Survival strategies for a "Black Swan" event?
November 8, 2014 11:41 PM Subscribe
My industry has just had a Black Swan event and has entered a period of systemic risk.
The largest marine fuel trader/supplier in the world went suddenly and spectacularly bankrupt. Although my colleague-competitors and I suspected that something wasn't right with their risk management, no one saw it coming this fast. A massive fraud in Singapore triggered the immediate situation but was only part of the overall problem. So let me try to unpack the situation in order to garner specific, useful advice.
The bankrupt company has no equity left and the banks own all their AR and are in position above unsecured creditors. Over the next 30 days (standard trading terms in our industry) roughly $1b-$1.2b in AR will simply not be paid, and that's not even counting the up to $400m involved in the risk management and fraud problems. My company is fine with a limited exposure that's fully insured, and we have offsets in excess of what the bankrupt company owes us; that's not my worry. My worry is systemic risk. Possible/likely results:
* Oil majors/state oil companies stop offering credit terms to traders across the board; that's about 15% of global fuel trade and the only (appreciable) fuel sources in key markets such as Brazil and Indonesia.
* Suppliers begin arresting vessels because the bankrupt company was in a trade between the owner and supplier. Those vessels in turn will not pay other traders & suppliers or the arrest could force the shipping company into bankruptcy.
* Smaller, uninsured traders exposed to the bankrupt company will certainly "domino" into bankruptcy, but it's impossible to tell which ones.
* Insured traders or those not directly exposed to the bankruptcy will be exposed to these smaller uninsured traders.
* Insurance companies (now taking a massive hit on this) will begin to pull coverage on other traders, rendering ineligible otherwise good AR that supports the industry standard ABLs or forcing some traders into a death of a thousand write downs.
* Banks will freak the fuck out and start slashing and burning ABLs or other LOCs.
...and this is all occurring as oil prices fall through the floor.
Yes I know mere billions of dollars are not anywhere comparable to the situation in '08. But it's enough to potentially "freeze" credit in the marine fuel industry taking with it many players in the fuel (and even shipping) industries. Does anyone who lived through the '08 meltdown have any advice other than to change industries. I'm standing by my CEO regardless.
Also if we could refer to it as the "bankrupt company" rather than by its name that would help keep this discussion less visible to search engines, thanks.
The largest marine fuel trader/supplier in the world went suddenly and spectacularly bankrupt. Although my colleague-competitors and I suspected that something wasn't right with their risk management, no one saw it coming this fast. A massive fraud in Singapore triggered the immediate situation but was only part of the overall problem. So let me try to unpack the situation in order to garner specific, useful advice.
The bankrupt company has no equity left and the banks own all their AR and are in position above unsecured creditors. Over the next 30 days (standard trading terms in our industry) roughly $1b-$1.2b in AR will simply not be paid, and that's not even counting the up to $400m involved in the risk management and fraud problems. My company is fine with a limited exposure that's fully insured, and we have offsets in excess of what the bankrupt company owes us; that's not my worry. My worry is systemic risk. Possible/likely results:
* Oil majors/state oil companies stop offering credit terms to traders across the board; that's about 15% of global fuel trade and the only (appreciable) fuel sources in key markets such as Brazil and Indonesia.
* Suppliers begin arresting vessels because the bankrupt company was in a trade between the owner and supplier. Those vessels in turn will not pay other traders & suppliers or the arrest could force the shipping company into bankruptcy.
* Smaller, uninsured traders exposed to the bankrupt company will certainly "domino" into bankruptcy, but it's impossible to tell which ones.
* Insured traders or those not directly exposed to the bankruptcy will be exposed to these smaller uninsured traders.
* Insurance companies (now taking a massive hit on this) will begin to pull coverage on other traders, rendering ineligible otherwise good AR that supports the industry standard ABLs or forcing some traders into a death of a thousand write downs.
* Banks will freak the fuck out and start slashing and burning ABLs or other LOCs.
...and this is all occurring as oil prices fall through the floor.
Yes I know mere billions of dollars are not anywhere comparable to the situation in '08. But it's enough to potentially "freeze" credit in the marine fuel industry taking with it many players in the fuel (and even shipping) industries. Does anyone who lived through the '08 meltdown have any advice other than to change industries. I'm standing by my CEO regardless.
Also if we could refer to it as the "bankrupt company" rather than by its name that would help keep this discussion less visible to search engines, thanks.
I don't really have any insider view, more of just a spectator. But in '08, some of it came down to Berkshire Hathaway underwriting some otherwise insane things, given their reinsurance program.
On the other hand, one particular credit market freezing up is systemically different than what happened in 08, where people were (rightly) afraid that the investment banks underwriting things were themselves bankrupt. The market for subprime mortgages could have collapsed without systemic concern, except the way the investment banks had operated in that market led them to keep the worst assets on their own books, and in some cases to facilitate bets on asset performance 10x the insured value based on faulty counterparty analysis. I can't say I know the markets that well, but I don't see why marine fuel markets would cause 'systemic' risks beyond marine fuel. Obviously shipping from China will be more expensive, but it won't be affecting mortgage rates.
So how you handle this depends on your firm. If your firm depends on a functioning market to supply your company with marine fuel, I suspect you'll be fine in the long term. This fraud does not eliminate buyer's need to ship things, or seller's ability to produce. If the market is small enough, a clever hedge fund with a clean balance sheet can step in. You might have a bad quarter, or at least a messy one while what's owed works its way through the legal system.
If you're a commodities trader worried about counterparty risk, well, the answer is options, and default swaps. And swaps on the swaps. And a centralized exchange to make counterparty risk more visible. And sufficient diversification such that one bump in a tiny fraction of the economy jeopardizes the firm.
posted by pwnguin at 12:39 AM on November 9, 2014 [1 favorite]
On the other hand, one particular credit market freezing up is systemically different than what happened in 08, where people were (rightly) afraid that the investment banks underwriting things were themselves bankrupt. The market for subprime mortgages could have collapsed without systemic concern, except the way the investment banks had operated in that market led them to keep the worst assets on their own books, and in some cases to facilitate bets on asset performance 10x the insured value based on faulty counterparty analysis. I can't say I know the markets that well, but I don't see why marine fuel markets would cause 'systemic' risks beyond marine fuel. Obviously shipping from China will be more expensive, but it won't be affecting mortgage rates.
So how you handle this depends on your firm. If your firm depends on a functioning market to supply your company with marine fuel, I suspect you'll be fine in the long term. This fraud does not eliminate buyer's need to ship things, or seller's ability to produce. If the market is small enough, a clever hedge fund with a clean balance sheet can step in. You might have a bad quarter, or at least a messy one while what's owed works its way through the legal system.
If you're a commodities trader worried about counterparty risk, well, the answer is options, and default swaps. And swaps on the swaps. And a centralized exchange to make counterparty risk more visible. And sufficient diversification such that one bump in a tiny fraction of the economy jeopardizes the firm.
posted by pwnguin at 12:39 AM on November 9, 2014 [1 favorite]
Not a black swan event by a long shot.
Everything else is hard to answer w/o understanding where the reorg is taking place, how the assets are encumbered and if the creditors want to and can restructure rather than liquidate. If the business itself has value its likely there is an agreement to us DIP funds for the w/c as that preserves more value to the creditors.
Basically your question is impossible to answer except that these sort of failures have occurred in other spaces (hence the non bs nature) and there is usually some very short-term stress, usually the banks become a bit more stringent on terms and transparency and that's about it.
posted by JPD at 4:51 AM on November 9, 2014 [4 favorites]
Everything else is hard to answer w/o understanding where the reorg is taking place, how the assets are encumbered and if the creditors want to and can restructure rather than liquidate. If the business itself has value its likely there is an agreement to us DIP funds for the w/c as that preserves more value to the creditors.
Basically your question is impossible to answer except that these sort of failures have occurred in other spaces (hence the non bs nature) and there is usually some very short-term stress, usually the banks become a bit more stringent on terms and transparency and that's about it.
posted by JPD at 4:51 AM on November 9, 2014 [4 favorites]
So, first, on anonymizing the company name, this AskMe shows up first (!) when I google "marine fuel bankruptcy." Lol.
Second, the company in question supplied 7 percent of global marine fuel. Not insignificant, but not something other suppliers aren't already reconfiguring around.
Third, a black swan event would be completely unpredictable. Corruption and bankruptcy in a commodity business are highly predictable, even if no one saw this event in particular coming, that's why there's insurance for it.
posted by spitbull at 5:09 AM on November 9, 2014
Second, the company in question supplied 7 percent of global marine fuel. Not insignificant, but not something other suppliers aren't already reconfiguring around.
Third, a black swan event would be completely unpredictable. Corruption and bankruptcy in a commodity business are highly predictable, even if no one saw this event in particular coming, that's why there's insurance for it.
posted by spitbull at 5:09 AM on November 9, 2014
People like me will be offering to buy the AR at a discount starting at the Asian market open in a few hours. So not a total loss.
posted by MattD at 8:45 AM on November 9, 2014
posted by MattD at 8:45 AM on November 9, 2014
This thread is closed to new comments.
That said, let's back up and take a 10,000-foot view of the system here, because that's what we're talking about when you say "systemic risk." This event won't change the basic demand for shipping. Shipping companies will still need to operate. To do that, they need marine fuel and they're willing to pay for it. Someone has to supply that fuel to them. At a systemic level, none of that has changed: both the supply and the demand are still there.
So things may be rough for a while, and others might get dragged down in the process, but markets are good at finding a way when people need goods and other people want to sell them those goods. You also have two very powerful groups, the oil producers and the shipping industries, with a very strong interest in preventing complete chaos.
posted by zachlipton at 12:26 AM on November 9, 2014 [4 favorites]