An increasing amount of shippers are requesting “hidden” financial data from carriers, following weak carrier financials and Hanjin’s bankruptcy filing, according to shipping research and consulting firm Drewry.
Shippers are demanding more financial transparency from carriers in the wake of Hanjin Shipping’s decision to file for receivership, according to Drewry, a shipping research and consulting firm based out of London.
Drewry expressed how there is an increasing demand from exporters and importers for carrier financial risk indicators and advice on risk management. The firm believes shippers will award more cargo to carriers who are “closer to the safe zone” and “provide visibility into their financial health.”
In addition, Drewry said it found that carrier financial stress has increased as the industry’s average revenue per TEU has fallen steadily since the first quarter of 2013.
To measure financial stress in the industry, Drewy and others use the “Z-score,” for predicting bankruptcies. The Z-score is a formula developed by Edward Altman, a professor of finance at New York University.
Drewry sorts carriers into a safe, caution or distress zone using the formula, which uses inputs that include assets and liabilities, retained earnings, annualized earnings before interest and taxes, book value of equity, and annualized sales.
As of June 30, Drewry said only AP Moller-Maersk and Orient Overseas (International) Ltd., the parent of container carrier OOCL, were in the gray or caution zone as calculated by the Z-score formula. Another 14 carriers, including Hanjin were in the distress zone as calculated by the formula.
“We expect to see some uptick to the Z-score when the third-quarter 2016 results are published, while the removal of Hanjin from the sample will also benefit the average score,” Drewry said.
“Stakeholders must understand that no carrier is too big to fail,” the firm said. “The hitherto expectation that some white knight would rescue an ailing carrier has been erased forever.”
Drewry said Hanjin’s demise “is not expected to create a domino effect,” but that “a number of major carriers are still struggling and the risk of another following the same path as the Korean line cannot be discounted.”
Drewry added, “Knowing these things, any company doing business with ocean carriers must undertake more due diligence than was previously the case.”
However, the firm noted, “Getting financial visibility is not always possible, however, as many
large carriers, such as MSC and Hamburg Sud for example, do not publish
their financial results. Others only report at the group level with
minimal data for container operations.
“The demand for financial
transparency is increasing and Drewry is aware that some large shippers
are now requesting access to ‘hidden’ financial information before
entrusting their cargoes, in return for signing a non-disclosure
agreement. As more shippers demand access to financial data during
contract negotiations, it will become harder for secretive carriers to
hold down the drawbridge.”
Drewry: Shippers are demanding more financial information from carriers
