Valuing vessels, like most other types of assets, would seem to be fairly straightforward: a review of recent market transactions would more or less provide a very good guide of the value of a vessel. This method is formally called the market comparable approach, or ‘last done’ in ship brokerage parlance, and it’s usually the number that gets stuck on the so-called desktop valuation certificate.
Parenthetically, the valuation methodology extends to incorporate the replacement cost method (usually for unique type of vessels with minimal comparative guidance) and of course the income approach method based on the present value of the vessel’s earnings potential (there are variations on the theme of the income approach such as ‘charter-attached’ valuation based on actual employment contracted for the vessel, discounted cash flows (DCF), long term value or value based on the ‘Hamburg Rules’, etc.)
As a matter of industry practice, the charter-free, market comparable approach is typically utilized for documentation and collateral purposes in shipping loans, unless the lenders have financed a vessel / project based on an existing contract, revenue stream and their associated cash flows, and have agreed to accept valuations based on different methodology. Therefore, deriving market based valuations is of paramount importance, especially at times like presently when asset prices have dropped significantly since the market topped and hovering perilously around the loan-to-value (LTV) covenant triggers.
As important as it is to have accurate market approach valuations, market conditions are not necessarily conducive to such noble aim. For instance, for modern vessels including prompt resales, there is an extremely limited market. While older vessels might still trade more frequently, comparatively speaking, and thus there is a better guidance on pricing, for new vessels, where incidentally the stakes are much higher, market guidance is extremely limited. For example, as of middle October 2011, there are two transactions that took place for prompt resale VLCC year-to-date, one in January 2011 and the second in April 2011; that is, the freshest comparable transaction is already six months old, when all along, freight rates are demonstrably deteriorating and finance costs are getting patently more cumbersome. To complicate matters more, both of the transactions took around the $105 million mark, which as strong price no doubt in retrospect as it may seem, at least it shows convergence to a concentrated price level. However, in the first transaction, the banks privately forced the sale of the two vessels from a weak owner (whose equity was completely wiped out from the sale) while the same banks extended 100% financing of the purchase price to the new buyer at, more or less, the bank’s cost of funds. In the second transaction in April, the buyer has a strong reputation for quality vessels, unrestrained access to the financial and capital markets and an operating profit business model in mind (as opposed to an asset play mentality). However, strictly speaking, neither of these transactions fulfills the definition of fair market value (FMV), especially the part of willing seller and willing buyer neither under compulsion to act and with knowledge of all pertinent facts.
So, how one values a prompt resale VLCC these days?
As recently as in September 2011, the Captain attempted to market for sale a prompt resale VLCC with approximately $95 million asking price, and some indicative offers received were in the $75 million range. Is the price still at $105 million from April as ‘last done’, or the sellers’ asking price at $95 million, or the price from ‘bottom fishers’ at $75 million? To spice things up, such a vessel has a $130 million cost basis, earns about $10,000 pd in the spot market at present, and based on standard financing assumptions, the daily bank note of interest and principal repayment would be close to $35,000 pd.
Figuring out the value of a prompt resale VLCC, or any other type of modern tonnage for that matter, in the present market! That is the question!
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