What do you use yours for?
25th February 2013 22:43 GMT

Although the maritime credit report was conceived in the 1970s, perhaps it has more pertinence today than ever before. At the start of 2013, the maritime sector is experiencing the fourth consecutive year of a market and global recession. Companies are exposed to this prolonged trough which some analysts view as having no immediate end in sight, at least for the shipping sector.

As my colleagues at Ocean Intelligence have touched upon in previous blogs, the maritime sector is unique in the sense that it offers 30-day open credit terms as standard on amounts which can reach up to the USD eight-figure mark to companies that range from super oil majors to single ship owning companies that have a limited profile in the market. Some market and counterpart knowledge is therefore seen as being vital.

Over the last 40 years, the maritime credit report has been part of the basis for informing decisions by those involved from a credit risk as well as the commercial side of the business. The question is; what are the possible uses of such a report?

Some might view maritime credit reports as having limitations. Some may just print them off and stack up a pile of papers, to sit there for a year until the next review is required. But as part of a larger credit management suite of tools they can be used for much, much more.

Reports can provide a foundation for a credit assessment model that has a more quantitative slant. Background information on particular shipping segments provided by analysts that look at these markets day-in and day-out can provide some useful insights. Segments can vary from the high-seas fishing segment to container shipping. Scale can range from of a single ship owning freezer trawler company to the world's major container liner operators, and everything in between.

Despite what some of my fellow maritime credit analysts and I might think, our reports are in fact read, digested and dissected to be used for different functions both from a credit risk and commercial perspective.

First, a basic check that the company is a registered legal entity that is either live or de-registered. Further reading covers information on the subjects' relationships and affiliations with both smaller, larger and sister entities; this basic search can be important for credit insurance coverage. In some cases, familial ties with other companies and the history behind the entities can be established. For some, details like this can be integral when stipulating group credit exposures. Answering questions such as whether these are affiliations through common individual shareholders or a more clear-cut parent and subsidiary relationship can establish if it would be possible to seek more security from a Parent Company Guarantee (PCG).

From a shipping perspective, the reports can help identify the vessel owning structure of beneficial versus direct registered owners, and trading patterns of the fleet. The company's vessel ordering trends can be an important factor to assess when and how much it spends, and whether it might be overburdened by its ship finance arrangements in the near future. Among some credit management departments, the reports are a starting block for their own internal report writing and review process, where further qualitative and quantitative analysis is conducted – applying their own market knowledge and experience of the counterparty.

Credit management departments do of course have the power to get financial statements directly from existing and potential counterparts, and have increasingly been doing this since shipping was hit by the double whammy of weak rates and high bunker prices. But not all are forthcoming, especially those under single ship owning entities or with offshore registry in the likes of the British Virgin Islands, Hong Kong, those under Greek Law 89/1967, and many other seemingly far-flung locations. Even where financial statements are available, they can be dated. Which is where the segment knowledge of the analyst and application of the variety of standard shipping/energy financial structures can be applied on a micro scale within the maritime credit report.

Market feedback remains one of the foundations for the maritime credit report. They offer a third party a source of information on payment performance feedback and on the individual counterpart, confirm what the counterpart's normal trading style is, and provide a rough gauge of others' trading capacities. Not all the details are revealed of course, and here at Ocean Intelligence there is a fine line between what is told in confidence and what must be opaquely recorded, filtering out along the way what might have been thrown in to set the “cat among the pigeons” by reference providers.

The final appraisal of the company provides a considered recommendation for the basis of payment terms, whether any open credit could be granted and to roughly what level. Comments from users of the maritime credit report indicate that they use this as a guide, and gauge their own open credit/payment terms alongside a range of other data they have gathered  - and of course their own credit assessment of the counterparty (including their own gut feelings).

Periodic reviews often call for updates of existing credit reports to bring clients up to speed with recent trading activity, a counterpart's financial position and any changes to the overall operations of the subject, including its actual or expected financial performance and payment review. Any deterioration in payment performance should have been picked up from the analysts' reference checks and the credit manager may choose to take heed and adjust credit terms accordingly.

Credit insurance coverage in the marine fuel segment has become an increasingly common requirement for a range of suppliers/traders, in the context of a destabilised market. Periodic reviews are often brought about by the need to maintain blanket credit insurance coverage, and a shiny new or updated report can be a factor in this. With a limited amount of capacity in the insurance market for each counterpart, there is a growing trend for insurers to seek the best information available and cross-check it with what the insured tells them in their application. Once the domain of the big three insurers (Atradius, Euler Hermes and Coface), we now see markets in London, Singapore and further afield taking a growing interest in this segment which - for all its risks – can offer lucrative rewards!

From a commercial standpoint, maritime credit reports can also be useful tools for those seeking to maximise sales potential. Details in the reports can form the basis for a review of a potential counterparty and even an existing account. Risk departments can pull particulars from the maritime credit report on whether it is a perceived low-risk and therefore low-margin account, or high-risk and potential high margin account. Over the past year we have seen various Chapter 11 filings and more low-profile insolvencies of bunkering companies.  The information within a recent credit report can help assess when to stop dealing with companies that may be on the brink of collapse.

If needed for legal purposes, information in maritime credit reports can be used as a basis for much wider investigations and examination of any affiliations. Information can be used as a basis for proceeding with vessel arrests – to help identify whether there is a maritime lien over a vessel for salvage claims, unpaid bunkers, lubricants, coatings bills, providing a basic overview of the assets held by the company.

As we move towards a digital work life, the maritime credit report agencies have responded accordingly and that stack of papers on the desk may even be recycled/burned/trashed (delete accordingly) and viewed on email, computer screen or even as an application on mobile devices. Of course, the report does have its limitations, but if put to good use and combined with other risk mitigation tools, provides the sound footings for a broader credit assessment procedure. At the end of the day it is up to the user how to apply the information, but the maritime credit report  can do more perhaps than what it was originally recognised for.

Jacqueline Phillips,
25th February 2013 22:43 GMT

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