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Counterparty scrutiny spikes as supply chain risks rise

Lloyd’s List Intelligence and industry experts discuss counterparty risk and corporate governance as part of a new series of expert insight briefings exploring the shifting dynamics of political, regulatory and financial risk in shipping

Counterparty risks across the entire supply chain have increased as the liquidity crunch caused by the pandemic presents strong headwinds globally for shipping. Experts warn that the industry will be increasingly subject to forensic probes into corporate governance and financial stability as a result

COUNTERPARTY risks across the supply chain have increased as coronavirus exacerbates the existing trend of exiting liquidity, leaving many companies on the borders of financial viability, struggling to meet increasingly forensic due diligence and corporate governance requirements.

“Appetite for funding for shipping has been drying up and the liquidity crunch caused by the pandemic over cash, credit and the insurance market continues to present strong headwinds globally for marine businesses,” said Cockett Group chief executive Cem Saral.

“Basically, counterparty risks of the entire supply chain have increased across the board,” he told the Lloyd’s List Maritime Risk Briefing, published today.

According to Lloyd’s List Intelligence’s Credit Report business, this year has seen a spike in demand from clients reviewing credit lines and ramping up due diligence checks in the face of increased volatility and market uncertainty.

Just over 10% of the companies reviewed have been given secured cash terms because of their financial condition or lack of verifiable information about their operations or ownership.

In 20% of the companies reviewed by LLI, the credit report team flagged areas of concern, classing the financial condition of the company as either weak or severe.

Fears of a liquidity crunch, particularly in the bunker sector, are nothing new and European lenders have been withdrawing from commodity and trade finance for some time.

But recent financial scandals including the sudden collapse of Singapore-based bunker trading firm Hin Leong, increasing complexities of exposure to international sanctions risk and a general perception of poor corporate governance across the sector, coupled with the pandemic-induced market volatility have combined to generate something of a perfect storm in terms of credit risk.

Whether real or perceived, increased counterparty risks have required a step change in corporate governance and a tightening of lending criteria that is increasingly locking out those unable to provide forensic evidence of risk management across businesses.

“This is a trend that we see continuing for the foreseeable future and the lending criteria will continue to require increasing levels of due diligence and much more probing questions to be asked of businesses,” said Sebastian Otterstad Villyn, Head of Risk & Compliance Data Lloyd’s List Intelligence.

What complicates the matter is that quite a few traders and bunker suppliers had a strong 2019 performance that previously would have supported increased credit lines, however the pace of the change in the market means that even relatively recent past performance is not a sufficiently reliable indicator of current financial health. 

“A strong 2019 record doesn’t mean that as of October 2020 a company is not feeling the pinch. Companies need to be able to prove sound corporate governance and compliance procedures, access to capital and a record of strong cash discipline,'' said Mr Otterstad Villyn.

“Our view of how much credit a company can sustain needs to be based on up-to-date intelligence and data — past performance is not enough.”

Scrutiny has fallen specifically on the bunker sector in the wake of the Hin Leong scandal, where recent memories of OW Bunkers’ collapse and revelations of undisclosed and unsecured credit and long positions on oil proving fatal, have reignited calls for more stringent oversight and governance. 

But according to Mr Seral the risk of default, financial difficulties and access to liquidity is by no means a bunker-specific issue and such examples are not isolated incidents that can be pinned on a single mistake or bad transaction.

“The risk perceived by the financial community is not exclusive to marine fuels, this applies to the wider shipping and maritime community,” he said. “If you look at the root cause of all these problems you find a lack of proper governance, either in terms of how the organisation is run, or how it is communicating with lenders or the oversight and governance that has been executed by the auditors or lenders.

“These companies have shown multiple years of similar behaviour, so these are not the result of an isolated big loss or single incident — they are the result of an organisation that is behaving and operating without the proper corporate governance required”.

The Lloyd’s List Maritime Risk Briefings are a series of on-demand video discussions between sector experts analysing the shifting dynamics of political, regulatory and financial risk in shipping.

The latest edition explores the topic of counterparty risk and corporate governance and features:

•            Cem Saral, Chief Executive Officer, Cockett Group

•            Paul Millar, Group Credit Manager at Bominflot

•            Sebastian Otterstad Villyn, Head of Risk & Compliance Data Lloyd’s List Intelligence

 

Lloyd’s List subscribers can view the full on-demand video discussion here

 

 

The previous edition of the Maritime Risk Briefing, focusing on sanctions compliance and detection can be viewed here

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