With the collapse of Greensill Capital, investing time in counterparty risk has become essential to safeguard supply chain finance, says Søren Høll, CEO of KPI OceanConnect.
Greensill Capital became the world’s biggest supply-chain finance company over the last decade or so.
Its clients numbered two container majors, while former UK prime minister David Cameron served as one of its advisers, and it received billions from investors such as Softbank.
Despite this, Greensill’s business model has left it insolvent and created serious cashflow challenges for those who used its products. Many have been left scrambling to fund their employees’ salaries and operations.
It remains unclear what Greensill’s departure will mean for the maritime sector.
What we do know is that it comes as a timely reminder of several pressing credit lessons.
Greensill’s core service was, in short, the exchange of customer IOUs for immediate access to cash at a discounted rate.
In shipping this practice is often described as ‘pledging invoices’, and that service played a key part in the legal and financial aftershocks of the collapse of OW Bunker.
The OW bankruptcy created huge issues for its clients and partners. The costs were massive, and litigation is still ongoing seven years later.
I was recently talking a KPI OceanConnect client, and the subject of risk management arose. She noted the ignominious history of invoice pledging, and asked why it kept happening.
Perhaps more pertinently, she also asked what questions she should be considering so that she could ensure that her company is protected from the next OW or Greensill.
Due diligence is one of the most effective forms of defence to shield your company from risky financing and disreputable counterparts.
Finding the right answer begins with the right question, and once you know what to ask, you can proceed with greater confidence and comfort.
Any reputable counterparty will be happy to answer your questions, and able to guide you efficiently and effectively through the process.
This is important, because supply chain finance comes in many forms, and not all of them will be suitable for your company.
What works well for someone else in your sector might be unsuitable for you, and it’s a timely reminder of why it pays to work with experts you trust. This is especially for fuel procurement, which is often a ship’s biggest variable cost.
In the aftermath of OW Bunker, BIMCO created a list of eight questions that it recommended marine fuel buyers ask their counterparty before contracting with them.
For me, the most important one remains, ‘does the counterparty pledge its invoices?’
But the other seven on that list are all important and equally sensible: Who are you dealing with and who is the legal entity? What terms and conditions will you enter into? Does the counterparty have credit insurance? Is the counterparty covered for product liability and have professional indemnity? Does the counterparty have a compliance programme? And, is the counterparty financially strong?
The reality is that if you ask your prospective counterparty those questions and get credible answers, you’re unlikely to be dealing with a suspicious player.
Moreover, by undertaking this exercise you’ll be improving your risk management and ultimately creating a more efficient operation, a healthier bottom line, and protecting your colleagues, investors, and partners from preventable challenges.
From my experience after 35 years in the industry, it will also improve the level of trust in your company, enhance staff retention, and create employees that are invested in better client outcomes.
Over the next few years there are going to be major changes in the marine fuel supply chain. We’re going to witness a transformation, and IMO 2020 was only the start of it.
This metamorphosis will pose no shortage of challenges, but counterparty risks don’t have to be one of them. Time spent investing in risk management and understanding what forms of supply chain finance will work best for your business will be rewarded many times over.
Disclaimer: Article original published by Lloyd’s List on May 12, 2021.