Bunker traders and ship operators are not the most obvious bedfellows, but the two sectors share many similarities. Both exist to fill a skills, risk or credit gap (usually between generally asset-heavy oil companies and tonnage providers, and more exotic counterparties), both have struggled to persuade clients of the true value of these services (or certainly pay a premium in return), both have turned to digitalisation to try and improve these margins, and both experience significant defaults and pressure on liquidity. At times, the bunkering sector has actively assisted the ship operating sector in managing its liquidity and, in return, ship operators have provided the bunkering sector with an opportunity for improved returns, away from the tapped-out "well-known" risks.
The reliance of certain ship operators on their bunkering "banks" was exposed after the sudden bankruptcy of O.W. Bunker A/S in 4Q 2014, with the disappearance of the latter's extended credit terms immediately impacting a number of smaller operators. Bunker traders have, at least on the face of it, and in response to the greater perceived liquidity demands of their own (pre-2020), tightened up on their "banking" activities, and sought to secure a greater alignment between their own cost of capital, and the terms offered to clients. Certain bunker players have also sought to improve transparency, compliance, reporting, credit insurance products and legal teams in an effort to generate a flight to quality (and improve their banking options). Anecdotally, these measures appear to be working.
Operators don't seem to have been able to persuade their cargo or relet clients to be better behaved. There can still be huge gaps between hire outgoings and freight income, and then you can add on the post-fixture shenanigans experienced by almost all operators (and occasionally deployed by such operators to improve their own liquidity position), with operators having no "bunkering backstop" of arresting the ship concerned. Operators also seem to be unable to generate the aforementioned flight to quality. What use is it of having an unblemished track record, full ownership and financial transparency, and a rock-solid balance sheet, if cargo interests are willing to save a few USD (or even cents) per tonne and give the offshore-registered, two-men-and-a-mobile a go? It is perhaps telling that some of the largest public operators have booked significant losses in 1H 2019, despite such risk "advantages", investments in new platforms and reductions in costs.
Who will provide the liquidity operators need?
How are these smaller or less transparent operators finding the capital they need to compete with their larger cousins? One of the start-up ship operators we spoke to on its formation in 2013 claimed that to successfully launch, and operate, even a small-scale dry bulk chartering business you needed a minimum of USD 5m of committed capital/cash in the bank at day 1. USD 5m seems a sizeable amount of capital to raise when the costs of launching an operator have historically been so low (buy a mobile phone, work your old contacts, put together a website/flashy Powerpoint, persuade a ship owner to charter a vessel to you and an old bunkering contact to give you 30-60 days credit), but to stick around in this business (if you want to), you need capital to absorb the operational issues that will certainly come your way. Start growing to circa 10 ships and you can probably double that number.
The reduction in the willingness of bunker traders and suppliers to provide low-priced (or even free) credit to lower-quality operators has seen these operators turn to alternative forms of finance to fill the gap. This has included second-tier lenders, private equity, receivables financing and elaborate profit-sharing agreements with owners in return for more flexible terms. All of these options come with risks for both the operator and the lenders/partners.
A happy marriage?
It is perhaps telling that at least four of the higher profile failures in the dry bulk market in 2019 have utilised these options and, having spoken to some of the financiers involved, it seems unclear if they really appreciated the counterparty risks involved. What's the use of seeking a "payday loan"-size return on investment when the recipient of your funds barely makes it past its first anniversary, or lending against "A1" freight receivables if the recipient of your advanced funds fails to turn up to carry these cargoes? On the flip side, the lending strategies of such funding partners can be as opaque as the operators they serve, and operators who are reliant on such funding run the risk of it being withdrawn at, occasionally, very short notice.
So, conditions are extremely challenging for operators. Access to liquidity is critical, and the number of operators and even bunker suppliers who can prove they have USD 5m in the bank, even at day 365, is very, very small. We'll be redoubling our efforts to accurately rate the risk of dealing with bunker suppliers and operators alike as we move through what is likely to be a tumultuous 12 months, and continuing in our efforts to demand greater transparency from industry participants as we do so.
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