The biggest loss the trade credit industry has ever experienced, is a reminder that financial catastrophes do happen in shipping and bunkering
OW Bunker’s bankruptcy on November 5, 2014 sent shockwaves through the shipping industry. Only seven months earlier the firm had undergone its initial public offering (IPO) – Denmark’s second-largest company flotation since 2010 – and, measured by turnover, it was the third-largest company in Denmark, controlling around 7% of the global market for shipping fuel.
Yet the discovery of fraud came out of the blue and has led to repercussions for all companies involved in the shipping and bunkering sector, including their insurers.
OW Bunker is one of the biggest claims the trade credit insurance industry has ever experienced. Its sudden bankruptcy caused a mini credit crunch in the bunkering industry, which typically works to tight margins, meaning even a small change in terms and conditions in the supply chain can have immediate consequences for liquidity.
For example, if one supplier wants to be paid up front and a customer needs 30 rather than the usual 20 days to pay for their fuel, serious financial pressures can quickly build, as outstanding receivables escalate and may eventually overwhelm the balance sheet.
The unforeseen squeeze that the OW Bunker bankruptcy caused, combined with a more general feeling of distrust and fragility that arose in the sector, resulted in several companies further along the supply chain facing shock bankruptcies.
At the same time as the sector was reeling, many of the existing large mono-line credit insurers quickly reduced the level of their exposure and the shipping and bunkering sector struggled to find credit capacity at the time it needed it the most.
This left companies that had seen their insurance cover cut forced to ask their trading partners to pay them more quickly, exacerbating what was already a very challenging situation.
Although the legal battles have commenced, it will be years before these cases are resolved and, until more information comes to light, it is too early to assess what the full lessons are. However, from what we have digested so far, there are three areas that both the shipping and insurance industry could reflect on and learn from.
First, the assumption that large companies in the shipping industry are immune from bankruptcy and that consequently purchasing insurance is unnecessary is clearly wrong. OW Bunker demonstrated large companies are not immune to either failure or fraud. As a result, we may see increased pressure from shareholders and banks on the shipping industry and its suppliers to purchase insurance to ensure their investments are safeguarded.
Second, there is now likely to be greater scrutiny of relationships, risk management procedures and the specific terms of trade among the shipping and bunkering community. The regular interactions between those engaged in the financing and management of receivables and their customers may have clouded their view of possible problems lurking beneath a healthy business façade.
Analysis also highlighted that risk management procedures did not meet best practice and standards. We believe there is room for the commodity trading sector across the board to implement far more robust risk management procedures, part of which will be a greater analysis of relationships across the supply chain.
Terms and conditions
Additionally, terms and conditions are likely to come under scrutiny, particularly regarding terms of trade and the retention of title. Many companies did not insist on strict terms of trade because they felt the size and reputation of the company was security enough. Having secure terms of trade is not the shipping industry norm but this is very likely to change in the future.
Insurers need to use the OW Bunker experience to underscore not only the value of their product to the shipping and bunkering industry, but also to be better prepared for the scale of potential losses to which they are exposed.
For those that traded with OW Bunker there was little, if anything, they could have done to avoid the loss itself. The company had gone through full due diligence ahead of its IPO, and there can rarely be a time when a business is scrutinised more than just before a listing.
What the case does highlight however, is that no matter how big the company, or how strong the trading relationships, nothing is risk-free. OW Bunker’s bankruptcy reminds the affected industries and their insurers that although rare, these unexpected and unpredictable events do happen and effective credit insurance protection is vital to the long-term safeguarding of their business.
Mike Holley is chief executive of Equinox Global
This article was first published in Insurance Day on 18th January