Industry Insight: Are Physical Suppliers Really Safer to Deal With than Traders?
Ship & Bunker
Published: 8th February 2016
Anders Leissner, director, corporate legal and FD&D for The Swedish Club, recently warned that there was a fundamental risk in purchasing bunkers through intermediaries. As many are aware, this is in fact one of a number of recent industry comments concerning the focus on different lender styles in the industry in the wake of the OW collapse.
It is certainly a sound and very vital discussion to have in the current shipping and bunkering climate, and KPI Bridge Oil would also like to contribute to this discussion, and address some of the apparent confusion in this matter.
The collapse of OW has highlighted the so-called “double payment” problem. That is, if the trader goes bankrupt the buyer faces two potential claims: One from the physical supplier and one from the bankruptcy estate. In an effort to avoid this situation some buyers have been quoted as saying that they are refraining from using traders and instead will only deal with a company when they act as physical supplier.
Part of the issue stems from the pledging of invoices, and there seems to be a general misconception among buyers that the pledging issue does not apply when a company is acting as a physical supplier. This is not necessarily the case. 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 suppliers go bankrupt. In other words this financial model presents an added potential risk to the buyer.
It may be worth noting that OW also acted widely as a physical supplier and this did not prevent the bank syndicate led by ING from chasing the debts simultaneously with the bankruptcy estate.
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.
Know Your Counter Party
We can also take an example from the buyer side to see why treating all traders the same is problematic. The situation in the dry bulk markets has been well documented in the media over the last several months, and so in light of this should all bunker sellers now say they will no longer deal with any dry bulk players? Should they also refrain from selling to anyone involved in the offshore sector? No, of course not. But it does highlight the most important thing for the seller is to know their counterparty. And the same is also true for bunker buyers.
In fact if there is any lesson to be learned from the collapse of OW, it is that there is great value to be had in knowing your counter party and, more specifically, knowing not only their business model but also their financing arrangements (if any). And ask yourself, who is safer for a buyer – a trader who has a low gearing, a sound reputation, a robust and solid financial foundation and who has been around for a long time, or a smaller supplier that may have undersold its last cargo and is at risk of going bust?
In other words the advanced buyer of today needs to be more sophisticated in his or her choice of vendors and not just categorize suppliers vs traders in general but actually dig deeper into the whole KYC concept.
KPI Bridge Oil
Take a company like KPI Bridge oil for instance: I am pleased to say that we are running with a profit, we have a very low gearing ratio and last but not least we have a strong and solid equity. Our overdue receivables are well within reasonable limits and they are partly insured as well. We have an extremely sound business model and our culture towards risk taking in general is light years away from the one that OW turned out to have and which eventually became their nemesis.
We are proud that, following the collapse of OW not only did our syndicate of banks grant us bigger loans at cheaper rates, 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.
As a final point, the recent rumors over job losses in our group highlighted just how ready the industry is to believe “the next OW” is going to happen any day now. In reality of course there were nothing to these rumors. Running the world’s best trading teams is very similar to managing one of the world’s best football teams: In order to defend your position in the top of the table you have to ensure that you have the best team at all times and that also means that you have to change some players occasionally so that all positions are covered by top-shelf players.
KPI Bridge Oil remains a very robust and financially sound company. We made a few people redundant recently in order to maintain that position and in order to invest in the right people and offices going forward. It is part of our commitment to all our counterparties and stakeholders to remain a lean and performance oriented company which produces good results and which has a long-term sustainable business model and where organizational efficiency is a must win battle.