World Bunkering >Articles > Risk management > Reporting on credit risk management

Adam Dupré

Risk is not necessarily negative, but it is real and needs to be managed. You might say it highlights a watershed point up to which activity is likely to be successful and beyond which it may be dangerous. It highlights the point in the consideration of any transaction where the possibility of failure is too high to justify proceeding. Low risk is still risk, but it is positive and justifies proceeding, whereas high risk may not justify proceeding.

Risk management is the skill/art/science of assessing where on the line from low to high risk any particular customer or deal sits, and of making the right decision as many times as possible. The closer to the line you can get, the more likely you are to do more and more successful business. If your risk assessment procedures do not generate clear assessments, then you need to err on the side of caution, and may miss opportunities. If you have sophisticated risk analysis systems that you can trust, you can work much closer to the wire, with the opportunities for higher rewards that this kind of business can bring. The nub of the matter is, how accurate are your means of assessing risk?

The toolkit

The most crucial risk in today’s markets, to which all bunker traders and suppliers are exposed, is counterparty credit risk: the risk that your customer may delay payment or default.

The larger bunker trading companies have sophisticated systems to analyse counterparty credit risk, while the smaller companies take a more intuitive approach. But, whether done by system or by instinct, credit analysis in bunkers is more of a skilled art than an automated science. There can be no credit risk assessment or scoring system in the bunker sector where data fed in one end automatically delivers a sure-fire credit recommendation that can be trusted and acted upon.

However, in working towards the decision whether to give credit or not, there are a number of tools available to the bunker credit manager. These run from personally gathering and assessing all possible data to reach a decision, through to simply passing all or some of the credit risk to someone else by insuring it – and anywhere in between. There are all the usual tools of the credit manager – interviewing the customer, asking for financial accounts, checking with competitors for previous trading experience, and of course referring to your own previous experience with the customer. There is also another tool available to the bunker credit manager which is special to this industry and which can be, if used properly, a very helpful support to the credit management function. This tool is the bunker credit report, which is different from any other credit report because of the nature of the shipping markets and the needs of the bunker credit management function.

Why is shipping different?

There are particular obstacles to knowing your customer in the shipping sector, and thus being able to analyse credit risk. In the first place, shipping companies take every advantage possible of the peculiar status of their assets – they can choose anywhere in the world to register them and naturally choose the most tax efficient and the ones that offer the opportunity of least disclosure of corporate and business data to outsiders. And they will set up separate legal vehicles to own each asset. That means their structure is usually complex and opaque. From a legal perspective, a typical shipping company is more like a group of independent operators working in unison than a single operating legal entity like ExxonMobil, or Microsoft, or Ford. A bunker supplier needs to know exactly to whom he is delivering – not least because this will be crucial to any recovery procedures if there is a payment issue. There will normally be a single, agency/management company representing the group, but this will rarely have assets and the supplier must understand the structure of the business and his counterparty within it.

The second issue is that since a shipping company is made up of a number of asset-holding entities registered in offshore non-disclosure domiciles, there are no consolidated accounts. In fact there are often no accounts at all! A third question is whether the potential customer pays its bills. The problem with calling your competitors for references is that they may be reluctant to be truthful about a good customer for fear of losing them, so it is not always easy to tell if a reference is accurate. The shipping industry is getting hotter and hotter as a place to be. Every month that goes by without a major collapse means the likelihood of a serious collapse is that much closer. To stand the best chance of minimising potential loss, you need to have the most sensitive awareness of the markets and of the players in them that you possibly can. So how can a specialist marine credit report clarify these issues?

Understanding the fleet

Take the first issue, the opaque structure of a shipping business with every ship owned by a different off-shore company. A number of sources list the ships trading in a particular fleet, but the credit report attempts to present more than a list. It should give an idea of the organic structure of the fleet – how it has been built up over time – and thus provide insights into the character, abilities and professionalism of the owner. A tightly run fleet of modern-product tankers with a good mix of long-term and spot work with top-class shippers is likely to be a better credit risk prospect for a bunker supplier than an owner whose tonnage is old and badly maintained and only intermittently employed by second or third-tier shippers.

A good marine credit report will point out the implications of the fleet and its structure and will also set it in the context of the prevailing market – given today’s freight rates and the particular balance of supply and demand, how will this fleet be doing today? Is it concentrated into one sector so that business will suffer if that sector is down? Or is it operating across a few markets where the principal is experienced and well connected, so likely to get the pick of whatever business is available as well as spread its own risk?

Assessing financial viability

The second point a marine credit report will address is how to assess the financial viability of a shipping company in the absence of consolidated accounts. The credit reporting companies get the information from the same place that the accountants who work for the business get it – generating the P&L from the trading results of the fleet, and the costs of running the ships, and the balance sheet from the asset values against likely finance cost, and debtors against creditors.

The credit companies know the freight rates for the particular vessel types and trading routes where the fleet works. They will have an idea of roughly how much the vessels have been working. On the balance sheet side, they will know what similar ships cost when the vessels were purchased and they know how long a mortgage usually runs. So from this it is possible to generate an approximate set of consolidated accounts.

The crucial question

Finally, the third point. Will the company actually pay up on day 30? The credit-reporting companies are in a slightly better position than the supplier here. We are able to speak to a wide variety of suppliers to get references – and we’ll call charterers and other suppliers too. If you call enough people who supply a company you start to see a pattern. You can adjust for and discount major distorting factors and, setting all the references against the market context and trading history of the business, you can estimate what the real position is likely to be and make a pretty good guess whether payment will be forthcoming. It is not certain, but it is a good guide.

A good credit risk report will provide an insight into the structure, finances, management style, trading patterns, asset base, historical payments performance, known recent events and market and other factors that might impact on a potential customer. Used in conjunction with the supplier’s own knowledge, a credit report can allow a greater depth and breadth of insight to allow a finer commercial decision to be made.

The point of credit risk analysis is to let you give credit with as much confidence as possible and thus maximise revenues. The trick is to do as much business with a particular account as possible before pulling out. You don’t want to be the last person standing when the music stops. In today’s market it would be dangerous for a bunker trader or supplier to take any other attitude; the stakes are just too high.

Ocean Intelligence is a specialist marine credit reporting company.