Way out of Line
October 10, 2012 Leave a comment
A quick and dirty rule of thumb to get a feel for a S&P project is roughly calculate how long it would take to pay off the loan. We can do this by dividing the current timecharter rate by the loan required. If we assume the loan is 70% of the price, and divide this by the annualized one year charter rate, this gives a rough guide to the number of years to pay off the loan. Of course, this excludes important factors, such as amortization or fees and so on. But on the other hand it can be done on the back of an envelope (“rule of thumb”, “on the other hand”, “back of an envelope” – I must have eaten too much cliche muesli this morning).
For example, the September indicative price for a five-year old Capesize is $32.5m (Clarksons). It is unlikely at the moment that a European bank would offer a loan of 70%, but I am using this as an average across a long time series. A loan of 70% of the price is $22.75m. The one-year timecharter rate (used as a proxy for future earnings – see “Looking for Turning Points”), for Capesize in September was $10,875/day. If this is annualized at 350 days income, this produces a sum of $3.0m/year. Therefore it would take nearly six years to repay the loan. The average repayment time between January 1980 and September 2012 (using blended rates and prices) is around three and three-quarters years (3.72). The chart below shows the averages for different vessel types, ranked by the current levels.
In order to fall back in line with the long term average the price of a five-year Capesize will have to decrease from $32.50m to $20.25m. This is the “Adjusted Price” in the table below. The last time Capesize were at this Adjusted Price was back in the 1980s. The Panamax sector too, would have to see prices return to 1980s levels. This could be seen as an indication that these sectors are still over-priced compared to the available rates and a substantial re-adjustment needs to take place. At the other end of the scale, the Handysize sector is closest to its long term average. Indeed, less than four years to repay seems reasonable, but there is still a 20% gap between the adjusted price and the current price.
In the tanker sector the range of disparity between the Adjusted Price and Current Price is not as wide. The five-year old price in the VLCC sector would need to fall to under $50m to fall in line with the long term repayment level, prices that have not been seen since 1995. The most reasonable appears to be the coated 75k dwt tanker, which is close to its long term average repayment level, but what is the demand for this ship? The best looking sector is the 47k MR. Product Tanker, which is almost on the average of 3.6 years, and is one of the ships in demand at the moment.
The container sector shows some interesting results based on current prices and rates. The 2750-TEU sector is so over-priced compared to the current timecharter rates that to re-adjust to the long term repayment levels the secondhand price would need to fall to below any prices recorded in the long term time series. On the other hand, the smaller sectors look very interesting. Both the 1700-TEU and 1000-TEU are under the long term averages. The future value information contained in the timecharter rate indicates that these ships are under-valued, as seen by the Adjusted Price being below the Current Price. The 1000-TEU looks especially encouraging, as on current timecharter rates the repayment time is only three years.
So the quick and dirty S&P rule of thumb would suggest that the S&P deals that can fly in the current market lie in the Handysize dry bulk, the 47K dwt Product Tanker and the 1700-TEU and 1000-TEU Containership sectors. In the other segments owners / banks that need to sell will have to seriously lower expectations to attract buyers at the current rates.
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