‘New York! Just how I pictured it’. These are, of course, the words of Stevie Wonder from his hit tune ‘Just Enough For The City’. And so, with the vision of Stevie to fall back on, to New York, and the manicured lawns of southern Connecticut, went the maritime conference circuit last week. It always amazes me that New Yorkers use the word ‘like’ so often, particularly as they are usually explaining something that they actually don’t like.
To the Capital Link shindig my thoughts wandered. I’m not sure if there is a collective noun for people who lose money (whether theirs or somebody else’s), so I’ve invented one. Here you found ‘a bulker’ of losers. Examples of companies that went bankrupt when the market was far higher, and yet they are still strumming the same three chords from the same Status Quo song. If you went bust when the market was three times higher and haven’t changed the tune, then, well, ummm, maybe . . . . Some shipping companies must have unbelievably good boardroom biscuits considering how often their bankers keep turning up for pointless meetings about rescue plans that are less plausible than the plot of Con Air.
I must confess that I didn’t go. I must confess further that I would rather stay in Airdrie and empty my dog’s anal glands than sit through another panel of ‘bulkers’ tipping us on when the Chinese economy will rescue their hopelessly antiquated business models. But me being me (unless when booking a table at the Harvester in Luton, where I pretend to be someone else after my lifetime ban for crashing the salad cart through the glass doors and running down the high street with it) I knew people who were there. By the way, just revisiting the Harvester for a moment, how come I was apprehended and charged with theft and criminal damage when the waitress clearly said ‘Help yourself to the salad cart’?
So back to New York and also the many cocktail parties at CMA. My spy there was a trader friend who goes by the name of Stavros McTavish. His Dad went to watch Scotland play in the 1978 World Cup in Argentina, got on the wrong flight home and ended up settling in Piraeus. Stav may be a bit slick when it comes to some of his trading manoeuvres, but he knows the difference between fillet steak and horse meat. In my eyes his opinions count. So I was delighted to hear that he ran into a mutual acquaintance of ours, a man we call ‘The Pound Shop Onassis’.
Pound Shop likes to talk about Pound Shop. Usually he does it loudly, but always he picks his audience like OJ’s lawyers pick a jury. In an ideal world he will hold court with people he pays (brokers mostly), people who know absolutely zero about shipping (private equity bods mostly) and those who haven’t realised that if you haven’t realised who is the dumbest in the room, if Pound Shop is there then it’s him (journalists mostly). But never, ever will he open the floor to questions as it would become clear that he has no practical answers.
Stav told me that Pound Shop had found such an audience in the corner of a drinks reception hosted by the Maritime Sanitary Towel Providers Association of America. He was braying at the assembled onlookers who wore expressions of people who were trying their mother in law’s cooking for the first time. Stav sidled up so that he could eavesdrop.
‘I tell you pal. Even by Pound Shop’s standards it was stunning. He told them that he was the only man in shipping who could correctly price risk. That’s why he was making so much money trading FFAs’ laughed an incredulous Stavros. Now I might not be totally on the pulse when it comes to who trades what, but I am very certain in the case of Pound Shop that he doesn’t trade FFAs. He’s had the opportunity at every company he’s ever worked for (and left smouldering like a tyre mountain once finally kicked out), but never pulled the trigger. I remember having dinner with a broker pal when we bumped into Pound Shop. Sweating, drunk and loud, he bellowed at his fellow diners ‘This guy is my FFA broker. What a guy!’ My mate reliably informed me when out of earshot that Pound Shop would call him at odd hours, ask some stupid questions, give him an impossible spread to trade then disappear again with nothing done. ‘Just a lonely bloke’ he concluded mournfully.
Interestingly Stav told me that while parting his fellow drinkers’ slicked hair in Connecticut, he regaled them with his best trades of the year. ‘I wrote them down just to make sure I didn’t get it wrong. When I got back to the office I confirmed what I suspected all along. Every trade was a loser,’ he laughed. Luckily for his employers, Pound Shop no more did those trades than I can get my dream date with Samantha Fox. However, there was something that did require closer inspection in those ill-chosen words of his.
There is more than a nagging suspicion that risk could be priced more efficiently on a structural level. Take a typical trade in the dry bulk sector. The cargo seller is a grain house for example. The ship itself is owned by somebody with a fleet of 20 vessels. The cargo buyer is also a grain house. The ship is on time charter to an operator. Now one of these participants in the chain has no assets and is very much in the cash flow management business on a limited credit line for which it pays good interest. The rest have large balance sheets, access to deep pools of cheap trade finance and assets to back it all up with. The operator is really ‘back to back’ trading between ship and cargo owner, with a time lag in payment terms.
So on which of these entities should the risk be most efficiently priced? There are only two parties to this whole shipping transaction who have to play the cash flow game. The first is the operator, who is paying up front for the time charter hire and port costs, and secondly the bunker supplier who will give payment terms to the operator based on risk profile. So it is pretty clear that the credit risk is actually placed on the riskiest part of the deal. The typical operator can find themselves sat on a pile of invoices ready to be sent out to companies with investment grade ratings. Yet the operator, the weakest link in the chain is the one being leaned on.
I called Les Miserable to see what he had to say about this. ‘Yep, it’s true. I spend more of my time here juggling cash flow than actually thinking about what’s best to trade. I know we’ll get paid, but it’s like being a hamster in a wheel’ he explained. Has he thought about other ways around this. ‘Yep. I came up with a really good way to deal with this. There must be a market for something here,’ he pondered.
He was recently in exactly the position where he was owed millions by good credits for outstanding charter parties while additionally owing millions to various bunker suppliers and owners. So he approached one of the bunker suppliers and explained the issue. He had a supramax which he’d bunkered in Europe on its way to the Plate to pick up a cargo of grain. He was then going onto Japan to deliver to a major Japanese grain house.
The bunker supplier reviewed his charter party and, having been the supplier of the bunkers for the vessel going from the Plate to Japan, he knew it was a real fixture. He agreed to lend Les 90% of the total value of the fixture (at the time probably close to $3m), keeping back the outstanding amount that was to be paid for the original bunkers. Les got the grain house who had bought the cargo to assign the earnings to the bunker supplier and the rest is history. ‘We paid off a couple of outstanding bunker payments and it allowed us to quote and get another trade with a long ballast leg which, without the up front payment, we wouldn’t have been able to do,’ he concluded. ‘You know, the longer the ballast the worse it is. Sometimes we have to leave paying business just to be prudent,’ he moaned.
Thinking about this, there is the possibility to take it a step further. For example, would a charterer offer an advance payment to a well trusted operator in exchange for a discount? Would a bank or fund offer a trade discounting service for charter parties with companies who’s credits are better than the operating company that is borrowing? Could there be a pool from which operators could commit capital then use it to cash in charter parties early? Like a clearing house for charter parties in essence.
A step even further would be to create a marketplace for people to offer charter parties for discounting, on which participants could offer terms and interest rates, the best terms winning the deal. This would essentially create a ‘crowd funding’ style of platform for freight which would ease the cash flow burden of operators considerably. After all when a company with no assets and a $10m unsecured credit line is the reference point for pricing risk in a chain where they are not responsible for the main financial risks seems odd, if not just plain wrong. Will a Rio Tinto or Vale pay you? If you think ‘no’ then you are in the wrong business. So knowing that ultimately the cash to pay to transport goods comes from these entities, why are the terms based on the asset-less service provider in the middle?