Risk Management the Key to Surviving Tough Times

International accountant and shipping consultant Moore Stephens warns that shipping companies should be pursuing a policy of robust risk management in order to identify and ameliorate the increased level of financial risk to which they are currently exposed.

Geoff Woodhouse, head of Moore Stephens’ Governance, Risk and Assurance Group, says, “Risk management has become an increasingly important aspect of global business. A mixture of prudence and optimism, and close attention to risk management, is essential at all times in the shipping industry, but the global economic downturn has accentuated the dangers which lie in wait for the unprepared. To manage risk, it is necessary first to identify it.”

Writing in the latest issue of the Moore Stephens shipping newsletter Bottom Line, Woodhouse says, “Long-term charter party agreements should be money in the bank, but there are potential risks. For example, what is the charterer's reputation, how long is the charter for, and how much business is tied up with a particular charterer? The failure of a charterer can start a counter-party domino effect which will have far-reaching consequences for trading partners.

“Furthermore, where charters have been fixed at above market rates, what is the risk that the charterer may not be able to fulfill its obligations, or attempt to renegotiate a lower rate? If the charterer reneges, deliberately or through insolvency, the shipowner will have to find a new charterer, most likely at a lower rate in today's market.”

Woodhouse explains that there is a risk, also, where the bank or other counter-party owes money under derivative contracts to an owner. The bank or other counter-party may not be able to meet its obligations, and failure to honour the agreement could result in a loss. Another area of counter-party risk concerns shipyards constructing newbuildings, where the ongoing financial viability of both the yard and the associated refund guarantor should be assessed. Woodhouse notes, “Loan finance availability is currently very restricted, which may lead to an owner's inability to finance newbuildings, resulting in failure of the contract and potential losses to the owner. Shipping companies may also be exposed to interest rate risks on borrowings and to risks from exchange rate fluctuations.

“Failure to comply with covenants on existing loans is also a key risk, as banks may call in their loans, threatening the survival of the business.

“Where companies have insufficient resources to meet their contractual commitments, liquidity risks arise. Cash generated by trading activities will be insufficient to pay staff, suppliers and other creditors. Companies must look at their options, including overdraft or other bank facilities, new equity finance, increased trading and sale of assets.

“Companies also need to be aware of their exposure to fraud. This might include the risk of collusion when charter parties are being arranged, over-priced contracts, and the possibility that supplier discounts for a range of goods and services from bunkers to drydocking may not be passed on in full in return for some kind of kickback to a member of staff.”

Woodhouse concludes, “While it is impossible to eliminate risk from your business completely, robust risk management will help protect you against the unexpected. Risk management strategies and processes and regularly reviewed risk registers all fall within a strong governance framework. By the end of any risk management project, there should be improved understanding, increased transparency and better controls to monitor and manage strategic and operational risk.”

•About Moore Stephens LLP

Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping and insurance adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 647 offices of independent member firms in 98 countries employing 21,224 people. Fee income increased in 2008 by US$353 million to US$2,237 million, a growth rate of 18.7%.

•For more information:

Geoff Woodhouse, Moore Stephens LLP / Tel: +44 (0)20 7334 9191 / E-mail: [email protected]