OW Bunker Collapse: can it happen again?
The OW Bunker bankruptcy affected over 20,000 shareholders, drying up credit liquidity in major ports and started a barrage of legal proceedings for shipowners, banks and physical suppliers around the world.
Could it happen again?
To answer that, we first need to explore what happened.
28th March 2014 → OW IPO is a smashing success (shares up 20%).
3rd October 2014 → OW releases a profit warning.
23rd October 2014 → OW estimates loss at $24.5m.
5th November 2014 → Loss estimate increases to $150m.
7th November 2014 → OW files for bankruptcy.
It’s a staggering fall from grace: from being valued at nearly $1 billion at the end of March to going bankrupt just over 7 months later.
What went wrong
When a company goes public they have a duty to disclose any potential risks they might be facing. At the time, OW said they hedged their physical oil but allowed free exposure of up to 200,000mts.
We can use this number to calculate the approximate loss:
On March 28th 2014 (day of the IPO), the Brent Oil Price was approximately $107/bbl.
On 7th November 2014 (day of the bankruptcy) the price was $83/bbl.
That is a drop of $24/bbl. In fuel oil terms that is approximately $24/bbl x 6.35 = $152/mt.
If we assume they were at their maximum risk limit (200,000mts) during this whole period, they would have suffered a loss of:
$152/mt x 200,000mts = $30.4m.
As described in the timeline above, the loss reported was $150m from one of their entities in Singapore known as Dynamic Oil Trading. This means that OW, on the whole, were far over their risk limits.
The above is a simple calculation, when in reality it is believed they were rogue trading put options. Derivative options allow companies like OW to put on much more risk with less collateral, sometimes even receiving money up front when trading (e.g. selling a put option to get money upfront, but having to pay out huge amounts when the price drops below a certain strike price).
Brent Oil Chart 2014
Why were banks getting involved?
OW would give unsecured credit terms to their buyers (typically 30 days). They in turn would receive credit from their suppliers.
However, to have more flexible payment terms, a company needs a large amount of cash (say they want to give a buyer 60 days credit whilst paying their supplier cash in advance).
A bank will typically supply this cash for a fee which the trader will make back in their margin. Additionally, the bank wants to guarantee that should the trader go bankrupt, they will still get paid. Therefore, in OW’s case, the banks had the right to go after any shipping companies that owed money to OW to collect money for bunkers on their behalf.
The problem was that this left the physical suppliers unpaid, so they then started to go after the trader’s clients as well. This left many shipping companies with vessel arrests and the danger of paying twice for the same fuel. The BunkerEx infographic below describes the flow:
- The green arrows signify the regular flow of cash.
- The red dotted arrows signify the collection attempt by both the physical supplier and the bank in the event of a trader default.
So could it happen again?
YES it can.
Any trader that sits between the buyer and the physical supplier (where cash is passing through them) can go bankrupt, and this would lead to the same messy situation that the OW case brought up.
Unfortunately, that is the nature of unforeseen losses and derivative risks: trading companies don’t know they are in trouble until it’s too late.
How can you protect yourself?
Every trader is at risk of defaulting. OW claimed they were in a ‘healthy state’ and doing deals just weeks before going bankrupt. Therefore, if you want a market expert on your side it is much safer to use a bunker broker instead.
A broker will often connect you with the physical supplier directly meaning lower margins and security of supply. If you still want to see quotes from traders, use a transparent broker such as BunkerEx that allows you to assess and filter your suppliers before buying.
Another option is to insist that you only pay your trader once you have proof that the physical supplier has been paid. This mitigates your risk of double payment.