Klaveness: No Company Is “Too Great to Fail”

One month after the South Korean shipping giant Hanjin Shipping sought bankruptcy protection, there are a number of important lessons to be learned from the event, according to Norwegian shipping company Torvald Klaveness.

Hanjin’s move was earlier described as a “Lehman moment” by Seaspan’s CEO Gerry Wang, as the event has materially impacted the shipping industry.

Although the comparison with the Lehman failure in September 2008, which rocked the foundations of global finance with huge consequences to the real brick and mortar economy, could be “an exaggeration,” according to Torodd Eeg-Olsen, Head of Risk Management at Torvald Klaveness, there are important similarities and learnings to be had between the events.

Eeg-Olsen said that the major similarity between Lehman and Hanjin is not its consequences to the wider market, but the fact that anything that is looked upon as “too great to fail” actually fails.

In the case of Hanjin, it was the Korean Development Bank’s unwillingness to prop up modus operandi, where a company with wafer-thin equity is allowed to roll over short term liabilities to survive until markets eventually recovers.

“Consequently, the elephant in the room is: will banks increasingly pull the plug on shipping companies that have been in breach of covenants for a long time? If so, we could expect similar events,” Eeg-Olsen said.

He added that following Hanjin’s default and the original Lehman moment, it is worth noticing how the financial industry learnt from the financial crisis and consider applying it within shipping.

Namely, Hanjin’s move led to the urge to quantify, monitor and limit credit risk for individual accounts, which would increase understanding and cap potential loss.

Additionally, the company needs to ask how big could the PnL of its contacts become before its counterparty defaults, and does it have sufficient capital to cover such loss. The likelihood of default and loss should also be added into the equation to get an idea of what counterparty credit risk costs, even before entering a new contract.

Furthermore, Eeg-Olsen said that a company should manage counterparty credit risk in its contracts, including (near) default break clauses, contract PnL netting, parent guarantees and financial credit mitigating instruments, such as bank guarantees, credit default swaps and other derivatives, not only reduce overall credit costs, but could also enhance risk adjusted income.

“Although we think counterparty credit losses will not be eliminated in shipping, our credit losses recent years have been minimal,” according to Torvald Klaveness.

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