Bunkering and Banks - Once Bitten, Twice Shy?
Bunkering and Banks - Once Bitten, Twice Shy?
Bunkering has always needed finance to cover expansion and bridge cash flow gaps in a notoriously liquidity-demanding sector, and banks have often been keen to provide it. While the impacts on the multiple unfortunate creditors of the recent collapses in Singapore's bunker sector are known, the indirect impact may be more significant — it may undermine confidence in the sector at a time when the bunkering industry seeks liquidity in the run-up to 2020.
Once more, news about a formerly prominent Singapore bunker supply company hit the international bunker grapevine in mid-December 2018, as Coastal Oil Singapore Pte Ltd filed for liquidation following a creditor's voluntary winding up procedure. Leading up to Coastal’s filing, observers indicated with some concern that the company had only been handling small volumes, so at that time, there was a lack of clarity as to what had prompted the liquidation. The new year brought more clarity on this matter, with the company’s creditors list circulated. It became apparent that instead of a list of traders and suppliers taking significant hits, it was the company’s banks that shouldered the burden, with claims from banks totalling circa USD 354m. The remainder of creditors shown in existing filings account for just USD 3m, spread across various entities; this was perhaps symptomatic of the low volume of business that the company had entered into immediately prior to its demise.
How did it come to this?
As might be expected, Coastal's banking creditors were primarily Singaporean. At the time of filing, OCBC claims amounted to USD 123m, DBS almost USD 30m and UOB USD 20m; International banks fared little better, with Rabobank and HSBC reporting claims of circa USD 68m and USD 40m, respectively, and BNP Paribas USD 25.2m.
As a supplier, with tangible assets in the form of vessels, it is conceivable that the banks perceived Coastal and its affiliates to have sufficient liquidity requirements and security to support this lending. However, a back of the envelope estimate based on Coastal's "normal" trading activities would suggest that, assuming that not everything is bought and sold on 30 days, and allowing for higher cost fuels and some longer-term inventory, Coastal's total liquidity requirement for a proper function would be closer to USD 200m (still far below the USD 500m in undrawn borrowing facilities shown in Coastal's accounts for the year to June 2017). In addition, it seems that Coastal and the wider group's tangible assets were relatively modest; valuation specialist vesselsvalue.com estimates the current market value of the four bunker barges and two coastal tankers, which are reported to be owned by Coastal’s affiliates Heng Tong Fuels & Shipping Pte Ltd and Coastal Logistics Pte Ltd, to be USD 61m, a value which equates to just 17% of Coastal’s outstanding bank debt. DBS has already arrested three of these vessels in Singapore, but even if sheriff sales by auction took place, we estimate this would generate a maximum of just USD 40m. This leaves a giant gap in what the business seemingly needed, and the debts accrued.
While some of this difference is said to have been attributed to unspecified forex losses, local sources suggest that Coastal now faces fraud allegations. Unconfirmed reports of Coastal issuing false documentation to plug a financial hole have been circulating the Singapore market, seemingly supported by COSCO Shipping International (Hong Kong) Co., Ltd issuing a notice on behalf of its bunkering subsidiary, Sinfeng Marine Services Pte Ltd (a significant bunkering client of Coastal), alleging that documents issued in relation to the debts owed to Coastal were 'not genuine'. If fraud is proved, Coastal's banks may have an even harder time recovering funds from any insurers.
Business as usual?
So far, so very troublesome, but Coastal is far from the only bunkering company in Singapore to face issues of late, with Coastal’s bankruptcy following the fall from grace of six other Singaporean bunker suppliers over the course of just four years. In October 2014, Vanguard Energy Pte Ltd collapsed owing USD 36m, followed a month later by the collapse of Dynamic Oil Trading Pte Ltd (painted as the primary causes of the wider collapse of OW Bunker A/S). Compatriot Searights Maritime Services Pte Ltd filed for liquidation in August 2016, with UOB reportedly being owed USD 112m. Similarly, Vermont UM Bunkering Pte Ltd’s supply license from the Maritime and Port Authority of Singapore (MPA) was withdrawn in 2016, and a year later members of its senior management were charged with conspiracy to cheat customers.
After the MPA failed to renew its supplier license (one of its mass flow meters (MFMs) had allegedly been tampered with), Panoil Petroleum Pte Ltd was placed under judicial management in October 2017. A matter of weeks later, Universal Energy Pte Ltd fell from grace and creditors filed almost USD 105m in claims; this time Société Générale accounted for a reported USD 56.71m of its outstanding debt. Last and quite possibly not least, Brightoil Petroleum Singapore Pte Ltd had a winding up procedure against it issued by Petrolimex Singapore Pte Ltd in November 2018; Qatar National Bank is reported to have claims totalling USD 21.6m in relation to non-payment of letters of credit, two group owned tankers have been arrested by Credit Suisse in relation to a USD 15.75m claim and ICICI Bank Ltd (Singapore branch) also filed a claim of USD 9.9m against the company.
There is no doubt that the market was a factor in some (and potentially all) of these cases, with Singapore's already highly competitive market further impacted by tightened supply conditions (or at least an inability to improve 'margin') imposed by the MPA, mandating the use of MFMs for residual fuel in January 2017.
Still, the question remains, given all the issues the Singapore bunkering market has had over the last five years, why are banks still lending suppliers seemingly far more than their business models would warrant? In certain cases it would appear that bunkering is (or at least was) regarded by banks as a standard SME lending, rather than essentially trade finance to a sector which is arguably high risk, low reward, with the implication that the lending teams (and potentially auditors) were not aware of the complexity/risk of the sector. Could these collapses have been avoided if banks had been more stringent in counterparty due diligence, or been better able to price the risk associated with it?
These issues could not have come at a worse time for the bunkering sector. Singapore has the double whammy of a potential expansion of the MFM regime to gas oil supplies on 1st July 2019 followed, six months later, by the additional capital demands of IMO 2020. On a global level, bunkering needs finance now more than ever, and Singapore's issues, in conjunction with high profile incidents such as those surrounding Aegean, suggests that the industry is hardly making itself a desirable target for what appears to be a financial world flush with cash to lend.
While some of the larger players have invested heavily in compliance and financial transparency to meet more stringent banking demands, such an investment is not possible (or potentially desirable) for some of the smaller players out there. More shake-ups seem certain to follow unless new lending practices are put in place or bunkering cleans up its act - perhaps cold commercial reality will take bunkering where regulation has failed to.
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