Just when the Captain thought that we all had figured out that vessel prices were in a precipitous fall and ship brokers were busy slashing their price list for vessels on their weekly reports, there you have a company like SK Shipping ordering allegedly three VLCC vessels this week at Hyundai Heavy (HHI) at $100 million each with a 2013 expected delivery date. The exact details of the transaction are not well known, but even the facts that a) someone places an order for more VLCCs in the present market and b) at a price of $100 million per vessel are extraordinary by themselves. The Captain does not know the intent and the logic behind the buyers' decision in terms of employing the vessels such as whether the buyers have secured a long term employment contract or a contract of affreightment for the vessels, but this order, if true as reported, basically turns any attempts for vessel valuations, especially for modern expensive vessels, on its head.
VLLCs, of all vessels, in the last year have more or less been operating below cash break-even and it seems that several owners for such tonnage have been under pressure. After more than six months of any meaningful activity in the second hand market, in the last forty days there have been several transactions of approximately ten-year old VLCCs at approximately $30 million, take or leave a couple of million, and thus there has been a realization that asset prices have dropped by more than 40% for such vessels since the early part of 2011. At the face of a weak freight market and extreme difficulty at securing sufficient / competitively priced debt financing, and despite the fact that resale VLCCs were sold more than six months ago, it has been estimated that modern VLCCs, whether resales or newbuilding contracts, had to have dropped lower by a lot as well. Most ship broker reports post VLCC newbuilding prices at $90 mil, take or leave a few million dollars, and much lower from Chinese yards. But again, the SK Shipping order, is more or less 10% apart from the brokers' estimates, and it is even more impressive given that the yard where the order has been placed is a highly reputable, brand name yard and not in an immediate need of orders.
As a matter of reference, there are approximately 570 VLCC vessels today on the water with about 145 more of them on order; that is an outstanding orderbook of 26% of the world fleet; in more tangible terms, a brand-new VLCC is planned to be delivered every five days for the next two years. And, for CAL2012, TD3 paper market from AG to Japan trades at about $8,200 pd at present, just at about the vessel daily operating expense. And, in general, in terms of obtaining debt financing for a modern VLCC, the major quantitative terms might stand at about 50% leverage of the present FMV and on average 400 bps above cost of funds, if there is still a bank to consider financing such a vessel. The present order therefore of SK Shipping for these three vessels at $100 million each shows a great degree of faith in the market and runs directly against any consensus estimates for the shipping and tanker markets, and the VLCC market in particular.
And, one of the major implications of such newbuilding order, still if true as reported, it's that the 'intrinsic' and replacement cost of vessels still remains high. No matter how low second-hand values have moved and how much eager buyers of distressed assets salivate about the prospects of 'vulture' acquisitions, modern tonnage is only available at strong prices, even stronger than the freight and financial markets may suggest. And, such transaction provides for a solid benchmark in setting vessel valuations for documentation purposes at levels than are still within line of recent history and without causing undue concern to lenders and borrowers.
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