customer credit… why & how institute of chartered shipbrokers lectures singapore august 2014
TRANSCRIPT
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Customer Credit… Why & How
Institute of Chartered Shipbrokers Lectures
Singapore August 2014
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So who am I?
• Managing Director • Global Head of Credit
Awyr Las Pte Ltd (inactive) Soyuz Bunkering Group
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
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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
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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
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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)?
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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)
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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)
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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
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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
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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
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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?
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Revisit Review – Why?
Why Revisit:• Has something changed in the business?
• Moreover is business still there?
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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
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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.
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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
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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?
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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
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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
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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
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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)
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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
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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
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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 &
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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
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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 -
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Thank You