards. In other words, the banks may take the same position as many physical suppliers do – namely to protect their own interest by seeking arrest wherever it suits them best – irrespective of court rulings in other jurisdictions.

You are furthermore asking me to advise how our particular financing agreement is constructed. Well, it’s quite simple: We have an un-secured financing agreement with our banks. This means that none of our invoices are pledged to third parties. In other words, we have removed that added potential risk making it more secure for our counter parts to deal with us. As for the factoring part of our business it is exactly as you state:

‘Factoring:
Is the sale of receivables usually to a financial institution at a discount. The original invoice issuer forfeits all rights the receivables’.

Simple explanation for this: The financial institution has no ownership of said invoices before it has paid them into either the company (prior a bankruptcy) or the estate (post bankruptcy). This means that the estate(s) would never even attempt to chase the same money as the banks – as opposed to the pledging scenario that has been playing out since OW’s demise.

In the wake of the OW collapse there is definitely a need to raise awareness about what pledging is all about and what effect it has in the aftermath of a bankruptcy.
Fuel Bird
11th May 2016
I think we can all agree that awareness is good, no doubt.

But, you are misinterpreting the underlying basis of pledging an invoice. Once a financial institution has issued a loan basis security in said invoice the institution will have the right to receivership of that same invoice should the borrower fail to repay the loan, whether because of bankruptcy or otherwise.

So if a supplier where to pledge an invoice the estate in case of bankruptcy will have no right to request for those receivables, meaning only one claim for payment toward buyers would persist. Yes, this was unclear in the initial stage of the OW case, but was later made abundantly clear as posted in official memo’s between ING, the estate and PWC.

To spell it out: IN A TRANSACTION BETWEEN A PHYSICAL SUPPLIER AND AN END BUYER, REGARDLESS OF PLEDGING OR FACTORING, THERE WILL EVER ONLY BE ONE CLAIM FOR THE SAME RECEIVABLES!

The only scenario where this does not hold true on OW’s physical deliveries is In those cases where a buyer had remitted the funds to OW’s prior the collapse and where OW where yet to repay the loan (typically 80-90% of the invoice value) – in this case the estate owes ING and they will try to recuperate the funds from the buyer / the vessel.

On the matter of all OW’s traded bunker transactions (those where they acted as middlemen) between a supplier and an end buyer there is the inherent risk of double payment, this can NOT be removed, and factoring or pledging his no impact of this what so ever. This inherent risk comes from the fact that both supplier and seller holds a maritime lien and have sold the bunkers to “ABC Shipping Ltd and/or Master and/or Owner of m/v ABC”.

In simple terms:
Supplier -> End buyer = 1 possible claim
Supplier + Bank -> End Buyer = 1 possible claim
Supplier -> Trader -> End Buyer = 2 possible claims
Supplier -> Trader + Bank -> End buyer = 2 possible claims
* bank being those transactions where the invoice is pledged or factored.
Carsten Ladekjaer - KPI Bridge Oil London Ltd
1st June 2016
Dear "Fuel Bird",

Thank you again for your interest and contribution to the debate.

I can only reiterate and refer to points 1-3 in my previous response above.

In my view Pledging of invoices clearly does represent an added potential risk to counter parties which they should consider.

The OW case is a clear testimony to that.

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