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