Customer Credit… Why & How
Institute of Chartered Shipbrokers Lectures
Singapore August 2014
So who am I?
John Phillips MSc, BSc (Hons), FICS, CMILT,
Visiting Research Fellow University of Plymouth
Chartered Shipbroker, entered tanker operations & port
agency 1982, own business 1990-1995, worked in Middle
East, Greece, & Singapore, specialised in counter-party risk
and intelligence/research in maritime sector since 2002
Awyr Las Pte Ltd (inactive)
• Managing Director
Soyuz Bunkering Group
•
Global Head of Credit
and Soyuz Bunkering Group (SBG)?
 Established in 2013 by interests affiliated to Souz Petrolium
SA through Summa Group Europe Holdings BV
 Part of the Summa Group (Russia)
 Offices in Rotterdam, Dubai, Singapore and Hong Kong
 Strong position on Russian Far East, ARA and West Africa
 Team of experienced Traders and Operators
 Strong support from parent group
What is Credit & what are the Risks
In most of the bunker market trading & supply businesses,
Credit runs hand-in-hand with due diligence and is usually
described as: “Credit, Due Diligence & Country Party Risk”
 Managing Credit / unsecured transactions
 Risks of Non-Payment
 Using Credit as a Sword & Credit as a Shield
Understanding Credit Risk
 Credit Risk can be defined as the amount of risk taken
against non (or delayed) payment for goods delivered
today but paid in the future
 An extension of the RISK we manage everyday
 We all come across Credit Risk in work
If I lend you my Ferrari for the weekend, what is the likelihood I
will get it back on Monday undamaged (or at all)?
Shipbrokerage & Shipagency
 the impact of introducing parties where default occurs
 Financial (cash-flow)
 Reputational (measurable?)
 the risk of operating without adequate pro-forma funding
 Delayed Payment (cash-flow)
 Non Payment (cash-flow + legal recourse + reputation)
Shipowner & Operator
 Vessel Withdrawal (always best option?)
 the impact of non-payment of freight or hire
 Financial (cash-flow)
 Reputational (bank confidence in decision making ability)
Three Key Themes
 Knowing your Customer
 Prevention is better than Cure
 Forearmed is Forewarned
These cannot be overstressed and have been a mantra of
Credit Report Writers and Managers since the 1970s
Selecting the Right Party
 Adoption of ‘Best Practices’
 Use of Rightship or equivalent processes (best practice!)
 Carry out Due Diligence review on at least bi-annual basis
 Credit reporting Agencies assistance (Due Diligence data)
 Dynamar
 Infospectrum
 Lloyd’s List Intelligence
 Ocean Intelligence
Implications of Transacting unsecured
 Will customer still exist at due date?
 Will I be paid on time or delayed (if so, how long)?
 What is my cost of borrowing (see next item)?
 What is my margin (is it worth it)?
 Do I have capacity (Loss of Opportunity)?
 What is my exposure profile (Ratio 1-5 risks)
 Recovery costs
Impending Default - Some Warnings
 Speak with brokers – Is tonnage idle, what is happening in
macro and how will it impact micro economics?
 Check Press & other Media comments
 Calls are met with ‘unavailable’ or ‘will call back’
 Has there been a steady slipping of payments (legal
implications of not addressing immediately)
 Have Reporting Agencies (OI, LLI, Info, Dynamar)
reviewed recently, change in recommendations?
Revisit Review – Why?
 Why Revisit:
•
Has something changed in the business?
•
Moreover is business still there?
Use of Financial Statements
 Reporting Standards
 Some jurisdictions do not report (this applies to most in this
sector)
 Creative Accounting
 Age (even for PLC’s can be 1Q out)
 Difficulty in obtaining even when reported
 Language used
Do Financials have a Value?
Corp. Hancock: Sir. [Offers mug of tea]
Maj. Gen. Urquhart: Hancock. I've got lunatics laughing at
me from the woods. My original plan has been scuppered
now that the jeeps haven't arrived. My communications are
completely broken down. Do you really believe any of that
can be helped by a cup of tea?
Corp. Hancock: Couldn't hurt, sir.
What can you learn?
 How a business has performed historically
 Suggest how it may perform going forward
 Indicate how it has structured its finances
 Give insight into shareholders’ commitment
 Show how it remained liquid historically
 Is the business ‘open & available’
 Who audited and what opinion
Reading Between the Lines
 What type of Company is it
 What is it trying to say in its Financials
 What is not there that should be there?
 Why are the Financials overdue?
 In an improving market why are numbers down?
 Has business been lost & what is the orderbook?
So what should be there?
And why isn’t it?
To do this you really need to know who your customer is and
what it does
Legal & Recovery Considerations
 Are we being “Reasonable”
 Ensure data collected is accurate
 Speed may well be of the essence
 Empty Threats are No Threats
 Interact with Legal and Finance
 Remember Legal Recovery has a cost – evaluate
 Establish track on vessel (www.sea-web.com or
www.seasearcher.com) and maybe go active
The REAL cost of recovery
 Debt chasing
 Arrest of vessel – if a Maritime Lien exists
 Enforcement of award after vessel release
However, this can take months or years.
Example from Marine Fuels sector
How long would it take to make back a USD 1 margin on a
1,000 tonne sale of IFO 380 cSt at USD 610 pmt
Any Guesses?
Its an reasonably easy one…
610,000 tonnes
And remember, in the meantime you have financed a
purchase at USD 609 which you maybe paid on 5 days!
(finance cost)
A thought….
So what percentage is this of annual sales?
I’m sure this translates to brokerage commissions or agency
fees, how many more deals to be done to recover the
money outlaid to bring a customer in who doesn’t perform!
Now tell me that good credit decisions have no value
Getting it right will save time and money
Use Credit as a Sword and as a Shield
Develop Business
 Using good due diligence as a way to grow your Business safely
 Wise Growth - Considered & Reasoned Growth
 Use credit/unsecured transactions to encourage wanted accounts
Protect the Business
 Credit/unsecured transactions only where credit is due
 Closing out unwanted accounts
 Use credit to deter unwanted accounts
The Importance of Audit Trail
 Internal & External Factors
 Best Practice
 Credit Insurance & Finance Approvals
 Counterparty Confidence
 Bank Confidence
 Management Purposes (ISO identification of system failures)
 System Improvements (ISO remedial &
Main Players
 Credit Manager / Business Development Manager (Strategic
implementation of Corporate wide solutions to meet
strategic goals)
 Research Teams
 Finance and/or CFO
 AP/AR & Treasury Officers
 Legal Counsel
…and of course – Operations teams
Credit Management Structures
For those with credit sales in portfolio
 Hierarchical system
 Triangular Systems
 Multi-Point Systems
 Single Advice Methods
 Passed Responsibility Method
Each of these can be developed with or without a Credit Model
to support it -
Thank You