Tag Archives: Long Term Asset Value

Valuing Vessels, for the Long Term

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.

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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 …


In providing vessel and shipping valuations and marine appraisals and surveys, our firm Karatzas Marine Advisors & Co employs highly qualified professionals with Accredited Senior Appraiser (ASA) by the American Society of Appraisers for Machinery and Technical Specialties, Accredited in Business Valuation (ABV) by the American Institute of Certified Public Accountants (AICPA), Certified Marine Surveyor (CMS) by the National Association of Marine Surveyors, among their many qualifications.


© Basil M Karatzas 2013 – 2014 All Rights Reserved.

Values, Long-term Values, and Vessel Valuations

In an article published a few years ago in the Tanker Operator, a well-respected trade publication about the tanker market, we had discussed the three primary methods of vessel valuations: a) the market comparable approach, also known as ‘last done’ in shipping, b) the replacement cost method, and c) the income approach.

Each of these three methods has its advantages but also shortcomings, and each method may be better suited under certain circumstances. The market comparable approach reflects what the market will pay for an asset in nakedly materialistic, ‘cold money’; this approach is the default method for vessel valuations in standard loan agreements, but it’s also an approach susceptible to the ‘animal spirits’ of the markets, opaqueness, illiquidity, market dislocations, and all.  The replacement cost method has been burdened by its backward-looking mentality and dependence on ‘historical cost’, and thus this approach has been limited to valuing unique, customized and non-mainstream assets.  The income approach ought to be the preferred way of valuing vessels (and all sort of investments) since it depends on expected earnings during the asset’s remaining economic life. However, as ‘fundamental’ or ‘intrinsic’ this way of valuing assets may be, the devil is in the details, as they say; since expectations for future earnings can vary widely based on many factors, including the ability to generate them – a more competent investor (buyer) can generate more profits than a poor performer, and also the cost of capital – better capitalized investors (buyers) have a more effective capital structure with lower costs, the income approach valuation methodology can lead to a wide-ranging values. In the hands of a scrupulous valuator, the income approach may be just a weapon of ‘mass destruction’ to work ‘backwards’ and generate any price for the price of the asset; just presume future earnings trends and justify a low discount rate, and voilá, the price can appear out of thin air.

There have been ‘variations on the theme’ for the income approach, such as Discounted Cash Flows (DCF), Net Present Value (NPV), etc. An income approach variation unique to shipping has been the method suggested by the Hamburg Shipbrokers Association (HVSS) three years ago and has been known as the Long Term Asset Valuation method (LTAV), also known as Hamburg Ship Valuation Standard (HSVS), also colloquially known as the ‘Hamburg Rules’ of vessel valuations.

It has widely been debated whether the ‘Hamburg Rules’ is a proper valuation methodology since the formula inputs for future earnings are ‘backward looking’ dependent on the ‘past performance’ of the last ten years (including the years of the unique super-cycle of freight earnings) will be achievable going forward (as proxy of future earnings, the average of freights for the last ten years is inputted.)  Likewise, the discount rate suggested by the Hamburg Rules has been debated that could only be achieved by exceptionally well-capitalized companies at times that the finance cost is historically too low.

But again, when the market is so illiquid and the market comparable approach can only have indicative consequence, a valuator needs all the help they can get in order to value a vessel. For instance, in the last three years, only four VLCCs up-to-four years old have been sold. Not sure that the market comparable approach offers any better guidance on pricing than the ‘Hamburg Rules’ approach. Probably ‘gut feeling’ is a much better approach, although no self-respected valuator or accountant will accept such approach; but again, shipping is a poorly model-able industry.


In providing vessel and shipping valuations and marine appraisals and surveys, our firm Karatzas Marine Advisors & Co employs highly qualified professionals with Accredited Senior Appraiser (ASA) by the American Society of Appraisers for Machinery and Technical Specialties, Accredited in Business Valuation (ABV) by the American Institute of Certified Public Accountants (AICPA), Certified Marine Surveyor (CMS) by the National Association of Marine Surveyors, among their many qualifications.


© Basil M Karatzas 2013 – present    All Rights Reserved.