Adam Dupré i AN INTRODUCTION TO BUNKER CREDIT RISK v Foreword Adam Dupré has taken on the unenviable task of explaining the unexplainable and has risen to it with success. No wonder it has not been attempted before! This is a unique, precious and most important book. It is possibly even an essential one, for, since bunkers are bought on credit, no seller can sell a drop of oil without understanding the credit risk involved. This is calmly, precisely and patiently laid out here in a way that makes it clear and comprehensible to the reader. It is not such a surprise that, if anyone could do this, Adam Dupré should be the one. He began analysing bunker credit risk at MRC in 1985 and has over 25 years of experience in assessing corporate success or failure, investigating maritime principals and companies, tracing assets, and training others to learn about marine credit and write intelligent and intelligible reports. In every case, and especially in recent years running Ocean Intelligence, any error is under the microscope, so getting it right matters. Readers of this book certainly bene?t from this! Whilst declaring a personal involvement in having engaged him at MRC, I hope I am objective enough to recognise a good thing when I see it and in this book I feel he has struck a rich vein of ore and mined it impressively. The vital importance of both company structure and industry sector is explained. We are taken through the crucial distinction between nominal ownership and actual control and the question of who is the actual credit party. It outlines the whats and hows regarding the essential need to understand both the micro side – the company being offered credit – and the macro side – the market context such as the subsector’s tonnage position; hence the company’s earnings situation, its worth and its debt position. The global bunker market is worth many, many billions of dollars and it is constantly changing. Individual suppliers are heavily exposed ?nancially and physically. One bad debt wipes out the pro?t on numerous other stems. Any fool can succeed in a rising market but it takes good management to steer through a falling one and both bunkers and shipping are cyclical businesses. So it is not just wise to be well informed about counterparties, not just pro?table, but maybe even life or death. By the time a company’s problems or a ship arrest are in the newspaper, it is too late – you have to be pre-warned and prepared. I used to think that bunker credit was just that – a risk to be prevented if necessary. I soon learnt though that it is a sales tool and that there is no ‘right’ answer to the inherent, necessary con?ict between sales and credit, competition and security, volume and margins. The balance varies over time, but a constant is risk assessment: you choose what risk to take but then you must know it. This is where this book is so important. There is a cost to recognising risk, but the reward for getting it right is great. On a personal note, it is an enormous pleasure to see how a gleam in my eye so many years ago – that bunker risk needed specialist attention – is now mainstream, vi AN INTRODUCTION TO BUNKER CREDIT RISK with a book being published on it. I am delighted that the bunker industry, so huge and so exposed, recognises itself as such and has and continues to seek to order itself. The one thing we all know is that tomorrow will not be the same as yesterday, or today. Now though, we do all recognise this and having this book both exposes it and makes it clear how to proceed. Stuart Kenner Founder of MRC Business Information Group September 2010 xiii Contents Foreword v Preface vii About the author ix Acknowledgements xi Introduction xxi Chapter 1 - The bunker market 1 Origins ...........................................................................................................................................1 A market is born.............................................................................................................................1 Enter the trader .............................................................................................................................2 Trading grows up ...........................................................................................................................2 The supply chain ...........................................................................................................................2 Fuel delivery ..................................................................................................................................3 Some modernisation, but still an old fashioned industry ...............................................................4 Chapter 2 - What is bunker credit risk? 5 Buy now, pay later .........................................................................................................................5 Sell your risk? ................................................................................................................................5 What can a poor buyer do? ...........................................................................................................5 Security? What security? ...............................................................................................................5 What price bunkers?......................................................................................................................6 The Big Price Collapse ..................................................................................................................7 Where can you ?nd bunker prices? ...............................................................................................8 A volatile market ............................................................................................................................8 Different ways to prepare for the bad times ...................................................................................8 The pressure of competition ..........................................................................................................9 Credit risk – a necessary education ..............................................................................................9 It takes more than numbers to understand the credit risk .............................................................9 Chapter 3 - The market today – structural risk 11 The constituent players – how do they work? .............................................................................11 Flags of Convenience ..................................................................................................................11 One ship, one owning company ..................................................................................................11 Limited liability .............................................................................................................................12 The debt is ?xed to the vessel .....................................................................................................12 Types of shipping business .........................................................................................................12 Who is actually buying? ...............................................................................................................14 Greek shipowners........................................................................................................................15 Norwegian shipowners ................................................................................................................15 German shipowners ....................................................................................................................16 You must know the responsible principal ....................................................................................16 The make-up of the shipping industry .........................................................................................17 xiv AN INTRODUCTION TO BUNKER CREDIT RISK Wet and dry trades ......................................................................................................................17 Containers ...................................................................................................................................17 Cruise shipping ............................................................................................................................18 Fishing .........................................................................................................................................18 Chapter 4 - Background factors affecting risk 19 Market volatility ............................................................................................................................19 Cycles are essential to the health of world shipping....................................................................19 Historical example of shifting ship values ....................................................................................20 12 dry sector cycles since 1869 ..................................................................................................20 Some drivers of ?eet expansion ..................................................................................................20 Tankers since the 1970s ..............................................................................................................21 The dry sector over the last 20 years ..........................................................................................21 The 2008 collapse .......................................................................................................................22 Non-market risk factors ...............................................................................................................22 The effect of hostilities ................................................................................................................23 Political unrest .............................................................................................................................23 Piracy...........................................................................................................................................23 US blacklists ................................................................................................................................23 IMO regulation .............................................................................................................................24 Emission Control Areas (ECAs)...................................................................................................24 Port State Control ........................................................................................................................24 Trading areas ..............................................................................................................................24 Institute Warranty Limits (IWL) and government restrictions .......................................................25 Practical/operational constraints..................................................................................................25 Innovation ....................................................................................................................................25 Financial innovations ...................................................................................................................26 FFAs and risk management.........................................................................................................26 Why FFAs? ..................................................................................................................................26 Paper driving physical – not healthy ............................................................................................28 Modelling risk...............................................................................................................................28 Chapter 5 - Review of shipping markets 29 Bulk carriers.................................................................................................................................29 The good times… ....................................................................................................................29 …and the bad ..........................................................................................................................29 Was the 2008 crash foreseeable? ...........................................................................................29 Subdivisions of dry bulk ...........................................................................................................30 Dry bulk sector risks? ..............................................................................................................30 The newbuilding disaster .........................................................................................................30 Pushing the problem back .......................................................................................................31 Real structural changes following world events .......................................................................31 Asia not insulated ....................................................................................................................32 Shipping enters recession late and comes out more slowly ....................................................32 The number of ships on order..................................................................................................32 The China effect ......................................................................................................................33 A brief major bulks review ........................................................................................................34 Foreshadowing the crash ........................................................................................................34 Risk factors ..............................................................................................................................35 More rapidly ?uctuating rates...................................................................................................35 Capesize rates .........................................................................................................................36 Paper trading issues ................................................................................................................36 COAs no longer a necessary good ..........................................................................................36 xv Tankers ........................................................................................................................................36 Changes coming up .................................................................................................................37 Spot earnings...........................................................................................................................37 Build costs erode earnings ......................................................................................................38 Fleet size reduction and sector recovery .................................................................................38 Risk arising from loss of oil major approval .............................................................................38 Political volatility of crude oil loading areas .............................................................................39 Falling demand for oil impacts the tanker ?eet directly ............................................................39 Changes in re?ning affects trading patterns ............................................................................39 The Liner sector...........................................................................................................................40 Conferences ............................................................................................................................40 Review factors for liner companies ..........................................................................................40 Falling consumer markets impact on the container trades ......................................................41 Movements in charter rates .....................................................................................................41 Cost saving measures .............................................................................................................42 Some good news, but not much ..............................................................................................42 Newbuilding ?ood not quite so bad for liners ...........................................................................42 Basic risk factors remain income too low, costs too high ........................................................43 Container market realignments in the face of the recession ...................................................43 General economic conditions ......................................................................................................44 Considerations on the world economy ....................................................................................44 Economic risk factors in key segments of the freight market...................................................44 General considerations of threat/risk factors for shipping .......................................................45 Chapter 6 - Country risk 47 Time zones ..................................................................................................................................47 Language barriers .......................................................................................................................47 Legal issues.................................................................................................................................48 Currency ......................................................................................................................................48 Information...................................................................................................................................48 Current areas of concern .............................................................................................................48 North Africa ..............................................................................................................................49 West Africa...............................................................................................................................49 East & North East Africa .........................................................................................................49 The Middle East ......................................................................................................................49 The Indian Sub-Continent ........................................................................................................49 South East Asia ......................................................................................................................49 Australia, New Zealand and Oceania .....................................................................................50 North East Asia .......................................................................................................................50 The Americas ..........................................................................................................................50 Europe and the Former Soviet Union .....................................................................................50 Chapter 7 - Tools for credit risk analysis 51 The underlying dynamics of risk in shipping ................................................................................51 The boom to bust cycle ...............................................................................................................51 Shipping follows world trade ........................................................................................................52 Markets down, credit risk up ........................................................................................................52 Every case may be different ........................................................................................................52 The credit risk analyst’s tool-kit ...................................................................................................53 No formulaic answers ..................................................................................................................53 xvi AN INTRODUCTION TO BUNKER CREDIT RISK The tools available.......................................................................................................................54 1) The Internet .........................................................................................................................54 2) The press.............................................................................................................................55 3) Colleagues and networking .................................................................................................56 4) Specialist data vendors .......................................................................................................58 5) Industry associations ...........................................................................................................60 6) The company itself ..............................................................................................................61 7) The specialist marine credit report ......................................................................................62 Chapter 8 - Making the credit decision 65 The basic question ......................................................................................................................65 Your own records .........................................................................................................................65 The specialist data vendors .........................................................................................................66 Sovereign risk ..............................................................................................................................66 What vessels? What trades? .......................................................................................................66 The initial hypothesis ...................................................................................................................66 Trade press .................................................................................................................................67 Asking the market ........................................................................................................................67 Buy a credit report .......................................................................................................................68 Use as many sources as you can................................................................................................68 Know for yourself as much as possible .......................................................................................69 A credit check list .........................................................................................................................69 Chapter 9 - A positive business tool 71 Sweating the debtor book ............................................................................................................71 Putting pressure on the sufferers ................................................................................................72 Credit as long as it is due, not when it is not ...............................................................................72 Seeking out the higher margin payers .........................................................................................73 Selling to the higher payers as long as they are safe ..................................................................73 Give credit, get something back ..................................................................................................73 Chapter 10 - Securitising credit risk 75 Credit insurance ..........................................................................................................................75 Where bunker credit insurance started........................................................................................75 Parental guarantee ......................................................................................................................76 But it is always your responsibility ...............................................................................................76 Chapter 11 - What to do if there is a default 77 Asset tracing and chasing ...........................................................................................................77 Ship arrest ...................................................................................................................................78 Be careful ....................................................................................................................................78 Where ship arrest can work for the bunker supplier ....................................................................78 A question of jurisdiction ..............................................................................................................79 Find the best port to arrest ..........................................................................................................79 What you need to consider ..........................................................................................................80 Chapter 12 - Summary and conclusions 81 Appendix 1 - Credit check lists 83 Major oil company credit check list ..............................................................................................83 Small ship supplier credit check list .............................................................................................84 Independent bunker trader’s risk breakdown ..............................................................................85 xvii Appendix 2 - Sample credit reports 87 Sample 1: Ocean Intelligence: Yang Ming Marine Transport .....................................................87 Sample 2: Lloyd’s List Intelligence: Hapag-Lloyd AG ..................................................................96 Appendix 3 – Bibliography 105 Technical and legal ....................................................................................................................105 General bunkering .....................................................................................................................105 Bunker markets .........................................................................................................................105 Credit issues ..............................................................................................................................105 Ship arrest .................................................................................................................................106 Useful websites .........................................................................................................................106 Credit analysis .......................................................................................................................106 Associations...........................................................................................................................106 Information sources ...............................................................................................................106 Appendix 4 - Glossary of terms 107 Index 111 xviii AN INTRODUCTION TO BUNKER CREDIT RISK