How are Tankers Valued?


Reprinted from the June issue of Marine Log
JUNE 17, 2016 — In this article we explain how VesselsValue produces tankers valuations, and look at some interesting recent sales. Who were the top sellers of tankers this year? By Craig Jallal, Senior Data Editor, VesselsValue (Extended Coverage from Marine Log’s June 2016 issue).
The birth of VesselsValue was driven by timing and need. In 2008, the crisis in the financial market extended into shipping. The dry bulk sector and the containership sector were hit the hardest, and while tankers remained relatively buoyant, banks needed to assess their capital commitments against the value of the assets being financed and being used as collateral. However, in the depth of the crisis (2010 / 2011), ship brokers were telling clients they could not value the ships as there had been no recent sale or “last done” in ship broker speak. Richard Rivlin, a sale and purchase broker with 30 years’ experience, had long felt that an automatic valuation system could be built, which would produce valuations in any market, at any time. Luckily, his brother is a Professor of Mathematics, and together they designed and built such a system. It quickly became apparent that the highly detailed multi-level regression model was far too complex for normal spreadsheets, and a specialist modelling company was employed to develop the model.

The model is fed by two databases. One contains the features and specification of the ships arranged in a unique structure that allows the computational model high speed access. This database is researched and compiled by VesselsValue own team of 30 researchers and analysts on the Isle of Wight in the UK. The second database consists of sale and purchase transactions and charters. Both feed the mathematic model which is operated by a team of quantitative analysts. The aim was to produce an instant, accurate and always available online ship valuations for the banks and finance houses, that form the main customers of VesselsValue.

Tankers Valuation
According to VesselsValue, five factors make up a valuation:

Type (VLCC, Suexmax and so on)
Features (shipyard, hull, and so on)
Age
Cargo Capacity
Freight Earnings
Each factor is broken down into further elements that are scored. As an asset, tankers are relatively straightforward, being highly commoditized, and standardized in terms of size ranges and specification. In part this is due to the international safety and pollution control legislation that has been forced on the tanker sector. This level of standardization makes VesselsValue task somewhat easier when it comes to scoring the factors, than offshore vessels, which have just been added to the system. In the case of tankers, there are around 140 scores. One of the most important scores is the shipyard. A vessel built in China is less desirable than one built in Japan. A well-published example is the one shown above. In November 2014, the New Century-built Supramax bulker ACS Diamond was sold for $10 million. The previous week, the slightly older Japanese-built pair of Supramaxes were sold for $15.5 million each. This was an implied discount of around 40% between Japan and China. However, the shipyard scoring goes into several levels of sophistication, including many ships the shipyard has built and when the last vessel was constructed.

This model is continually updated and recalibrated overnight to give the closest possible fit to the reported sales prices. It is the analysis of the sales that can produce the weightings required for different shipyards. These are applied to all shipyards, not just Chinese shipyards.

So far VesselsValue have performed over 1,000,000 valuations to date, about 400,000 a year and the number is increasing.

How Accurate is VesselsValue?
The split of VV customers are banks and finance houses, owners and other maritime industries such as lawyers, insurers and charterers – sophisticated market participants who insist on knowing the methodology behind our valuations. But ultimately they want to know how accurate are our valuations because this will affect their bottom line. Valuation accuracy is assessed as the difference between the price a vessel is sold at, and VV valuation on the day before the actual sales date. This is expressed as a % of valuations within a certain band of accuracy and shown in a chart form. The accuracy report is available on the website.

Tanker Valuations Development
According to the VesselsValue transactions database, between the start of 2012 and May 2016, a total value of $143 billion of tankers have been traded on the sale and purchase market. During that period the value of second-hand tankers has steadily increased, as can be seen from figure 1 (“VV Tanker Matrix”) below of the VV Tanker Matrix, expressed as USD / DWT.

During that period, the MR tanker has been the most frequently traded tanker type, both in terms of number of sales, and value (see figure 2 “Total Value by Type of Tankers Sold 2012 to Date”).

So far in 2016 (to 15 May 2016) 83 tankers with a total value of $1.4 billion, have been traded on the second-hand market, and again the MR tanker is the most popular (see figure 3 “Value of Tankers Sales Jan 2016 to YTD).

Interestingly, the average age of MR2 (Chemical / Product) tankers sold in the first five and half months of 2016 is only three years-old. Altogether 17 of these vessels were sold in this period, with eight tankers being sold by owners in the USA (these were not Jones Act vessels).

The majority of tankers and the largest value of tankers sold so far this year (2016) were constructed in South Korea, followed by Japan and China. As far as owners are concerned, the lead seller across all types of tankers was Chembulk Tankers, Scorpio Tankers and companies associated with the Navig8 group (see figure 4 “Top Ten Sellers of Tankers Ranked by Number of Vessels Sold”).

Recent Sales of Interest
The top three sellers have sold tankers for completely different reasons and strategy. In January 2016, Chembulk Tankers was sold by parent company Berlian Laju Tanker (BLT) to private equity investor Kohlberg Kravis Roberts (KKR). Chembulk Tankers is said to have a number of Contracts of Affreightments (CoAs) and the older tankers were surplus to requirement. This is part of the KKR growth strategy to rebuild the Chembulk Tankers fleet. KKR has also invested in a fund to invest in two Greek bank shipping portfolios.

The number two top seller, Scorpio Tankers, was a tactical, opportunistic sale. The purchaser, Bahri (formerly known as National Chemical Carriers of Saudi Arabia) is on something of a buying spree. Bahri has recently purchased two VLCCs from Tanker Investments in December 2015, for a reported $77.5 million. The five 2014-built MR2 tankers were sold en bloc for $167 million are trading in the UAE under Bahri CoAs.

The third most active seller, Navig8 Chemical Tankers, Inc., sold the four resales (the MR2 tankers are due for delivery in 2017) under a ten-year bareboat charter (with purchase option) for a reported $35 million each. This was an internal sale within the group, and part of a longer term strategy.

Advertisements

What Will be the Impact when the Newly Extended Panama Canal Locks Open?


What will be the impact on shipping when the newly extended Panama Canal open today (26th June 2016)? Figure one below shows the physical changes to the dimensions of the old and new locks on the Panama Canal (time lapse video of the construction).

Fig 1 New Panama Canal Dimensions
Under the old dimensions, the widest containership that could pass through the Canal was one with a beam of 33m – Panamax (3,000 to 5,999 TEU). The ships are pulled through the old locks by “donkeys”, which are small gauge locomotives, and often a sea cadet on his first passage would be given a bucket of water and told to water the donkeys. Interestingly, there has not been any clear indication from the Panama Canal Authourity if the old locks will continue to be operated in parallel with the new locks. These old Panamax containerships make up around 16% of the current capacity of the containership fleet.

Fig 2 New and Old Panamax Containerships
As trade increased, and due to changes in trade routes, containerships wider than 33m were built. In theory, these older Post-Panamax containership (3,000 to 9,999 TEU – see figure 2) will be able to use the new locks, too. These currently make up 22% of the fleet.

The New Panamax (10,000 to 13,399 TEU) containership, also known as Neo-Panamax, currently makes up 18% of fleet by capacity, according to mapping, ship search and valuation provider, VaesselsValue, but it is expected that this sector will replace the old Post-Panamax.

It is expected that the old Panamax containerships will cascade downwards into the other sectors, and may even “interfere” with the Feedership trades (1,100 TEU), should the rates decline to comparable levels. This will most likely decrease the values of old Panamax vessels, and may lead to a new round of sales for scrapping.

Fig 3 Seatime Savings

The increase in capacity able to pass through the new locks and the sea-time savings (see figure three) for the larger ships will be significant, but the impact is hard to assess until the liners start using the new locks.

The top five New Pananax containership owners are shown below (figure 4).

Fig 4 New Panamax Owners

According to some studies, the opening of the new locks could double the volume of total trade (tankers, dry bulk carriers, containerships and gas) passing through the Panama Canal. So far, the emphasis has been on the liner trades and their use of the new locks on the Panama Canal, but the LPG and LNG gas carriers are expected to be significant users, too.

The Rise and Rise of VesselsValue


Five years ago, ship brokers were introduced to a scary new phrase, which was to forever disrupt the cozy and somewhat Delphic world of desktop ship valuations. That phrase was “quantitative analyst1”, which first appeared in a Tradewinds article describing the launch of the mapping, ship search and valuation provider, VesselsValue in May 2011. Today, most shipping people are familiar with work of “quants”, and their role in the examination of big data to produce meaningful and useful information, but five years ago, the launch of VesselsValue was nothing short of a revolution.

Behind that revolution was years of hard work. Indeed, the origins can be traced back to 1976, when VesselsValue CEO, Richard Rivlin, joined Clarksons as a trainee ship broker and helped set up a computer system for the Sale and Purchase department. Innovation is a theme throughout Richard’s career. He was a founding member of Braemar Shipbroking in 1983. In 1993, he formed Seasure Shipbroking and it was then that the outline for VesselsValue began to take shape.

The catalyst was the 2008 financial crisis, when a slump in ship sales forced ship brokers to declare that with no “last done” ship sale, the market was illiquid, and therefore ship values could no longer be given.

“This was exactly the time when banks required values,” says Richard. “It was then I decided to activate my plan for VesselsValue.” Together with his brother, Christopher, a professor of mathematics, they built the first version of VesselsValue in Excel. However, the complex multi-regression analysis needed a new approach. Ben Durber and BB Solutions were brought in to develop the model and the website, which went live on Friday 13th May 2011.

Looking back on the last five years, Richard feels the hardest part was building the ship database. “The database had to be in a particular format and structure to ensure high-speed access. We decided to build our own database, which is why we built up a large team of researchers and analysts,” he said.

Ship finance providers, with their familiarity with the role of “quants” and regression models were the first to subscribe to VesselsValue. For them it ticked the boxes of transparency and accuracy. The methodology also satisfied the rigorous requirements of the risk analysis and compliance departments.

The shipping industry was a bit slower to recognize the ascendancy of VesselsValue, but in September 2012, VesselsValue was awarded “Highly Commended” at the Lloyd’s List Global Awards for Business Innovation. Since then VesselsValue has continued to grow and add new features:

  • Friday 13th May 2011: VesselsValue goes live
  • October 2012: Daily historical values added back to 2007
  • November 2012: VV+ search tool added
  • February 2013: LNG and LPG added
  • November 2013: Small tankers added
  • September 2014: Isle of Wight office opened, led by Simon Hastain
  • May 2015: One million valuations!
  • June 2015: London team says goodbye Chiswick, hello Hammersmith
  • June 2015: Discounted Cash Flow (DCF) added to VV$ module
  • July 2015: Adrian Economakis and Georgina Gavin ring the Nasdaq closing bell during MarineMoney week
  • September 2015: VV opens SE Asia representative office in Singapore
  • May 2016: The launch of VV Offshore

The shipping banks have been the driving force behind demands for the valuation of offshore vessels. This sector is currently going through its worst slump in living memory, and the launch of VV Offshore is timely, and mirrors the launch of the original modules of VesselsValue.

Looking ahead, Richard sees the continuing growth of transparency of shipping information for all in the industry. “In shipping, the increasing automation of services will be applied to processes and business sectors, which many previously thought to be impossible to automate,” says Richard.

The VesselsValue state of play in May 2016:

  • Four offices (Isle of Wight, London, Singapore, Stoke)
  • 66 employees and growing fast
  • Cargo Shipping, Offshore, and other departments established
  • 20 languages spoken across the company
  • 300 current clients including the world’s leading banks, funds, ship owners, and others
  • 2,260 total mentions in the press, across 37 countries, ranging from Greece to Fiji
  • Richard Rivlins’s 40th year in shipping!

We’ll leave you with one final thought…

  • The largest taxi operation in the world owns no cars – Uber
  • The largest property rental company in the world owns no property – Airbnb
  • The largest music distribution company in the world owns no music – Spotify
  • The largest shipping valuation company in the world owns no ships – VesselsValue

 

Notes: 1 According to a search of the Tradewinds archive, the phrase “quantitative analyst” was first used in May 2011, in an interview with Alex Adamou, the quantitative analyst at VesselsValue.

Comment Piece in Loadstar: a Maersk Line IPO?


While the recent history of container shipping has been turbulent, to say the least, one of the weirdest constants has been the AP Møller-Maersk Group share price.

In private conversations with senior Maersk executives, it has become clear that while the plaudits of being a bellwether company are welcome, the glow recedes over time.

“We have retuned profits year after year to investors in an industry that often fails to do that, and yet our share price has stubbornly remained the same – one of management’s biggest challenges is increasing the share prices,” one candidly told me a few months ago.

Indeed, go back five years to 2011 and you will find Maersk’s share was Dkr10,390 ($1,594), while today it stands at Dkr9,255 ($1,422), and although there have been some highs and lows, the story is of a share price that almost appears etched in stone.

So, in the spirit of speculation that all blue-chip conglomerates attract, we wondered what would happen if the AP Møller-Maersk board took the radical, nigh-inconceivable, step of separately listing its container shipping unit – what it would look like in terms of the market, and how that might affect the corporation’s other divisions.

Craig Jallal, senior data editor at vesselsvalue.com, says:

Since the start of the global economic downturn in 2008, AP Møller-Maersk has tried and tested many strategies to keep container division Maersk Line in profit. These range from the introduction of ever-larger vessels to lower the cost per teu, to the Daily Maersk, which offered guaranteed delivery times to entice shippers to stay loyal to its service.

On the operational side, Maersk Line was a one of the first to adopt slow-steaming and warm lay-up. But none of these strategies have produced the gains expected. For a while, the profits generated by Maersk Oil kept the group in the black, but with a prolonged downturn in the oil price and the dire state of the container sector, is there any point in being a conglomerate?

Maersk Group defines its business units as Maersk Line, APM Terminals, Maersk Oil, Maersk Drilling and APM Shipping Services (Maersk Supply Service, Svitzer, Maersk Tankers and Damco). In this article, we examine if there is any value and/or cost savings that would accrue from spinning-off Maersk Line as a separate entity via an IPO.

As such, Maersk Line would still be the largest container line by value, with a current fleet of 262 owned vessels with a value of $12.1bn (live vessels and newbuildings).

VV Chart 1

Source: Vesselsvalue.com

Source: Vesselsvalue.com

This is far larger than any of the currently listed public container companies (see table below, which includes liner companies and vessel-owning container companies). However, even including the likes of Seaspan fails to find a champion close to the value of the Maersk Line fleet.

We can take the speculation one step further and estimate the size of the market capitilisation of a publicly quoted Maersk Line, based on the currently listed publicly quoted container companies.

VV Chart 3

The table lists the public container companies by size of market cap. To estimate the potential size of the market cap of Maersk Line, we have used the median of the ratios of the above companies’ market cap to fleet values.

On this basis, a publicly-quoted Maersk Line might have a market cap of around $8.5bn. Of course, the potential range of market cap based on the range of ratios is very wide, ranging from a minimum potential market cap from $2.8bn and the maximum was $36bn. However, given Maersk Line’s relative prominence in the market, a reasonable estimate might be in the region of $20bn. This would make the company the largest of any other shipping-orientated company, apart from its parent AP Møller Maersk, and Carnival Cruise.

However, in comparison with other industrial sectors, a market cap of $20bn hardly registers in the rankings. Wal-Mart Stores, a major shipper using container services, has a market cap of $216bn. Analysis of the size of the dominant companies in each industrial sector shows there is domination by four or five companies. Therefore, to be on an equal to these companies in investors’ eyes, Maersk Line would need to have a market cap in the region of $100bn, which implies a fleet with a value of at least $50bn, or five times its current size.

To achieve such a size could not be done through purely organic growth. There would have to be a considerable round of mergers and consolidations (lots of fees for lawyers and bankers), but the end result would be a clear and easily sellable container shipping story for US investors.

Alessandro Pasetti, The Loadstar financial analyst & founder of Hedging Beta, says:

Maersk is very unlikely to consider a radical overhaul of its existing assets portfolio following a few years during which several non-core assets were divested. But Maersk Line continues to absorb a huge amount of capital and investors are wary of a prolonged downturn — these two elements do not bode well with value creation.

It could also be argued that its prospects weigh on the valuation of the entire Maersk group – so, how about a partial spin-off aimed at retaining control of its shipping line division?

Its quarterly results, released on Wednesday, show the level of invested capital in Maersk Line is a whopping $20.1bn, or 43.3% of the group’s total. Its return on invested capital (ROIC), which remains one of the group’s most important metrics, stood at 0.7%, which compares with 2.9% at group level and implies that the unit doesn’t make its cost of capital.

However, assuming it swings back to a normal level of underlying profitability, returns could be much higher, while its prospects as a standalone entity could be more appealing for investors. In this context, consider that in the first quarter of 2015, its ROIC stood at 14.3%, or 40 basis points above the group’s average.

Assuming Maersk Line’s worst days are over, it should be safe to assume that the unit could hit a normalised annual Ebit in the region of $1.5-2bn — its underlying profit was over $700m in the first quarter of 2015.

If we place on the unit an Ebit multiple of between 10x to 12x, the enterprise value (EV) of Maersk Line could range between $15bn and $24bn, while its equity value would sit between $11bn and $20bn, assuming it retains some $4bn of net debt on its books. As a reference, Maerk’s current EV is $39bn, while the shares of Hapag-Lloyd trade on a forward EV/Ebit multiples of 15.6x — so the upside could be greater.

One key element, possibly backing a value-accretive spin-off scenario, is that the value of several other assets – APM Terminals, Maersk Drilling, Maersk Tankers and Svitzer – remain subdued due to cyclicality, but also because they belong to a conglomerate that includes problematic shipping assets, although most of them currently earn much higher returns than Maersk Line and have significantly lower capital requirement, as the table below shows.

Source: AP Moller-Maersk

Source: AP Moller-Maersk

Maersk’s first-quarter performance in shipping was only slightly better than break-even. But it was far better than expected, helped by a 7% volume growth and better utilisation rate. If it hit rock bottom in the fourth quarter, now could be time to think creatively about the ultimate corporate structure of the group.

Admittedly it is quite difficult to see such a split taking place, but it’s a fascinating thought experiment.

Fun Chart of the Month


Fun Fact of the Month – it sounds like a potential regular feature, but I am so busy at the moment I didn’t do one in January. Therefore, I am grateful to Claudia Norrgren of VesselValue for providing one for  me! What she has found is that 50% of the total value fleet is made up from only 19% of the highest value vessels, and produced this rather cool graphic.

Fun Fact of the Month

Fun Fact of the Month

Why do we need ship valuations?


Why do we need ship valuations? A summary of the discussion so far on the LinkedIn “Ship Valuation” group.

My experience of valuations is mainly the first three situations, when a bank is serious about providing finance for the purchase (or re-finance) of a ship and negotiating the terms of the loan, when the loan is about to be drawn down (shipowner gets access to the funds) and as part of the ongoing assessment of the collateral used as security for the loans and client facilities.

In each of the three instances, the bank is testing its security of the loan through the Minimum Value Covenant (MVC). This harks back to the first rule one of banking – don’t lose money. If the owner can’t pay back the bank, the bank can legally take over the ship and other ships put up as collateral for the loan. The MVC is a ratio of the value of the ship to the loan outstanding, expressed as a percentage. That is, an MVC of 135% means if the loan is for $100 million, the ship must be valued at $135 million or more. As the loan matures and repayments made, the ship value limit should become easier to reach. But as we know, the shipping cycle isn’t always that generous.

1. Banking – Independent appraisal for loan application.

The term sheet lays out the terms of the loan, and terms are negotiable. The Relationship Manager (RM) needs an independent value for the ship the bank is considering financing. This could be a formal certified valuation or a phone call to a broker for an opinion of the value. From this the RM and from current market practice, the RM can judge the level of MVC to pitch on the indicative term sheet. In times of easy credit in the run up to October 2008, banks competed hard on MVC. Rumour has it some loans were negotiated down to 100% MVC. In eras of tighter credit, like at the moment, a bank is likely to stipulate the MVC to be 135%. In the 1990’s the MVC was regularly 150% and 200% for mezzanine finance.

At this stage a formal certificate is not always required, and unless the RM is very sure the deal is going ahead, it is a wasted expense. This is where the online tools are very useful. The oldest is Price Guidance, which is part of shipvalue.net from Clarksons Valuation Services, which first appeared as part of the original SIN (Shipping Intelligence Network). This allows a quick search of the ship and a current value. New entrant VesselsValue is targeting this aspect of the loan appraisal process, too. VesselsValue’s USP is that certificates are issued online, too.

2. Banking – Loan drawdown.

Once the loan is agreed the MVC is tested again at drawdown, the time when the funds are released by the bank. If it is a secondhand purchase weeks or months could have passed between the signing of the loan and the release of the funds. In the case of a newbuilding it could be years. If the value of the ship has fallen and MVC cannot be met, the loan terms will have to be renegotiated. The bank will usually know up to two weeks in advance the actual delivery date, and that is when to let the valuers know a valuation is needed. A panicked phone call from bank to valuer on the eve of delivery helps no one, especially if the market is moving fast.

3. Independent Appraisal during the loan review.

Every loan facility is subject to an annual or twice yearly review. Those facilities on “Special Watch” may be subject to quarterly or even shorter review periods. The MVC is tested during the review. The loan documentation will state the borrower must provide two certified valuations from a panel of six (the number depends on the ship type) shipbrokers or valuers. The two valuations must be within 10% of each other. If not, another valuation from another member of the panel is required. The average of the two valuations is used to test the MVC.

It will also state in the documentation that the client must pay for the valuation. This gives rise to an interesting situation. It is the client that instructs the valuer, signs the service contract and pays. The relationship is between the borrower and the valuer. However, the borrower will almost certainly have another relationship with a broker or brokers within the same shop, and will try to apply pressure for the value to be the “correct” one. Valuers need to have strong personalities to withstand these internal and external forces, and give the valuation they can prove through methodology and due diligence. The test is who has signed the valuation. Is there more than one signature, has a company Director put his name and reputation to the valuation?

Another interesting facet is the contract between client and valuer. This usually states the certificate is for the private use of the client. But everyone knows this is being passed onto the bank for the use of the bank.

Because loans have started on different dates in the year these valuations are not ideal for checking the quality of security in the bank’s shipping portfolio. Most banks arrange to have the whole portfolio valued as at the start of the year and at the mid-point. The introduction of online services like shipvalue.net and VesselsValue.com have made this process quicker and cheaper.

4. Creditors

A valuation is needed to give an indication of the likely amount the ship will raise in an auction sale. The valuer will be asked to give a reserve price. The creditors, which includes the port whose berth the vessel is occupying, will want a quick sale, so the reserve price must not be too high. Here the valuer needs to have specialist knowledge of the auction process and costs, and be aware of rate of deterioration of value a ship no longer active suffers. Payment for the valuation comes out the proceeds from the sale.

5. Insurance or general average.

I have no direct experience of valuations for insurance purposes, so I reached via LinkedIn for some expert advice on why the marine insurance industry needs ship valuations. The reply I received is; “We insure ships on an agreed value basis. This means what the underwriter insures the ship for is what he pays in the event of a total loss whatever the market value of the ship. Therefore the underwriter needs to appraise the insured value in relation to the market value. If it is too low then the probability of constructive total loss is greater, however if it is insured too high the moral hazard increases. Although the owner puts forward a value often reflecting the earning capacity and the residual value, the owner is often pushed by the bank. In the loan covenant it may stipulate the minimum sum insured. On top of the standard hull policy there is an “increased value” policy which only pays out in the event of a total loss. This value is generally limited to 25% of the hull value. So if the hull value is usd20m the increased value would be usdusd5m. Obviously the rate on the increased value is lower because it is only covering the total loss risk. Basically the logic goes along that if the vessel loss reaches say, usd20m then the vessel will be a total loss.” I would like to thank Jon Chaplin of Tradewinds for sourcing this explanation.

6. Investment prospectus: valuation of assets for ipo or for bond issues.

In most shipping companies the only assets are the ships. Therefore, to float part or all of a shipping company on a stock exchange the investors need to know the value of the assets they are “buying”. Shipbrokers are very aware of the pitfalls of dealing with financial investors. First, they are not shipping people, and expect to be able to apply the same criteria used to value any other enterprise to a shipping company and its ships. Therefore, a lot of management time is spent in education and marketing. Second, the rewards are relatively small. Although a premium is placed on the service to cover the costs, it is nothing compared to the rewards of the banks and lawyers running the ipo process. Third, and most importantly, the risks are huge. When the shipping cycle turns downwards (as it always will at some point), investors will look to get their money out, and maximise the cents on the dollar. These can be mitigated by showing the methodology and due diligence paper trial, but lawsuits do occur. After the boom in shipping junk bonds several brokers were hauled into court. Some cases were settled out of court, but there was considerably reputation damage. Damages in a US court could wipe out profits, or even bankrupt a small broking house. It begs the question; is it worthwhile providing valuations for raising finance?

7. Annual accounts and audits.

This is fairly straightforward, and the annual accounts of public shipping companies often list the brokers providing the valuation of the vessels at fair market value.

8. Accounting for vessels under shared or family ownership.

Many shipping companies are family owned, but not all of the family will be active in the day to day running of the company. Nonetheless, they need to know return on their investment in the business and the current value of their share of the assets. Shared ownership is more common than supposed. For example, three owners may feel strongly that the timing is right to invest in a particular sector. All three focus on one ship, and risk driving bidding beyond what the see as a reasonable level. They agree to co-invest in the ship, through the single purpose company that owns the ship. No one outside the agreement will be aware of the arrangement, and the registries will record the vessel as being operated and beneficially owned by one party. Therefore, the co-investors will require independent valuations of the current market value of the ship. But on an operational level all three co-investors are rivals and compete for business.

9. Legal disputes

Legal disputes over valuations are not uncommon, and many valuers also work as expert witness in court. In the 1990s shipping companies issued a series of junk bonds, of which around 90% defaulted. There have also been court cases where valuations have been a feature, but not the main issue. These go to show that a clear paper and electronic trial must be kept of all valuations.

10.Government regulations.

So far the only specific government regulation I have come across is a German regulation detailing how ships are to be valued. Under Section 24, paragraph 1 to 3 of the Pfandbrief Act there are exact rules for the determination of the Mortgage Lending Value of Ships (MLV). This entered force in July 2008, and upon examination is essentially “Last Done”. This will be discussed under when we look at how valuations are made.

Size of the Valuation Market?

Given that there are ten possible instances for the need for valuations, this gives rise to the question of what is the size of the valuation market? There is no central register of valuations completed, or the billings. To estimate demand I use a proxy of the number of deliveries combined with the number of ships sales each year. In 2012 there were 4325 deliveries and sales. Each certified valuation costs $1500, giving a potential market of just under $6.5 million. Although this sounds a lot, it is less than 0.01% of the value of ship sales in 2012 ($84.7 billion – source: CRS).

Ship Valuation and Insurance


I am researching ship valuation for some forthcoming articles. Before getting into how ship valuation is done, I want to look at why. I came across this ship valuation paper by Paul Willcox, managing director of CW Kellock and sworn valuer for the Admiralty Courts in London has written an interesting paper on ship valuation [http://goo.gl/XVpzG]. He lists nine reasons for valuations, to which I have added one, summarised below as;

  1. Banking – Independent appraisal for loan application.

  2. Banking – Loan drawdown (my addition)
  3. Banking – Independent appraisal of the ship subject of the loan, and any other ships used as security in the facility.
  4. Creditors – Reserve price for court sale – need to advise creditors of the what the ship may achieve at auction.
  5. Insurance or general average.
  6. Raising Finance – Investment prospectus: valuation of assets for ipo or for bond issues.
  7. Accounting – Annual accounts and audits.
  8. Accounting for vessels under shared or family ownership.
  9. Legal – A dispute over a valuation or a valuation as part of a court case.
  10. Statutory – Government regulations. 

I have good examples or direct experience of most of the above except No 5 – Insurance or general average. Can anyone tell me why valuations are used in insurance. Is it for a newbuilding replacement value or for the mark-to-market value?

I am collating the feedback on my LinkedIn “Ship Valuation” group, but you can add a comment here, too.

%d bloggers like this: