‘Ownership, cash management in shipping business’

SHIPPING is a cash-driven business, and the combination of large, frequent and often short-notice receipts and payments does not sit well with private equity firms when considering cash management.

According to international shipping experts, Moore Stephens, over the last two decades, the industry has moved from one populated by owner-managed businesses with cash payments authorised by owners, to a corporate one with companies growing and turning to external sources for equity funding.

They argued that despite the private equity industry taking a keen interest in the shipping space, significant cultural and knowledge gaps are frequently only coming to light for both the investor and the shipping company once an investment has been made.

The group explained that due diligence processes are typically focused on the economics of the market, adding that the individual track records of the management team and the ships themselves from a technical specification and operational perspective.  

Moore Stephens said: “The actual day-to-day operation of what is effectively the middle and back offices of shipping companies is often scrutinised to a much lesser degree.

“An understanding of the cash flows associated with running a shipping business is critical, receipts are often lumpy and irregular, payments inconsistent from month-to-month, widely spread in terms of size, frequent and payable on presentation of pro-forma invoices as opposed to final invoices.  In addition, late settlement can cause vessels to be delayed or even detained.

“Due to the nature of the movement of cash , the industry is at a high risk of unauthorised and/or erroneous payments . .  It is essential for shipping companies to have robust and routinely audited systems in place to ensure that risks are managed appropriately.

“Operating a ship is also an expensive business. Mechanical breakdowns occur on even the best maintained vessels, causing significant cash flow challenges. In addition, the rising cost of complying with environmental regulations in the wake of new regulations governing exhaust gas emissions, and incipient legislation covering the installation of onboard ballast water management systems should not be under-estimated.

“However, managing and controlling risk exposure is not simply a matter of compliance. In an industry where reputation has real commercial value, proper risk management adds value and enables businesses to protect stakeholders’ interests and gain competitive advantage”.

Meanwhile, companies in the offshore maritime sector need to keep a close watch on costs and manage their exposure to risk in the wake of the dramatic fall in oil prices.

Cassie Forman, Director within the Shipping & Offshore Maritime group, says; “It is remarkable how quickly the dramatic fall in oil prices has fed through to increasing levels of financial stress in the oil and gas services industry, where the sudden drop to around $50 a barrel is triggering cost-cutting across much of the sector. Oil and gas majors are already cutting costs, and several have recently announced cuts to investment in a number of major projects. Smaller players are also reconsidering their capital deployment.

“There was a significant increase in the number of insolvencies of UK oil and gas services companies last year. Although this increase is from a relatively low base, it is significant because insolvencies in the sector have been rare over the last five years.”

Referring to the recent bankruptcy of market-leading bunker supplier OW Bunker, Forman says: “This really set alarm bells ringing in the offshore maritime and shipping industries. Although the underlying reasons for the failure are still being analysed, the fall in oil prices is certain to have played a significant part.

In a related development, references to major risk management and fraud losses, and to unrecoverable credit, have been common throughout all reports to date involving the company’s collapse.

He added: “Any industry which suffers what is effectively a 50 percent reduction in income over a three-month period is going to suffer. But any sector where the revenue is predicated on the price of oil, such as the offshore maritime industry, is particularly susceptible because of its exposure to counter-party risk and potential credit line difficulties.

“With oil prices now at their lowest level for five years or more, the offshore maritime sector needs to look at costs in light of its current reduced revenue stream. This is not a time for speculative or non-essential spending. Rather, it is a time for strategic financial planning with experienced advisers who understand the risks peculiar to the industry.

“The offshore maritime sector also needs to make sure that it has proper contingency planning in place, and effective risk management procedures embedded into the everyday activities of the company. Sound corporate governance and a proper management structure and technical support systems are central to the ability to identify, control and ultimately mitigate risk.”

Alison Jarabo of maritime efficiency specialist Fathom Shipping told the recent Moore Stephens Opportunities in Shipping Services seminar in London that regulation and the need to control costs were the two main factors driving the growth of technology in the shipping industry. She emphasised, however, that, ”Technology and innovation may abound but, without end-users able to access the finance to deploy, the market will fail.”

Jarabo identified scrubber technology, ballast water treatment systems and ship performance management systems as some of the main technology opportunities in the industry today.

She cited unreliability of technology, lack of in-service history, and lack of acceptable clear parameters as some of the potential barriers to uptake, but also noted that the shipping industry excels at anticipating changes in regulations, at the timely implementation of R&D initiatives, and at the adoption of consistent and coherent regulation on a global basis.

Moore Stephens shipping partner Richard Greiner said: ”Private equity investors who have a firm grasp on the potential risks and rewards available in today’s shipping services sector could be a good match for well-founded shipping services and technology providers who have a clearly identified market for their products. Indeed, it could be argued that recent developments have created something of a perfect storm to bring the two together.”

Overall confidence levels in the shipping industry fell during the three months to November 2014 to their lowest level for two years, according to a survey conducted by United Kingdom based Moore Stephens maritime experts.

The survey revealed increasing concern about the high cost of achieving compliance with new regulations, and ongoing doubts about overtonnaging. But it was not all bad news; with charterers, managers and brokers all more confident than they were three months previously of making a new investment over the coming year.