In 2012 Lombard Insurance received a call from a commercial insurance broker. His client, a fuel wholesaler based in Mpumalanga, was experiencing unprecedented growth in his business and needed working capital relief in order to sustain this growth.
Lombard joined the broker on a trip to the client’s base of operations. We sat with the shareholders to try and understand where they were coming from and what their frustrations were. We liked what we saw. The wholesaler had a niche in the market selling fuel to petrol stations, mines, farmers and other wholesalers. The business was undoubtedly growing, even though the shareholders hadn’t done anything different to what they had done in the past.
The client / business was being supplied by one of South Africa’s leading fuel companies, where he / it had a good track record; so supply was not an issue, per se – although the wholesaler had noticed some inefficiencies creeping in on the supply side, with orders that once took less than 24 hours to be delivered now taking up to three days. Since the supplier requires payment in full on order, this had huge implications on the wholesaler’s cash flow.
Overall, Lombard was happy that the wholesaler was doing what he needed to do – focusing on growth, while keeping an eye on his existing business. It’s a tricky balancing act in any company, but the wholesaler’s approach was sound. Lombard was confident that the client had a good business, with the right team and principles in place to drive growth. What he didn’t have was access to sufficient working capital to support his growth activities.
He needed a line of credit from the supplier so that he could pay for the fuel on delivery, rather than when he placed the order. This would ease his cash flow and help him to grow his business in line with demand.
But the supplier was reluctant to issue a line of credit without a guarantee in place, and this is where Lombard came in.
Lombard did a complete risk survey on the client and, having had a face to face meeting with the shareholders in the client’s business, decided that this was a facility we were prepared to underwrite.
Lombard issued a guarantee to the fuel supplier of R60-million. This was not to say that the wholesaler was good for R60-million. On the contrary, at the time of issuing the guarantee they didn’t have the assets to cover such a large guarantee. But the supplier asked for the guarantee and Lombard issued it on the understanding that they would work together to make sure that the risk was managed appropriately.
Essentially, Lombard was comfortable with a R7,5-million exposure.
For any order over this amount, we required the client to provide collateral to reduce the risk to the pre-stated acceptable level.
The relationship continued in this way for the next four years. The guarantee remained in place. Lombard met regularly with the wholesaler. We monitored the wholesaler’s purchases carefully, and helped out up to R7,5-million where required, monitored the collateral and ensured the supplier was paid on due date.
Lombard also identified opportunities for the wholesaler and helped him to grow his business where possible. One example of such an opportunity was ahead of the government’s annual fuel tax increases, where Lombard helped the wholesaler buy additional fuel before the hike, which he could then sell after the increase for a profit. Lombard also assisted the wholesaler to buy extra stock for periods when the supplier was shut, for example over public holidays – because whereas the suppliers shut down over weekends, public holidays, etc., the wholesaler’s clients – farmers, miners, commuters – still want fuel at their sites.
They want their tractors harvesting; they want their mines to be producing; they want to get to their holiday destinations with their families. At these times, Lombard was often lenient with the client. Thanks to open lines of communication, we could come to the party and extend the line temporarily. This allowed the client’s business to keep functioning & prospering.
In February 2016 there were some issues on the client side. He didn’t have enough money in his account to pay the supplier the full value of his orders. Lombard picked up that the account was out of parameters. The wholesaler came back with a credible story, which Lombard believed, and things went back to normal for a few months.
For eight months the wholesaler kept this up, until one day in October Lombard received a statement showing there wasn’t enough money in the wholesaler’s account to settle the outstanding balance. According to the statement, the wholesaler owed the supplier R13-million. Lombard called the supplier and said the client was going to be short, offering to pay R5-million of the R13-million owed.
To their surprise, the supplier replied saying the client owed not R13-million, but the full R60-million!
The supplier immediately ceased trading with the client and froze his account. They compared statements with Lombard and saw how the client had been making changes to the documents before sending them on. The dates were exactly the same; the times were exactly the same. It was just the amounts that were changed. The documents looked exactly the same in all other aspects.
Lombard immediately started discussions with the supplier around calling in the guarantee. They discovered that the client hadn’t paid anything at all towards the R60-million’s worth of fuel they had received, and so the entire guarantee was called in.
Their part in the process is now purely administrative as they help Lombard to investigate the finer details of the fraud for the legal proceedings that are currently under way.
As soon as the fraud was detected, Lombard started legal action against the wholesaler. Two weeks later they had a judgement against them and liquidated the company, which means that they were able to recover some of the funds. Lombard has also gone after personal sureties and will be initiating criminal action against the client.
If the guarantee had not been in place, the supplier would have had to do all of that themselves. The process is likely to take two to three years to resolve. On their own, this would have resulted in huge costs, delays & distractions for the supplier, on top of the risk of receiving only a portion of the amount owing. Instead, the supplier was paid out in full within a week, leaving their bottom line intact and their credit managers sleeping peacefully every night.
Fuel guarantees, for example, are very specialised and require a highly specific skill set. There are many guarantors that will underwrite guarantees, but this is often accommodation business – part of a larger offering, and not always supported with the specialist knowledge, insight & capability needed to correctly deliver against such a unique matter.
Where the Lombard fuel guarantee really comes into its own for the broker is in terms of credibility. Being able to sell such a perfectly tailored product to a fuel wholesaler, underwritten by a group of people who live and breathe the fuel industry, brings huge kudos. This puts the broker in a position to deliver on the promise to his client of smart, tailored and relevant solutions.