Carsten Ladekjaer



The claim game

Volume 13 – Number 1 – February/March 2016

The bankruptcy of OW Bunker has resulted in an ongoing and complicated legal tussle over competing claims for fuel payments. Lesley Bankes-Hughes talks to KPI Bridge Oil’s CEO, Carsten Ladekjær, about the key issue of mortgaged invoices in bunker transactions.

What did the bunker industry talk about, and the bunker press write about, before the demise of OW Bunker? Traders may have grumbled about brokers, brokers may have grumbled about physical suppliers, and vice versa. And in turn this motley crew may have grumbled about shipowners and operators – and again, vice versa. However, the world of marine fuels still turned on its axis and no-one really paid much heed to the potential vulnerability of counterparty relationships and the spectre of financial liability should one of the parties in the supply chain suddenly go AWOL.

However, since November 2014, the bunker industry, which has for so long operated – and some would say positively thrived – on a huge exposure to risk, has become much more risk averse. And for good reason. Many players have reassessed their terms of business and found them to be fairly lax and open ended. The disappearance of a significant player such as OW has also shown that the fallout from such a major bankruptcy has been nothing short of a legal quagmire, where the frankly absurd proposition of a buyer having to pay twice for fuel may yet become a very painful reality.

What is clear is that many in the bunker industry did not realise the extent to which a bank which had negotiated a loan facility (with, in this instance, OW) ostensibly had an overarching claim against a company’s receivables. Indeed, after the downfall of OW, a number of smaller bunker suppliers, who in all probability do not operate in the sphere of major syndicated bank loans, contacted Bunkerspot to express their surprise and concern that invoices could be mortgaged to banks in such a way.

Well over a year after the event, the marine fuels sector remains nervous and sensitive to rumour, with market tittle tattle spooking the industry on a fairly regular basis. And as we all know, in a worst case scenario, market speculation can sometimes become a self-fulfilling prophecy, especially in a climate where economic fundamentals are looking somewhat shaky. Market sentiment can dictate share price movements, for example, just as much as real physical events such as commodity shortages or gluts.

Today, terms such as ‘counterparty risk’, ‘due diligence’ and ‘transparency’ are increasingly common in bunker ‘parlance’. Furthermore, the business model of the trader has come in for some close scrutiny, with some commentators suggesting that it may be more prudent to do business with physical suppliers than ‘asset light’ traders. Whatever the theory, the reality is that the bunker industry needs traders in order to function efficiently so removing the trading element of the fuel supply chain simply isn’t a feasible option.

But to focus on the issue of invoices which are pledged to banks, some members of the Bunker Holding Group have been actively publicising the fact that none of group’s entities have pledged their invoices as part of bank financing agreements. This drive to ‘educate’ the bunker industry could in some measure be seen as a way of reassuring buyers that doing business with a trader is just as ‘safe’ as doing business with a physical supplier. Or, to put it another way, doing business with a physical supplier with pledged invoices carries an element of additional risk that a buyer may not have factored into its counterparty risk assessment.

Whatever the underlying motive for this emphasis on pledged invoices, Bunker Holding’s flagging up of this subject has drawn attention to a largely disregarded or misunderstood issue, and so Bunkerspot spoke to KPI Bridge Oil’s CEO, Carsten Ladekjær to discuss the company’s decision to ask its banks not to mortgage its invoices as part of its credit line agreement.

In a recent interview with Bunkerspot, Bunker Holding CEO Keld Demant emphasised that there has been an increased requirement for transparency and scrutiny in counterparty relationships since the collapse of OW Bunker.

He noted that: ‘The type of questions that you hardly asked before you ask now. It goes from supplier to us and from us to the client.

‘We want to know what a company’s financial situation is, what bank package does it actually hold and how long is it secured for?’

Demant spoke just after Bunker Holding had negotiated a new $650 million loan facility with a banking syndicate. The facility was established with a group of eight financial institutions, with Deutsche Bank acting as coordinator. In addition to Deutsche Bank and HSBC, the syndicate featured a strong cohort of North European banks: Nordea Bank, Danske Bank, Jyske Bank, NordLB, DZ Bank and Nykredit Bank.

The five-year agreement was a 50% increase on existing financing facilities, and – what perhaps few commentators paid enough attention to at the time – it was an unsecured agreement.

Carsten Ladekjær comments on the highly febrile atmosphere in today’s bunker industry: ‘What we have seen is a lot of buyers who are seeking to buy from a physical supplier because they think that they are safer than buying from a trader. They saw OW more as a trader than a physical supplier and they also saw that because OW was a trader that a lot of buyers have ended up in the [current] situation.

‘This is also to some extent partly true – we can’t deny that fact. But I think that what is being overlooked is that the fact that OW was pledging its invoices to the banks made the whole thing more complicated.’

He continues: ‘You now have the banks chasing money, not just the estate but the banks chasing owners and charterers for money – and these cases have now gone to court and the banks have been arresting ships – and they are still doing it – led by ING, and this is nothing to do with whether OW was actually trading or acting as a physical supplier.’

KPI Bridge Oil has renegotiated its revolving credit agreement with its banks since the bankruptcy of OW, and made a measured decision not to include its invoices as collateral.

‘As you can imagine, all the banks were very cautious and nervous in the aftermath of OW,’ says Ladekjær, ‘ so the fact that we could get a bank package with more lending facilities, and without offering our invoices, is a massive signal from the banks.

‘They have looked into our organization and said that, even after OW, you are a very safe bet to finance, and we can do it without you pledging your invoices.’

He also accepts that banks will naturally prefer that invoices should be mortgaged as part of the terms of a credit facility.

‘Oil companies need a lot of finance to run their businesses, and I think that all banks would like to see invoices pledged to them, because in any company – be it a supplier or a trader – your assets are your invoices, so if you want to offer collateral to your financiers, your invoices are the biggest asset that you can use as that collateral.’

Ladekjær is pragmatic and acknowledges that buyers may still be looking at physical suppliers as potentially ‘safer’ counterparties than traders after the collapse of OW, and he also accepts that because a physical supplier may have pledged its invoices doesn’t mean that it is therefore an inherently more ‘risky’ counterparty in a bunker deal.

But, he cautions: ‘It might still be fine to go to a physical supplier. He might be financially sound even if he is pledging his invoices – it goes without saying that may be the case – but please make your decisions based on fact and not confusion.’

He does make the point, however, that while a physical supplier may be perceived as more asset ‘heavy’ than a trader, its exposure to operational and commercial risk can be considerable.

‘The physical supplier is exposed if he buys a big cargo which is off-spec and he is exposed to clients who go bankrupt. If he has a large exposure on a client which goes down – and we have just seen Daiichi go down last year with 170 ships – then he is also at risk himself.

‘Physical suppliers have a lot of their cash tied up in big cargos, which have to be supplied – usually on 30 day terms – before they get the money back in. If [the suppliers] have pledged their invoices then potentially the buyers are also exposed if they buy from them.’

Ladekjær also notes that OW and the recently bankrupt Bunkers International were also physical suppliers as well as traders. A fact, he suggests, that many people have tended to overlook.

While the fact that a bank does not require pledged invoices from a company may send a strong signal to the wider market that this is a player in good financial order, the core ‘benefit’ of having unsecured invoices is that there is one less party that may have a claim against any assets should that player’s business ultimately unravel.

Put simply, a trader with pledged invoices could have an estate, physical suppliers – and the banks – in pursuit, while a physical supplier with pledged invoices will have the estate and, of course, its financial institutions. And the reason why the issue of OW’s bankruptcy is being so assiduously and hotly contested in courts in numerous jurisdictions (and will be for years to come) is because of competing claims – the fact that the existence of mortgaged invoices brings ING Bank into the equation and gives it claim on assets/invoices which supersede those of the estate.

As Ladekjær explains: ‘As we have seen with OW, it can take years after a bankruptcy until everything settles, so do you want to end up in a court case and have your money tied up or do you want to have a clear scenario where you know what are heading into before you even enter into a deal?’

So, before OW, how many buyers asked KPI Bridge Oil if its invoices were pledged?

‘None,’ says Ladekjær. ‘Pre-OW I can’t remember anybody discussing if invoices were pledged or not – and even now, some 15 months after, I don’t think people know enough about the issue to discuss it.’

Before the final days of the OW drama played out in Aalborg, he emphasises that: ‘People were pledging invoices, partly because they had to, because it was something their banks insisted on, but also because before OW nobody paid any attention to this issue so it was felt to be safe to pledge your invoices – it didn’t have meaning to the buyers, and so they didn’t differentiate between those [traders/physical suppliers] who had pledges or those who didn’t.’

In the post-OW bunker market, Ladekjær suggests that: ‘The educated buyer today should know what it means to buy from somebody who pledges their invoices. He should ask himself if he is OK with the potential risk involved – if he is, fine. He should maybe ask his suppliers if they have pledged their invoices to the bank. If they have, then he may still want to deal with the suppliers, but he may want to know that this is the situation.’

After OW, every company which is part of the Bunker Holding Group has unsecured invoices, says Ladekjær. This is the new business model.

For KPI Bridge Oil, he says, ‘In the new bank package which was agreed after OW this was a condition from our side. We didn’t want to pledge invoices, and the reason for this was not because it was cheaper for us – as you can imagine, it doesn’t get cheaper to offer less collateral. It wasn’t because it was faster to get the loans through by not pledging – it takes longer.

‘We did it because, first and foremost, we had the financial muscle to say [to the banks] if you want to finance us we don’t want to pledge our invoices – we were in a position to say that.

‘Secondly, and very importantly, we wanted to show our counterparties that you don’t have this risk with us.’

So is KPI Bridge Oil taking this approach to those physical suppliers it does business with which have not pledged their invoices?

‘To some extent,’ says Ladekjær. ‘It goes into our wider risk analysis of dealing with suppliers – we are taking our own medicine as well!’

Would KPI Bridge Oil undo its relationships with ‘unpledged’ physical suppliers?

‘I don’t think it would be the pledging alone,’ he says, ‘if they are our good suppliers, perform well and are financially sound.

‘However, if we see some red lights with suppliers being strained in any way and they have pledged their invoices on top, then it may very well be that we choose another supplier.

If the issue of pledged invoices has a bigger part to play in counterparty relationships for suppliers and traders, then might this extend to the stipulations made by fuel buyers’ own banks?

‘It could be a possible spin-off,’ agrees Ladekjær.

‘I hope so, because it is all about transparency. We are trying to show transparency, and it’s no secret that banks everywhere, and in all industries, are doing more due diligence than ever before – but it will probably take some time before we get there.’

Some cynics may say that it is only the bunker industry heavyweights who have the leverage to negotiate banking agreements which can strip out the secured invoice requirement. Ladekjær doesn’t altogether agree: ‘It all depends on the scale of your own business in relation to your assets – big or small, its more about the ratio between your lending needs and your own financial position.’

Looking to the evolving profile of the bunker sector, Ladekjær, along with many other industry insiders, predicts more business consolidation. ‘We have seen suppliers moving into trading, and vice versa – and I think that will continue.’ However, he also believes a good many companies will keep to their own furrow, continuing to do what they know best, and doing it well.