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Posts Tagged ‘credit insurance’

“Credit Management at the Center of the Storm”

Monday, January 11th, 2010

From Adam Dupre CEO Ocean Intelligence Pte Ltd comes some wisdom on the current perils of counter-party risk in the bunker market.  In a credit market with historic volatility only just beginning to settle a bit and with credit insurance markets tighter than in recent memory voices of wisdom are particularly important.  Of course counter-party risk extends much further afield than the bunker markets. If you would like to discuss your needs please reach out to us.

Meridian is a highly dynamic specialized insurance consulting group and broker with offices in Boston, MA, Newport, RI and Brookfield, CT.  We are a hard-driving group with an entrepreneurial spirit who will work tirelessly for clients. We specialize in risk management and risk transfer for those in the energy markets.   We are members of the  International Energy Credit Association.  Our Mission is simple.  We seek to help our clients make the best risk and risk transfer decisions possible.

“Counter-party risk: in a recession it inevitably increases, and with it the importance of credit management.

That has been the topic of three recent conference presentations; in Oslo, Algeciras and Istanbul. I am beginning to feel a bit like a cracked record, but it really is an essential issue and one that deserves huge amounts of attention both from suppliers and buyers in the bunker markets.

Counter-party risk has, in many ways, actually surpassed price volatility as a matter of deepest concern to the market. If your debtors default enough times, your business is finished, and with relatively high prices and low margins, that may not be too many times for some players. What does it imply and what can be done?

One thing that was, not surprisingly, very clear at all three conferences was the anxiety caused by the current economic climate both from the suppliers side and the shipowners side, and the changes this is causing in the patter of relationships between the two sides. It is as if the onus has switched from traders doing everything possible to justify a sale, to the buyers now having virtually to demonstrate their creditworthiness. The supply side is sharply conscious that it is (and always has been) basically a cheap bank for the buyer side and it is beginning to look for some recognition of this. And trade finance for the supply side, though economic recovery may bring some easing here, has become more difficult and more expensive. Not only do you have to beware of default, but now late payment can become a serious issue for a supplier.

So we have a new situation here. Instead of cheap unsecured credit and relaxed payment terms, the supply side is tightening up – it has to! And it is paying even more attention than ever (is that possible?) to the analysis of real counter-party risk. Laying off credit risk to others has become expensive – the foresightful few who locked in their credit insurance premiums before the downturn hit will be relaxing by the pool (though their insurers probably won’t) – and for suppliers and traders making a tiny margin is not really a viable option.

That really leaves good due-diligence as the only viable option in assessing counter-party risk. But what does that mean in the context of the bunker market? Responding to this question, I took the specialist marine credit report as a paradigm, and also as an affordable proposition, because to assess counter-party risk, you need to know your customers pretty intimately – their habits, business manner, financial position, market prospects, management quality, experience and record in dealing with difficult markets and all the rest – what a good credit report gives you. Even with  customers you know (or think you know) well, if you are wise you will double check. Up to date credit reports can be an excellent way to clarify and update your picture of a customer, providing a detailed picture of its operations, market, operational and payment performance.

One of my Turkish colleagues used poetic Ottoman style to illustrate the point, saying that a good analyst, like a good cook, first ensures that he has the best ingredients (the best information) and then applies skills that should be honed over years of training and practice. A good credit report cannot be mass produced – too much haste can lead to mistaken judgements. That is a major reason why Ocean Intelligence does not demand more than three reports per day from its analysts. We may have to turn work away, but our reputation for quality is our most precious asset, and we are just not prepared to put it at risk by over producing.

As my colleague said: “Like in cooking you need to get the freshest ingredients (knowledge), separate the good from the bad (assess what is true and what is untrue in what we have been told by our market sources), and then use our expertise to combine the various ingredients of fact, rumour and direct experience into a suitable dish. As a cook uses different spices to bring out the true flavour of the dish, so the credit analyst combines, assesses and presents the ingredients of a report to present as accurate a picture and judgement as possible to the reader, with elements and judgements ranked according to importance to allow a clear credit decision to be made.”

Where credit insurance is too highly priced, tools that enable you to take the risk yourself become more valuable. Credit reports are an important part of the credit toolkit.

On the buyer side there is increasing pressure for transparency. At all three conferences, all speakers who touched on the matter of bunker trading directly pointed out the need for this element so hard for ship operators to work with. In a predominantly private and tradition-driven industry, changing the habits of lifetimes will not be easy, but it is certainly becoming more necessary.”

(follow more of Adam Dupre’s thoughts at Ocean Intelligence.  OI provides high quality intelligence and assessment for the marine industry’s most discerning participants.)