Infospectrum senior analyst William Hogg reports on the baffling behaviour of Singapore’s banks when it comes the bunker business
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 impact on creditors of the recent fails in Singapore's bunker sector are known, the indirect impact may be more significant, undermining confidence in the sector at a time when the bunkering industry seeks liquidity in the run-up to 2020.
Once again, news about a formerly prominent Singapore bunker supply company hit the headlines last December, 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; at that time, there was a lack of transparency as to what had prompted the liquidation.
The new year brought with it greater clarity on the 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 US$354M. The other creditors shown in existing filings account for just US$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.
“Instead of traders and suppliers taking significant hits, it was the company’s banks that shouldered the burden”
How did it come to this? As might be expected, Coastal's banking creditors were primarily Singaporean. At the time of filing, OCBC Bank Singapore’s claims amounted to USD123M, DBS bank to almost USD30M and UOB bank to US$20M. International banks fared little better, with Rabobank and HSBC reporting claims of circa US$68M and US$40M, respectively, and BNP Paribas US$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 Coastal's total liquidity requirement for a proper function would be closer to US$200M* (still far below the US$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; VesselsValue 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 US$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, it would generate a maximum of just US$40M. This leaves a giant gap in what the business seemingly needed, and the debts accrued.
William Hogg (Infospectrum): Is Singapore’s bunker market too competitive or are banks failing to understand the nature of the business?
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.
A long list of failures
So far, so very troublesome, but Coastal is far from being the only bunkering company in Singapore to face issues of late. Indeed, Coastal’s bankruptcy follows 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 US$36M, followed a month later by the collapse of Dynamic Oil Trading Pte Ltd (painted as the primary cause of the wider collapse of OW Bunker A/S). Compatriot Searights Maritime Services Pte Ltd filed for liquidation in August 2016, with UOB bank reportedly being owed US$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 US$105M in claims; this time Société Générale accounted for a reported US$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 US$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 US$15.75M claim and ICICI Bank Ltd (Singapore branch) also filed a claim of US$9.9M against the company.
“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?”
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 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 experienced 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?
Singapore is set to experience the double whammy of a potential expansion of the MFM regime to gas oil supplies on 1 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; but Singapore’s issues, in conjunction with high profile incidents such as those surrounding Aegean, suggest that the industry is hardly making itself a desirable target.
While some of the larger players have invested heavily in compliance and financial transparency to meet more stringent banking demands, such investment may not be possible (or desirable) for some of the smaller players. Hence, more shake-ups seem certain to follow unless new lending practices are put in place or the bunkering industry cleans up its act. Perhaps cold commercial reality will be the catalyst for this, where regulation has so far failed.
* assuming not everything is bought and sold on 30 days and allowing for higher cost fuels and some longer-term inventory
Singapore retains its crown despite regional wobbles
Singapore is the undisputed centre of Asian tanker shipping and it seems likely to remain so, despite the impact of the US-China trade wars
It takes more than just location to make a city a global shipping centre. Key factors include administration, contacts, technical prowess and financial clout and Singapore has them all in spades. “Singapore has [all] the fundamentals to be a strong shipping hub; it has the legal and business framework to support shipping operations and from a shipmanagement company perspective it is on the main shipping hub list with Hong Kong, Hamburg and Limassol,” explains V. Ships group managing director Franck Kayser.
“V.Ships sees Singapore as a very important location and we are working hard to optimise our activities and working to develop into a centre of excellence for tankers,” he says. “This requires investing in experienced tanker people for our operations team and investing in the education of technical staff and seafarers.”
“Where the trade war is biting is through the negative effects it is having on the Chinese economy - and one might argue, the negative effects it has on the US economy”
From a regional perspective Banchero Costa’s global head of research Ralph Leszczynski says that the trade war between the US and China will affect the tanker market “only to a limited extent”. He continues: “The US is a growing oil exporter, but it still accounts for no more than 5% of global exports. A significant proportion of US oil exports goes to Asia, but that is mostly to Japan, South Korea, and India, so there is little direct impact in Asia.”
Ralph Leszczynski (Banchero Costa): Believes that in 2020, 90% of ships will not have scrubbers
“The US was never a significant exporter of oil to China, nor was it ever a significant importer of oil products from China,” he says.
“Where the trade war is biting is through the negative effects it is having on the Chinese economy - and one might argue, also the negative effects it has on the US economy. Business confidence and investment in China is falling due, to all the uncertainty about its economy, and this influences oil demand as well.”
Turning to the 2020 sulphur cap, Mr Leszczynski has this warning: “When it comes to fuel availability, I am more concerned about the availability of high sulphur fuel oil than about low sulphur compliant fuels. The reality in 2020 will be that 90% of trading ships will not have scrubbers and will have to rely on compliant fuels. Whilst large hubs like Singapore will have every type of fuel available (even LNG), in small ports bunker suppliers may not have separate tanks and bunker barges to stock a fuel that only 10% of the fleet require.”
So while the lack of impact in Asia from the trade wars is a comfort, the possible impact from 2020 remains a worry for those involved in Singapore’s bunker industry.