A US district court has ruled that ING should recover money owed to its borrower – the now defunct OW Bunker – confirming the legal strength of receivables-backed financing structures, but emphasising the need for more security in contracts between bunker companies and physical fuel suppliers.
Judge Valerie Caproni ruled in favour of ING in four “test cases” out of the 24 she has been assigned, and this judgment now applies to all 24. She found that the two physical suppliers involved, namely US Oil Trading and NuStar Energy had lien, or claim, to the outstanding debt owed to OW Bunker, even though they, like the bank, were also owed money by the bankrupt company.
This follows a number of other rulings in Europe and the US, all in favour of ING as the security agent of a US$700mn receivables-backed syndicated revolving credit facility signed by OW Bunker a year before its collapse.
Bruce Paulsen, a partner at Seward & Kissel LLP and counsel to ING in these cases, tells GTR: “There’s no one case that’s a lot of money; it ranges between US$100,000 and a couple of million. In each case it’s just one ship taking on a supply of fuel. But if you add up all these cases, we’re talking about tens of millions of dollars.
“At the time of the collapse, ING and the other lenders had already disbursed US$647mn of the US$700mn so if ING couldn’t collect money from the receivables it couldn’t recover its loans.”
While the judgments have brought comfort to trade finance banks, they highlight the lack of security in bunker/supplier contracts, as US Oil Trading, NuStar Energy and all the other physical suppliers involved in these cases now have no other recourse than to place claims in bankruptcy against OW.
“The physical suppliers have claims in OW’s bankruptcy where they won’t go away empty-handed but they won’t recover 100% of what they are owed,” says Paulsen. “[To avoid this situation] they could have asked for payment in advance or some form of security such as a letter of credit. There are a number of routes they could have taken. I expect the business practices to change in light of these rulings.”