Freight counterparty risk spirals as lockdowns bite
Coronavirus infection and death curves are, thankfully, now flattening. Unfortunately, counterparty risk across the freight business is following the opposite path as the economic toll of lockdown policies ratchets up the financial stress on companies up and down the supply chain.
The upshot, according to Peregrine Storrs-Fox, risk management director at freight transport specialist insurer TT Club, is that the threat of another Hanjin Shipping-style bankruptcy by a large transport company or shipper is increasing just as the ability to monitor and evaluate counter-party risk is diminished due to social distancing policies.
“There have been plenty of lessons over the years where shippers have gone down or a carrier has gone down,” he told Lloyd’s Loading List. “Hanjin is the stand out one there.”
He explained that container lines had suffered “a twin punch” over the last three months.
Firstly, he said, the closure of factories in China from late January through most of February saw cargo supply dry up.
“Now we [see] China open and no one cares because [importing countries] are closed,” he added.
“Which means that everyone involved in the physical movement of cargo, particularly the maritime physical movement of cargo, is facing this double punch.
“We all know about cancelled sailings. Volumes are necessarily going to fall off a cliff for a second time this year.
“So the problem for the shipping lines is to manage [all these challenges] on top of IMO 2020 that already caused problems. And then you [have] crewing issues.”
Storrs-Fox believes heightened risk is by no means confined to container lines, however. Rather, across the logistics world buyers and sellers now face growing financial stresses, while leading shippers including retailers are at serious threat of insolvency.
“There is definitely stress on the shipper community and that will play out and cause greater stress to forwarders and other operators,” he said.
“The truckers, rail companies etc. will face pressure [at] the sender or receiver end of the business.
“Terminals may well face a number of physical issues – for example, manpower, the ability of cargo to move effectively through. Likewise warehouses.
“So we may face, in some scenarios capacity type crunches.
“In terms of the financial risk for most of those players, I don’t think that that will necessarily be the main concern.
“Obviously this depends on the ownership structure because if you are talking about a shipper in the 3PL and 4PL scenario you may well have exposure that is causing some stress.
“When you move through to the shipping lines and it’s of conjecture on certain shipping lines as to how highly geared they are and what that consequence might be but inevitably there is a risk.
“There are a myriad of problems being faced in the maritime chain.”
Storrs-Fox believes limiting risk as far as possible within the restrictions imposed by social distancing/home working is a necessity.
“Doing thorough risk assessment and revisiting the process of assessing counterparty risk in particular is absolutely something that any stakeholder should be doing to identify where the weaknesses and vulnerabilities are and any steps that can be taken,” he said.
“The credit facilities that are generally available may need to be tightened up.
“There may need to be greater scrutiny as to who is generally a poor payer – poor in terms of fulfilling whatever the nature of the agreement is and seeing what can be done to monitor that stakeholder more carefully and put in place things that potentially shorten the period of tolerance that there may have been in place already.”