In a previous posting, we briefly discussed the three main valuation methods, namely the market comparable approach, the replacement cost approach and the income approach.
Given the illiquidity of and the dislocations in the shipping markets since 2008, there is no wonder that some people may think that the present market is just too ‘depressed’ to be considered an active market. Vessel valuations is not just a ‘theoretical exercise’, one of the many boxes to be checked in a loan agreement; they can have severe implications for the shipowners and their lenders themselves, given the banking crises post-Lehman-Bros-collapse. Under that prism, the Hamburg Shipbrokers Association (HVSS) suggested a formula to be utilized for valuations (Financial Times article, October 25, 2009); it’s based on the income approach, and it presumes that vessels – read modern vessels owned by KG funds and financed by German banks – have value in the long-term, no matter how inefficient or dislocated the present market is. The so-called ‘Long Term Asset Value’ model (LTAV), also known as the ‘Hamburg Ship Valuation Standard’ (HSVS), or in short the ‘Hamburg Rules Method’, looks at the earning potential of the vessel over their remaining economic life, no matter how bleak the present situation is.
In short, the ‘Hamburg Rules’ presume that vessels are getting scrapped at the end of their design life (usually twenty-five years) and that have the same earnings potential throughout their design life; as a rule of thumb, estimates for future earnings can accurately be reflected by the average earnings of the last ten years. As far as the discount rate is concerned, it’s only a few short hundred basis points above LIBOR, especially for containerships that are chartered under long-term charters.
From data provided by Karatzas Marine Advisors & Co., a Manhattan-based shipping finance advisory, vessel valuations and ship brokerage firm, the following table was prepared for mainstream asset classes in the crude oil and petroleum product tanker markets, dry bulk markets, and small containership vessels market. The calculations are based on 5% discount rate (in line with the HVSS suggested rate – no debate on the accuracy of the rate from us), and future earnings for the vessels over the fifteen remaining years of their economic life are based on the average earnings of the last ten years (again, in line with the suggested HVSS suggested rate – but, one has to consider that the last ten years do incorporate an once-if-a-life time supercycle of earnings).
It’s clear that the Hamburg Ship Valuation Standard provides for ‘generous’ valuations, at least for now and at least for ten-year old vessels. The least ‘generous’ valuation is for MR2 product tankers with a 60% premium over the market comparable approach (the result of the product tanker market being ‘hot’ over the last few years), while the most ‘generous’ valuation has been for capesize dry bulk vessels (a premium of almost 1100%, no doubt due to the ‘red hot’ freight market for capes prior to 2008; again, ‘Hamburg Rules’ presume that the past is sufficient to predict the future, or, at very least, the most recent ten past years).
Germany’s investment code (Kapitalanlagegesetzbuch or KAGB) has recently been amended to allow for vessel valuations based on the ‘Hamburg Rules’. The accounting firm PriceWaterhouseCoopers (PwC) has attested that the ‘HSVS method is in full compliance with auditing standards for the valuation of an ongoing concern.’ The Verband Deutscher Reeder (VDR) – the German Shipowners Association, and the Zentralverband Deutscher Schiffsmakler (ZDS) – the German Shipbrokers Association, have welcomed the news of incorporating the HSVS methodology to KAGB.
It has been said before that accountants know ‘the price of everything but the value of nothing.’ It’s a very tough judgment, but again, it’s a very tough market …
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