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OW Bunker, one of the world’s leading suppliers and traders of marine fuel, has today stressed the need for companies to ensure that they understand the true impact of 'margin calls' when considering their hedging and risk management strategies.

In a statement released today, the company said "Amidst the current global economic turbulence as well as volatile fuel prices and reduced credit lines, companies leave themselves increasingly exposed to falling into arrears beyond their existing credit lines, which could put them out of business.

"Going forward, a major consideration for companies who wish to hedge, must be their ability to pay these potential margin calls."

Following the recent downturn in the shipping markets and current market volatility, a large number of bunker suppliers and traders are understood to be revising their existing credit lines with customers as it becomes increasingly difficult to have complete confidence in the strength of a company’s financial statements.

Understanding and identifying counterparty risk has now become a major issue for shipping companies, particularly in relation to charter and Forward Freight Agreements.

OW Bunker uses the following example: If two counterparties have an agreed $500,000 credit line and one buys 2,000 metric tonnes per month of IFO380 fuel over a 12-month period at $300 per tonne with an initial delivery date of Q1 2009, but one week later the price of fuel oil drops to $280, the buyer is $480,000 in arrears on the hedge. However, the current credit line ensures that no security needs to be posted.

Conversely, if the price falls a further $20 per tonne to $260, the buying counterparty will be $960,000 in arrears on the hedge and will owe the selling counterparty $460,000 as an immediate cash payment, as they will have exceeded the initial credit line agreement.

"This payment is due immediately, despite the first delivery often being weeks or months away," OW Bunker points out.

This could cause significant problems for the hedger if they do not have access to cash, which is becoming increasingly more common due to the current liquidity issues within the global economy.

OW Bunker also recommends that hedgers establish counterparty relationships as early as possible prior to hedging to ensure that they have the ability to trade when they want to, rather than been slowed down through administrative processes.

Morten Dehn, Head of Risk Management Sales for OW Bunker commented: “If a company wishes to hedge with the current levels of volatility and reduced credit lines in the market, they must consider their ability to pay margin calls, particularly if they are hedging a substantial position, which is more than a traditional bunker stem.

"If they get it wrong, then many face the risk of going out of business. It is therefore critical that companies review the financial position of each counterparty as well as readdressing the baseline for extending credit lines.

"Most importantly, it is vital that companies fully understand the risk that they expose themselves to, and work with suppliers that have a complete understanding of the hedging process and the role that credit plays in an overall risk management strategy," added Dehn.