The Hamburg Ship Evaluation Standard and Its Impacts on Ship Appraisal - Kalle Wanner (1)

Hochschule Bremen University of Applied Sciences Bremen

Bachelorarbeit zur Erlangung des akademischen Grades „Bachelor of Arts (B.A.)” im Studiengang Int. Studies Of Shipping & Chartering

The Hamburg Ship Evaluation Standard and its impacts on ship appraisal Der Hamburg Ship Evaluation Standard und die Auswirkungen auf die Schiffsbewertung

Vorgelegt von

Name:

Kalle Maximilian Wanner

Anschrift:

Herderstraße 50, 28203 Bremen

Matrikelnr.: 201411

Prüfer: Prof. Dr. Henning Jessen Korreferent: Dipl.-Ing. (FH) Bernd Holst

Abstract

The appraisal of ship values is a core business for the shipping industry. Market values form the basis for any book or collateral value. Hence, their calculation requires a correct evaluation of current ship values. The necessity of collateral values on the one hand, and the requirement for asset backing on the other hand stresses the importance of current market values for lending institutions. However, ship owners and KG-houses also have a desire for accurate ship values, as these display reserves. This bachelor thesis devotes to the problematic situation of ship appraisal in dysfunctional markets. The purpose of this thesis is to enhance an understanding for the methods of ship appraisal and for the influences on the value. Further, this thesis gives an overview on the distinct methods in place in contrast to the Hamburg Ship Evaluation Standard (HSES) developed by the Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V.. This paper outlines the development and the principles of calculation as well as the scope of application for the Hamburg Ship Evaluation Standard. Additionally, this complementary work tries to assess the impacts of the HSES on the collateral value and the asset backing by financing institutions. However, the focus of this thesis lies on the appraisal according to the HSES and the herewith connected difficulties in analysing and adjusting the parameters. Among these, the discount rate accompanied by the difficulty in reflecting the risk structures of shipping, and the assessment by the Capital Asset Pricing Model (CAPM) has been given special attention.

Keywords: ship appraisal, collateral value, market value, dysfunctional market, HSES, discount rate, risk structure, CAPM

Eidesstattliche Erklärung

Ich erkläre hiermit an Eides Statt, dass ich die vorliegende Arbeit selbständig und ohne Benutzung anderer als der angegebenen Hilfsmittel angefertigt habe; die aus fremden Quellen (einschließlich elektronischer Quellen) direkt oder indirekt übernommenen Gedanken sind als solche kenntlich gemacht. Die Arbeit wurde bisher weder im Inland noch im Ausland in gleicher oder ähnlicher Form einer anderen Prüfungsbehörde vorgelegt und ist bisher nicht veröffentlicht.

…....…………………. Bremen, den 08. März 2010

Kalle M. Wanner

I. Table of contents

I.

Table of contents

I.

Table of contents .................................................................................................................I 1.

Introduction .................................................................................................................. 1

2.

The principles of ship appraisal.................................................................................. 3 2.1

Influences on the ship value ................................................................................... 4

2.1.1

Economic and regional factors....................................................................... 4

2.1.2

Charter revenue .............................................................................................. 5

2.1.3

Operation expenses ........................................................................................ 6

2.1.4

Age and condition .......................................................................................... 6

2.2

3.

2.2.1

Market value................................................................................................... 7

2.2.2

Collateral value .............................................................................................. 8

2.2.3

Fractional value .............................................................................................. 9

2.2.4

Insured value ................................................................................................ 10

2.3

Appraisal reports .................................................................................................. 10

2.4

Appraisal procedures............................................................................................ 11

2.4.1

Reference value method ............................................................................... 12

2.4.2

Material asset valuation................................................................................ 13

2.4.3

Earning rate valuation .................................................................................. 13

The application of the traditional ship appraisal in the prevailing markets ........ 15 3.1

4.

The term value........................................................................................................ 7

Impacts of the traditional ship evaluation in dysfunctional markets.................... 20

The Hamburg Ship Evaluation Standard ................................................................ 26 4.1

Development and introduction of the HSES ........................................................ 26

4.2

Principles of application....................................................................................... 28

4.3

Principles of calculation and definition of parameters......................................... 30

4.3.1 Charter income .................................................................................................... 30 4.3.2 Operation costs.................................................................................................... 32 4.3.3 Discount rate ....................................................................................................... 33 4.3.4 Inflation rate ........................................................................................................ 36 4.3.5 Residual value ..................................................................................................... 36 5.

Analysis of the parameters ........................................................................................ 38 5.1

Charter income ..................................................................................................... 38

5.2

Operation costs..................................................................................................... 42 I

I. Table of contents

6.

5.3

Discount rate ........................................................................................................ 43

5.4

Inflation rate ......................................................................................................... 48

5.5

Residual value ...................................................................................................... 48

Application of the Hamburg Ship Evaluation Standard ........................................ 51 6.1

7.

Impacts of the HSES ........................................................................................... 52

Conclusion................................................................................................................... 55

II. List of abbreviations ............................................................................................................ III III. Table of figures .................................................................................................................. IV IV. Bibliography........................................................................................................................ V V. Appendix ............................................................................................................................VII Appendix 1 ........................................................................................................................ VII Appendix 2 ..........................................................................................................................XI Appendix 3 ........................................................................................................................ XII Appendix 4 .......................................................................................................................XIII Appendix 5 .......................................................................................................................XIII Appendix 6 .......................................................................................................................XIV

II

1. Introduction

1.

Introduction

Ship appraisal is a vital service for a broad spectrum in the shipping and ship financing industry. An accurate evaluation of the ship value is crucial for buyers, sellers, financing institutions and ship owners. Value estimates of ships are traditionally based on recent sales being concluded between a “willing buyer and [a] willing seller”. 1 Shipbrokers or ship appraisers use the market price at the time of sale as an indication of the ship value. So far this has been an adequate method of estimation. However, the interplaying forces of the economic, financial and shipping crisis created a market situation where ship appraisal was hardly feasible and the traditional way of ship evaluation alone led to delusive and sometimes destructive results. During 2009, some segments of the sale-and-purchase (S&P) market characterized a very small number of transactions (e.g. the container market). One can find that some of these transactions were realised under distress after insolvency, while others had prices heavily influenced by financing conditions. These conditions on the S&P market can therefore be hardly defined as representative samples in terms of traditional ship evaluation. Yet, the price collapse in the S&P market has lead to a problem for banks, issuing houses and ship owners who are not interested in selling their vessels. Banks need to assess ship values in their books, and if they have to calculate with prices achieved in fire sales as benchmark, this could result in major write-downs. In addition, banks have to allocate a certain amount of equity for each shipping loan to comply with the mortgage backing under the Basel II convention.

2

This is a heavy burden for the financing banks, which

again can lead to distress sales. These insufficiencies lead to the question of whether or not the reference value method is adequate for the evaluation of vessels in distressed market segments. At the beginning of 2009, the “Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V.” (VHSS) in co-operation with issuing houses, banks, shipbrokers and ship appraisers came to the conclusion that an alternative method of ship evaluation – The “Hamburg Ship evaluation Standard” (HSES) - should be established. However, the initial aim of the HSES was not to replace the existing methods of evaluation but to offer an alternative for times when there are only few sales to use as a benchmark. 1

Garfield, G., 2009. Move to uncover ‚real’ ship values: German banks and shipping bodies are working on a new way to assess vessel values, Tradewinds.27 Feb. 2 Hagen, P., 2009. German ship valuation formula adds up, says PwC: Testing against over 2,000 historic ship values reveals accuracy in 92% of cases. Lloyd’s List. [Online] 23 Sept., Available at: http://www.lloydslist.com/ll/news/viewArticle.htm?articleId=1253563330332 [Access 4 Jan. 2010]

1

1. Introduction Concentrating on the long-term and sustainable return of the investment and evaluating independently from market turbulences, the HSES - also “Long Term Asset Value“ (LTAV) - makes a sharp distinction between the highly volatile average of current prices and “intrinsic” or “lasting” values. This enables an accurate evaluation of ships during normal shipping markets as well as during abnormal highs and lows. The approach of the HSES is based on the earning potential of the appraised ship and orientates itself by the appraisal procedure of the discounted cash flow. The appraisal by the DCF-method is widely used in the assessment of corporations, and was modified to fit the demands for ship appraisal. Therefore, the introduction of the Hamburg Ship Evaluation Standard stipulates a shift from the traditional ship evaluation to a ship evaluation adjusted to net present value.

2

2. The principles of ship appraisal

2.

The principles of ship appraisal

In order to obtain an introduction to the topic, section 2 will give an introductory overview on the principles of ship appraisal. The appraisement of vessels is a difficult task, which requires profound knowledge in a variety of aspects. The expertise in shipping technology is as important as the accurate knowledge of the individual operation costs and the regulations in place. Furthermore information on the general charter market and sale-and-purchase market conditions is essential. 3 The evaluation of a ships value is required by a wide variety of parties, such as •

Banks for the assessment of the collateral value,

•

Insurance companies for the assessment of the insured value as well as for the validation of the insured value in case of loss,

•

General average adjuster for the assessment and adjustment of average in case of general average,

•

Ship owners in case of sale-and-purchase of vessels,

•

Ship owners and tax advisor in order to estimate the fraction value to calculate the balance for the tonnage tax,

•

Investors for the calculation of their rate of return

•

Courts. 4

Yet due to their limited knowledge of the shipping market, none of the mentioned parties is able to evaluate an accurate ship value on their own. Therefore the evaluation is 3

Holst, B., Bewertung von Schiffen, in: Winter, H., [et al.], 2008. Grundlagen der Schiffsfinanzierung. Frankfurt School Verlag. 4 Holst, B., Bewertung von Schiffen, in: Winter, H., [et al.], 2008. Grundlagen der Schiffsfinanzierung. Frankfurt School Verlag., p. 298.

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2. The principles of ship appraisal performed by ship brokers or ship valuators who are characterised by their sensitivity for the market.

2.1 Influences on the ship value However, before going into detail, one has to comprehend the factors and influences, which affect the value of ships. Several factors have influence on the ship value. Therefore this passage represents a summary of the general factors.

2.1.1 Economic and regional factors An investment only has value if it satisfies a need or creates a benefit, but is not unlimitedly readily available to everyone at the same time. This implies the concept that the value of an asset is not an intrinsic or immanent quantity, but generates from the costbenefit ratio and the level of the supply and demand equilibrium. The market value of an investment, such as a vessel, is formed when buyer and seller agree on a price. This agreement on a price takes place on a free market at supply and demand equilibrium. However, the price can increase or decrease depending on the variance in supply and demand and on the sentiment of the market participants. This sentiment is driven by different motivations. While some see the vessel as an asset, which is characterised by its relative stable and intrinsic value, others evaluate the ship by the future cash flow it is able to generate. These views are of vital difference, and lead to different results concerning the value of the ship. However, because vessels have a long but determinate lifespan, the evaluation usually includes the prospect income or rate of return. In order to assure a positive rate of return the capital expenditure must be in price-earning ratio to the expected revenue. The value therefore represents the expected future cash flow, and does not necessarily mirror the initial investment. 5 Nevertheless, the expectations depend on the rating of the future development; hence they are able to influence the ship values. These expectations for the future trends are stirred by a variety of causes. Foremost reasons are economic fluctuations in the world economy or in specific shipping sectors. These cyclical variances exist and have always existed, but can break through onto the shipping economy and therefore on the value of ships.

5

„Die Secondhand-Preise beruhen in erster Linie auf den Erwartungen, während die Neubaupreise hauptsächlich auf den Kosten für einen Neubau basieren“: Holst,B., 2008. Grundlagen der Schiffsfinanzierung. Frankfurt School Verlag., p. 304.

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2. The principles of ship appraisal Apart from that, the shipping economy acts independently from the economic trend. The reason for this fluctuation in prices is the so called “Schweinezyklus am Schifffahrtsmarkt”. 6 This cyclical describes the variations of prices as a result of the long construction period for new-buildings. The market conditions at the time of delivery can vary heavily from the expectations at time of signing the contract. Since the prices of the vessels are strongly dependable on the fright rate mechanism, described by Stopford in “Maritime Economics 3rd ed.”, 7 second-hand tonnage can become very attractive, as its ready availability enables the fast realisation of revenue and a simplified prediction on near future trends. Typical for this “Schweinezyklus” is its wave shape. Periods of economics prosperity and recessions take over from each other. The amplitudes in prices and the lengths of the periods are very difficult to predict and can vary from cycle to cycle. This is the reason why a constant observation of the market is of great importance for a correct appraisement of the vessels. Further, regional factors can have an effect on the price of a vessel. Even though vessels are movable, their specification for special trades and areas (e.g. Ice Class or MPPvessels) can limit their application. A vessel with ice class E3 may be able to obtain higher revenue if utilised in the Baltic Sea rather than the Mediterranean Sea. Moreover, the flexibility in utilization of a vessel is quite limited. Although there are vessels which are able to operate in different trades (e.g. OBO-carriers/MPP-vessels), a homogeny shipping market does not exist. The segmentation of the shipping market into different trades is the result. 8 These trades can be split again into sub-segments, which are determined by the vessel size, or in case of tankers, by the products, which are transported (e.g. crude, products, or chemicals). Those sub-segments all have a special trade in the market with different market exposures, which again may result in different expectations on the future revenue and therefore in a different rating of the value of the vessel.

2.1.2 Charter revenue The appraisal of vessels principally takes place without factoring in the charter contract. 9 Nonetheless, the charter market has a substantial influence on the development of the 6

Holst, B., Bewertung von Schiffen, in: Winter, H., [et al.], 2008. Grundlagen der Schiffsfinanzierung. Frankfurt School Verlag., p. 305. 7 Cf. Stopford, M. 2008. Maritime Economics 3rd Edition, Routledge., p. 135 ff.. 8 Major trades: Bulk-Carrier- , Tanker- , Container- and Multipurpose trade. 9 Holst, B., Bewertung von Schiffen, in: Winter, H., [et al.], 2008. Grundlagen der Schiffsfinanzierung. Frankfurt School Verlag., p. 307.

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2. The principles of ship appraisal value of the ship. A firm charter market will lead to an increase in the ships value with a delay of three to six months, whereas a negative development leads to a decrease in the value. 10 However, one can only establish a temporal coherence between charter market and secondhand prices, a conclusion cannot be drawn on the connection between the amount of the value and the fluctuation of the level in the charter market. Besides the increase or decrease of the level in charter revenue, determining factor for newly built vessels are by material costs and labour costs. The level of the charter market is not as important, since the shipyards level their prices to the economic situation of the buyer. Once a fundamental decrease in charter revenue can be stipulated, prices for new buildings drop, as owners decide not to invest into new vessels. But on the other hand shipyards raise their prices, once the charter market rises and the new building capacities are exhausted.

2.1.3 Operation expenses The Operation expenses have an influence on the value of the vessel. However, this influence depends on the charter market. While the effects are limited in a strong charter market with high revenues, the operation expenses are of greater interest in a weak charter market with low employment and little revenue. 11 Vessels with high operating costs will have to lay-up earlier and cannot act on the market as long as vessels with lower operating costs. They will simply get pushed out of the market due to their inability to react on lower demand. 12 Hence, operation costs may have an influence on the ship value, as they can lead to less employment of the vessel and thereof to less return on the investment which decreases the value.

2.1.4 Age and condition The age and the technical condition of a vessel both have influence on the ship value. However, the condition will become of greater importance with growing age of the vessel, meaning that the condition is expected to be satisfying at a lower age.13 The technical and

10

Holst, B., Bewertung von Schiffen, in: Winter, H., [et al.], 2008. Grundlagen der Schiffsfinanzierung. Frankfurt School Verlag., p. 307. 11 Everling, O., 2009, LTAV zur Schiffsbewertung, Everling Advisory Sevices, [Online], 7 October. Available at: http://www.everling.de/?p=1214 [Accessed 6 January 2010]. 12 Stopford, M. 2008. Maritime Economics 3rd Edition, Taylor & Francis, 19. Dec.. 13 Holst, B., Bewertung von Schiffen, in: Winter, H., [et al.], 2008. Grundlagen der Schiffsfinanzierung. Frankfurt School Verlag., p. 308.

6

2. The principles of ship appraisal overall condition of a ship can have negative effects on the operating expenses. Since technical insufficiencies usually arise at a growing age, one may have to expect higher maintenance and service expenses. These expenses have a direct effect on the operating expenses, which, as explained above, may have a negative impact on the value of the vessel. Appraisements without vessel inspection assume that the vessel is in good condition, yet vessels with an age of ten years and above should be inspected, since these vessels could have condition which might severely affect their value. 14

2.2 The term value In general, the term value represents an amount, as of goods, services, or money, which is considered to be a fair and suitable equivalent. This part will give a short overview on the termination of market value and collateral value in order to present a brief introduction. However, for the sake of completeness the terms fraction value and insured value shall be mentioned as well.

2.2.1 Market value Prices for many goods traded on the markets are published in newspapers or specialised journals. This makes it easier for citizens to evaluate the value of a similar good if traded on a free market. 15 Hence, evaluating a value is an easy and direct assessment of the average price which is usually paid on a free and unbiased market. The “International Valuation Standards“ defines market value as "the estimated amount for which a property [asset] should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion”. 16 This

14

Holst, B., Bewertung von Schiffen, in: Winter, H., [et al.], 2008. Grundlagen der Schiffsfinanzierung. Frankfurt School Verlag., p. 308. 15 Holst, B., Bewertung von Schiffen, in: Winter, H., [et al.], 2008. Grundlagen der Schiffsfinanzierung. Frankfurt School Verlag., p. 310. 16 Definitions of International Valuation Standards Committee,2000, p. 96., [Online] 1 July, Available at: http://www.romacor.ro/legislatie/07-ivs1.pdf [Accessed 7 January 2010].

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2. The principles of ship appraisal definition is in line with the definition of § 16 II, 4 of the German Bond Certificate Act (Pfandbriefgesetz). 17 It implies that the market value of a vessel reflects the average amount for which a ship could be realised if sold on a free market. However, condition for the objective market value is that both, buyer and seller, are not “over-eager” to buy or sell and that there is no particular or special relationship between the parties which could make the price uncharacteristic of the market. 18 Anyhow, the market value must be an average of many transactions of similar ships. The price of a vessel realised on the market does not have to be equal to the market value, as it represents an individual subjective price. Whereas the market price is the result of a single individual transaction between willing buyer and willing seller, the market value represents the objective average price buyer and seller agree on in a free and unbiased market environment. Yet, “in the absence of an [average] market price, it [the market value] is the estimated highest price a buyer would be warranted in paying and a seller justified in accepting, provided both parties were fully informed and acted intelligently and voluntarily.” 19 Concerning the accuracy, it must be mentioned that the market value of ships is not a mathematical exact factor. Nonetheless, the estimation is of great importance, as it can lead to different figures for the same good at the same date of evaluation. Generally has to be said, that the degree of accuracy for the estimation of the value for vessels is +/- 10 per cent. 20

2.2.2 Collateral value The collateral value is an appraised value of an asset (i.e. ship), which is pledged as a collateral in order to obtain a loan. Lending banks base the collateral value on the liquidation value of the asset and not on the actual cost, book value or even the current market value.

17

Cf. § 16 II, 4 of the German Bond Certificate Act, „Der Marktwert ist der geschätzte Betrag, für welchen ein Beleihungsobjekt am Bewertungsstichtag zwischen einem verkaufsbereiten Verkäufer und einem kaufbereiten Erwerber, nach angemessenem Vermarktungszeitraum, in einer Transaktion im gewöhnlichen Geschäftsverkehr verkauft werden könnte, wobei jede Partei in Sachkenntnis, Umsicht und ohne Zwang handelt.“. 18 Cf. 2008, SchiffsBelWertV § 9, Bundesministerium der Justiz, 6 May. 19 Downes, J., Goodman, J.E., 2006. Dictionary of Finance and Investment Terms Seventh Edition, Barron’s Financial Guides. P. 414. 20 Holst, B., Bewertung von Schiffen, in: Winter, H., [et al.], 2008. Grundlagen der Schiffsfinanzierung. Frankfurt School Verlag., p. 313.

8

2. The principles of ship appraisal In Germany, the collateral value is determined by reference to the § 24, 1-3 of the German Bond

Certificate

Act

(“Pfandbriefbesetzes”)

in

“Schiffsbeleihungswertverordnung 21 ”and the market value.

connection 22

with

the

The current market value,

the price for an equivalent newbuilding and the average market value of the past ten years are considered to be the maximum limit of the collateral value. 23 However, other than the market value, the collateral value is calculated by the financing bank and has the purpose to hedge the risk exposition of the lending banks. Hence, security needs and risk assessment are determining factors for the appraisal of the collateral value, as this value represents the security for repayment of the loan in case of insolvency of the ship owner. Thus, speculative elements should be detected and eliminated in course of valuation. The collateral value therefore requires a rating of the asset, including a careful assessment of the future marketability of the ship under consideration of the normal market condition in the current market. The definition of the collateral value implies a long-term responsibility of the appraisal for the hypothecary value, and therefore requires a more conservative and restrictive approach for the appraised value than for the market value. However, the conservative approach of the collateral value practices the idea to leave a financial range for future decreases in value resulting from fluctuations in the market value. The permanent variances in price, which are typical for the shipping economy, are levelled by the collateral value, and will only be taken into account if the price level has permanently risen or fallen. This is the crucial element of evaluating the collateral value in order to minimize the credit risks.

2.2.3 Fractional value The evaluation of the fractional value takes place in connection with the German tax law concerning the so called “Tonnagesteuer”. 24 For the evaluation the German Income Tax Act 25 defines the fractional value by the amount, which a fictitious buyer of the entire enterprise or ship would grant in the context of the total purchase price of the asset or the respective economic goods, while an assumption of the continuation of the enterprise is made upon valuation (continuation principle). 21

Cf. Regulation on collateral value - SchBelWertV. Cf. Appendix 1: SchiffsBelWertV. 23 Cf. § 4, II,III, SchBelWertVo, 6. May 2008. 24 Cf. 1998, § 5a Einkommensteuergesetz (EStG), German Income Tax Act. 25 Cf. § 6 exp. 1 No. 1 P. 3 Einkommensteuergesetz (EStG), German Income Tax Act. 22

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2. The principles of ship appraisal Internationally the fair value and the net realizable value are commonly used. They orient themselves more at objective market values and permit less interpretation clearance. The fractional value is consulted for the evaluation of the tax balance. If one talks about the balance (Unterschiedsbetrag) in connection with the German “Tonnagesteuer”, one imputes that it reflects the value of the ship. 26 However, other economic goods of the ship owner shall not be disregarded in this context. De facto is the market value of the single assets reproduced as fractional value. Hereby explicitly is a time charter contract to be mentioned, as this has a lasting effect on the economic performance of the ship, which again leads to an added value. For a detailed list of the concrete factors for the assessment of the fractional value for ships please see also the deliberations of Bernd Holst in Winter, H. [et al.], Grundlagen der Schiffsfinanzierung 3rd ed., Frankfurt School Verlag., pp. 313-315.

2.2.4 Insured value The term insured value of a ship is defined in § 6 and § 70 of the Allgemeine deutsche Seeversicherungsbedingungen (ADS) 27 in connection with clause 3 of the DTVKaskoklauseln (Deutscher Transport Versicherungsverband). 28 The value of the insurable interest usually equals the insured value. The insured value is not assessed by appraisers, but agreed upon by the parties of the insurance contract, namely the insured (e.g. ship owner) and the underwriter. The value stipulated in the insurance contract is the insured value. The agreement on the insured value usually equals the current market value of the ship at the time of signing the contract. However, the insured value is normally not adjusted to the market fluctuations, which can cause a large difference between the market value and the insured value.

2.3 Appraisal reports After having introduced the general influences on the ship value and the termination, this part shall give a briefly outline the appraisal reports prepared by ship appraisers. 26

Holst, B., Bewertung von Schiffen, in: Winter, H., [et al.], 2008. Grundlagen der Schiffsfinanzierung. Frankfurt School Verlag., p. 315. 27 German Standard Terms and Conditions for Maritime Insurance. 28 Clauses of the Union of German Transport Insurer.

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2. The principles of ship appraisal Principally, there are three kinds of appraisal reports. 29 However, there is a large difference between reports based on a survey of the vessel and reports that are produced without a survey. First to be mentioned are reports which include a survey of the vessel and are based on both the technical condition of the vessel and the actual market data. Secondly, reports produced upon the available information on the vessel including technical data and market data have to be referred to. These reports assume that the vessel is in condition according to the age. However, a plausibility check of the provided information can not be conducted, since no survey is undertaken. Finally, reports without any technical assessments, so called “Desk-Top-Appraisals”. 30 The evaluation of the vessel is undertaken without cross-checking its technical condition. This report is solely based on the market data and therefore is the common ship evaluation done by ship brokers. However all the mentioned reports should consider: •

the actual price of comparable vessels as a standard of comparison,

•

the respective specification of the vessel,

•

the ship value in US-dollar and Euro,

•

the immediate availability of charter-free vessels,

•

assumption of independent willing buyers and willing sellers,

•

regular condition of sale, cash payment,

•

the usual condition of the vessel according to the age.

2.4 Appraisal procedures This section shall present a brief overview on appraisal procedures commonly used for ship evaluation. In general there are three different appraisal procedures for vessels applicable: the evaluation by the reference value, the material asset valuation and the earning rate valuation.

29

Cf. Holst, B., Bewertung von Schiffen, in: Winter, H., [et al.], 2008. Grundlagen der Schiffsfinanzierung. Frankfurt School Verlag., pp. 319 30 Cf. Holst, B., Bewertung von Schiffen, in: Winter, H., [et al.], 2008. Grundlagen der Schiffsfinanzierung. Frankfurt School Verlag., p. 320

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2. The principles of ship appraisal 2.4.1 Reference value method The reference value method is the traditional procedure for the evaluation of ship values. The value results from the analysis of recent transactions being executed. The prices realised in those sales give an indication upon the market value of similar vessels. However, to compare the sales prices realised to the market value of the vessel, which is being evaluated, certain criteria have to be considered. Firstly, the reference vessels have to be “sufficiently consistent” with the valued vessel. For this instance “sufficiently consistent” in particular implies that type, age, size, equipment, construction and constitution of the ships have to be similar. 31 However, the given reference price should not be accepted as ship value without a validation on the actual shipping market. Still, due to the very individual characteristic of each vessel, a complete consistence between valued vessel and reference vessels seldom occurs. These discrepancies are corrected by deductions and appreciations in order to correctly display the current value. Further, the reference value method requires a minimum amount of transactions to assess the correct market value. As these transactions found the base for the average market value, a certain amount of vessels in the same segment have to be traded in order to enable a comparability of the values. The reference value method is insufficient however, if few or no sales are recorded on the market. Then, values have to be benchmarked against single prices, which hardly can be seen as average for the market value, since prices are influenced by individual circumstances (cf. 2.2.1). Finally, this evaluation method requires a sufficient number of reference values within a reasonable timeframe between the date of sale of the comparative vessel and the evaluation date for the appraised vessel. This proximity of time is important because market conditions are volatile and ship values heavily depend on the sentiment of the market participants. Yet, a flaw in the reference value method is its lack of transparency. It is difficult to comprehend the way of calculation, since the ship brokers hardly explain their work. Furthermore, different sales statistics as a basis of the assessment can alter the value, which again makes a plausibility check hardly feasible.

31

Holst, B., Bewertung von Schiffen, in: Winter, H., [et al.], 2008. Grundlagen der Schiffsfinanzierung. Frankfurt School Verlag.,p. 321

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2. The principles of ship appraisal 2.4.2 Material asset valuation As already mentioned above, vessels are very specific and individual assets, which may differ in type, size, technical equipment or utilization. This makes it difficult to always asses the value by the reference value method, and subsequently is the reason why some vessels (i.e. specialised ships) are valued by their single material assets. The material asset valuation is based on the market prices of the parts of the ship (e.g. main engine, hull, equipment, etc.), as it is easier to assess the value of the parts. The sums of the values compute to become the overall value of the vessel. However, the material asset valuation does not reflect any future revenue of the vessel. Moreover, this evaluation method is mainly in use for ships with hardly any market, or for vessels which have extraordinary high assets (i.e. yards).

2.4.3 Earning rate valuation A method, which is usually not being applied for the evaluation of vessels, but that is an established method for the evaluation of corporate values and real estate, is the so-called earning rate valuation. This method is based on the idea that an asset reflects the future revenue discounted to the evaluation date. The assumption is made that a value originates from the potential of future revenues. One of the most common methods within the scope of the earning rate valuations is the so called Discounted Cash Flow (DCF) method. 32 The DCF method ascertains the value of future expected cash receipts and expenditures at a common date, which is calculated using Net Present Value or Internal Rate of Return and is a factor in analysis of both capital investments and securities investments. The net present value method (NPV) applies a rate of discount (interest rate) based on the marginal costs of capital to future cash flows to bring them back to the present. The internal rate of return (IRR) method finds the average rate of return on the investment earned throughout the life of the investment. It determines the discount rate that equates the present value of future cash flows to the cost of the investment. 33

32

DISCOUNTED CASH FLOW accounting technique for estimating the present value (market value) of anticipated future income and expenditures, such as earnings from loan principal and interest payments, and income from investment securities.[…], Def. Fitch, T., 2006, Dictionary of Banking Terms, 5th Ed.,Barron’s Business Guides, p. 149. 33 Downes, J., Goodman, J.E., 2006. Dictionary of Finance and Investment Terms Seventh Edition, Barron’s Financial Guides. pp. 182-183.

13

2. The principles of ship appraisal In order to make a lucrative investment however, the price for the investment shall not be higher than the expected revenue. Still, it is very difficult to make economic assumptions on the potential of future revenues. The earning rate valuations are merely mechanical valuation tools, which are subject to the axiom "garbage in, garbage out". Small changes in inputs can result in large changes in the value of the asset. For this reason, it is important that such appraisals should not be based solely on historic data, as these usually differ from the future development. The shipping economy however, is well-known for its shipping cycles. This is the reason, why one could question, if historic parameter could be applied to project future developments.

14

3. The application of the traditional ship appraisal in the prevailing markets

3.

The application of the traditional ship appraisal in the prevailing markets

“Estimating the value of a ship is often based on recent sales being concluded; or discounted cash-flows; replacement cost and to a certain degree – gut feeling…”. 34 Accordingly, ship appraisal is traditionally conducted by the reference value method (or mark-to-market), which is a suitable and accepted method. Yet, as indicated in the introduction, the traditional way of ship evaluation alone can lead to “delusive and sometimes destructive results”, if applied in dysfunctional markets where the criteria described can not be assumed to be appropriately applied for the evaluation. Having discussed the general practice for the appraisal of assets (e.g. ships), this section shall comment on the application of ship appraisal in the prevailing markets and explain what caused the demand and the development of the Hamburg Ship Evaluation Standard. The year 2008 bookmarked the beginning of a fatal financial crisis. Deriving from a credit crunch, the financial crisis soon developed to the extent of a global economic crisis. The interrelation of the shipping market and the domestic global economy, described in 2.1, created a market atmosphere of very low demand for the carriage of goods by sea. However, the previous years had led to a boom in shipbuilding and many investors sought investments with extraordinary high returns in shipping portfolios. These exceptional high rates of return were often based on a prognosis of continuous growth in demand for shipping and carriage of goods by sea. Hence, high expectations on the future freight rate developments created a very optimistic market sentiment, which was reflected by a notable high volume of orders. The growing number of orders for new buildings and the high steel price led to an increase of prices as the building facilities soon reached their occupancy rate. Port congestions and a surplus in demand additionally tied tonnage and created a shortage, which led many owners to buy second-hand tonnage, as these were readily available. Ship values therefore increased, resulting in a boom on the new building and especially on the second-hand market. The graphic below illustrates the amount of orders placed until mid-2008.

34

Svenning, S.B., Oct. 2009., What is She Worth?, Fearnleys Monthly by Fearnresearch.

15

3. The application of the traditional ship appraisal in the prevailing markets

Figure 1: World Fleets & Orderbooks 1 Source: Shipping Intelligence Weekly, 26 Sept., 2008, Claksons Research

Yet the above mentioned market atmosphere of low demand, derived from the high volume of the orderbook in connection with the global economic downturn. On the one hand, the economic crisis broke through onto the shipping economy resulting in extremely low demand for carriage of goods by sea. However, on the other side, the - at times dramatic tumble on the freight markets was “homemade”, as very optimistic future prospects for the shipping industry in the previous years led to an overpaid orderbook, which tightened the freight rates on top of this. This market condition, previously described as “Schweinezyklus”, alone could have led in some segments to a drastic oversupply of tonnage, but was then raised to (even) higher power by the additional low demand resulting from the global economic crisis. 35 As a result, freight rates hit “rock bottom rates”. This being the case, values for ships dropped as well, and led to a problem for many ship owners, issuing houses and eventually banks. The prices at which they had bought the vessels made it very difficult to profitably operate them in the prevailing charter markets.

35

At the start of 2009 the containership orderbook stood at 6.0 million TEU, almost 50% of the size of the active fleet.Crowe,T., Liner Review – The Case Of The Missing Cargo, 2010 Clarksons research, [Online], 15 January, Available at: http://www.clarksons.net/markets/feature_display.asp?section=&news_id=29659&title=Liner+Review++The+Case+Of+The+Missing+Cargo , [Accessed on 19 January 2010].

16

3. The application of the traditional ship appraisal in the prevailing markets

Figure 2: Sencond-hand Prices '00-'10 Shipping Intelligence Weekly, p. 8; 26 Feb., 2010

The diagram above reveals the decline of the ship values for bulker-carriers and tankers, and likewise shows the impact the financial crisis on the shipping industry. The beginning of Q3 2008 featured a sharp drop in the long-term price trend for ships. This goes in hand with the insolvency of the investment bank Lehman Brothers, which stipulated the starting point of the global economic crisis. As already indicated, especially the container segment has been struck by the shipping crisis. While the bulk and tanker trade, after a steep decline, showed signs of recovery by 2009, rates for containerships, not least due to the high number of newbuildings entering the market and their dependability on the transportation of consumer goods, kept diving. Consequently, the S&P markets experienced a year of low activity throughout the container sector. 36 Accordingly, ship evaluation on basis of the reference value method was hardly feasible, as a total of only 89 container vessels changed hands over the full year 2009. However, only 24 of these vessels were below the age of 10 years. While 17 of these ships were smaller than 2000 TEU, 7 of the 24 vessels were recorded to be above 2000 TEU. Looking at a total fleet of container ships of all ages of over 4650 ships, the

36

Appendix 2: Holst, B., 2010, Executed Sales of container ships 2009 – 02/2010, Ingenieurbüro Weselmann GmbH, Hamburg, Germany.

17

3. The application of the traditional ship appraisal in the prevailing markets question is whether these 89 sales executed in 2009 are representative for the market value. As mentioned, the TC- rates for container vessels showed a steep decline. The rates for vessels below the size of 1700 TEU have dropped to as far as 35-40 % of the level mid2008. Vessels above the size of 1700 TEU contracted for even less and reflect a level of 20-25 % of mid-2008 charter rates. The graphic below displays the development of the TC-rates and of the few executed sales in relation to the level of mid-2008.

Development from mid-2008 to 01/2010 (mid-2008 = 100%) % 60

50

40 Sales 30

TC-rate

20

10

0 600

725

1000

1700

2750

4250

6000

6500

8500

12000

TEU

Figure 3: Development from mid-2008 to 01/2010 Source: Dipl.-Ing. Gerd Weselmann, Ingenieurbüro Weselmann GmbH, Hamburg.

Some of these executed sales can be referred to as “forced sales”, since no open market between “willing buyer” and “willing seller” can be stipulated. Further, the graphic reveals the behaviour mentioned in 2.1.2, and shows that the sales executed correlate with the development of the TC-rates over the different size segments. However, ships below the size of 1000 TEU did not register a decline in ship value and TC-rates like the vessels in the larger size segments did. Consequently, in order to establish a ship value based on the development of the TC-rates, the correlation between the TC-rates and the ship values has to be examined.

18

3. The application of the traditional ship appraisal in the prevailing markets Development of Time Charter Rates and Market Values 3 year-old vessels

1.000 TEU

1.700 TEU

2.750 TEU

TC-

Value

TC-

Value

TC-

Value

Rates $

$ m.

Rates $

$ m.

Rates $

$ m.

1985

21,3

2005

16.600

20,5

25.600

39,4

33.600

44,4

mid-2008

10.500

25,8

15.350

43,4

24.400

45,0

Jan. 2010

3.900

??

4.200

??

4.500

??

38%

9,8

27 %

11,7

18,5 %

10,7

6.150

18,8

14.750

27,25

21.200

37,9

% of mid2008 10-years average sales

13 -

16 –

24 -

15

18,5

25

Figure 4: Development of Time Charter Rates and Market Values Source: Dipl.-Ing. Gerd Weselmann, Ingenieurbüro Weselmann GmbH, Hamburg.

The table above shows the development of the ship values and 12-months TC-rates until 2010. Yet, the table reflects that an evaluation of the ship value by reference to the change in level of concluded charter parties, which was quite practicable throughout the past years, is not possible, since this would form unrealistic low ship values, which are even below the value of fire sales. A drop in TC-rates by 73 % to the level of 27 % of mid2008 for 1700 TEU vessel would result in a ship value of US$ 11,7 m.(Jan. 2010) , if the depreciation of the ship value was undertaken equally. However, the few sales executed were recorded at a level of US$ 16-18,5 m., while the 10-year-average for 1700 TEU container vessels computes to US$ 27,25 m. . The table shows similar results for the size segments of 1.000 TEU and 2.750 TEU vessels. Consequently, an accurate ship evaluation on basis of the change in TC-rates is not practicable. However, due to a very little number of sales an objective ship value by reference to the market value can hardly be stipulated either.

19

3. The application of the traditional ship appraisal in the prevailing markets

3.1 Impacts of the traditional ship evaluation in dysfunctional markets Until October 2008, active S&P markets enabled the ship evaluation by the reference value method for almost all types of ships. However, the above mentioned turmoil in the shipping industry led to a problem for ship appraisal, since variances in the charter level with timely delay cause variation in ship values. As of October 2008, especially for the container segment, the freight rates collapsed, which subsequently led to a decline in demand for tonnage. As a consequence, less activity on the S&P markets was recorded. However, few transactions made it very difficult to assess the ship value by the traditional ship evaluation. This problem carried on into the subsequent year, as 2009 also revealed extremely few sales which often were identified as fire sales. Further, at the prevailing low market level no seller was “willing”, and thus sold only if his cash flow forced him to sell. If one studies the conditions of these sales one will find that often only cash buyers were able to finance vessels, since banks did not deal in credits. However, if a financing or employment was attached to a vessel, these ships were sold at a higher rate than ships without financing and employment. 37 Yet, consequently the question is where exactly the market value is? And how does the buyer of a financed ship have to evaluate the vessel in the proceeding years if bankers asked him to evaluate on market value based on cash sale and charter-free? Ship appraisals are essential for the day-to-day business of banks, ship owners, shipbrokers, expert auditors, issuing houses and ship appraisers. The values have to be assessed, even if there is no intention of selling the ship. Therefore, due to the uncertainty in the shipping community, the question was raised as to what the exact value of a ship is in times of dysfunctional S&P markets? Some brokers and consultants would readily reply that the value is equal to the market value, which again reflects the price a “willing buyer” and a “willing seller” agree on in a free market. 38 No doubt, this is common practise and correct for a functioning market. These market values, evaluated by the reference value method, are sufficient in order to appraise the value of ships for the purpose of balance sheets, insurance values et cetera.

37

Cf. Dobert, J., Glaskugel Schiffswert, 2009, Hansa International Maritime Journal Nr. 10, p. 62. Cf. Definitions of International Valuation Standards Committee, 2000, p. 96., [Online] 1 July, Available at: http://www.romacor.ro/legislatie/07-ivs1.pdf , [Accessed 7 January 2010]. 38

20

3. The application of the traditional ship appraisal in the prevailing markets Yet the above mentioned position gives raise to the question whether market values, achieved by benchmarking against fire sales in dysfunctional markets, are representative for the value of a ship, if the owner has no intention of selling. Some brokers would agree and state that current market prices precisely reflect the prevailing shipping markets, with many ships being laid up. Consequently, every single transaction expresses a justified price, which represents the value of the good. However, at times of crisis with overcapacity of tonnage, charter rates on or even below the level of the OPEX, and a low lending mentality of ship financing banks, result in a lack of price formation for many sectors due to disproportional few transactions, which could be an index of the market value. Hence, the question is to a greater degree whether the fire sales, in absence of “normal” or unforced fixtures on the S&P and newbuilding market, are sufficient to accurately represent the market value on the basis of the traditional method for ship appraisal. Since forced or fire sales do not reflect objective transactions between “willing buyer” and “willing seller”, but merely a deal characterized by subjective motives where one party is “over-eager” to sell, it can be assumed that these sales, in absence of regular sale and purchase activity, are not useable in terms of assessing the market value. Thus, the conventional method, in dysfunctional markets under consideration of forced sales, does not necessarily correctly represent the market value of a ship, since an “arm’s length” transaction can not be stipulated. In addition, the traditional ship evaluation is characterised by a poor transparency, which makes a plausibility check hardly feasible. Ship owners or banks often miss an explanation on how the brokers approached to the ship value. Consequently, the validity of the reference value method in dysfunctional markets can be questioned. However, vessels are assets, and thus have to be appraised in order to display their value. Therefore a great number of ship brokers and consultants commonly perform guidance on values of standard vessel types through market reports and client circulars by reference to the traditional ship evaluation. Yet, prolonged unavailability of market values led to a suspension of ship appraisals. The well-established ship broker Clarksons, for example, ceased to conduct evaluations by declaring “Because of current market instability we are having difficulty in monitoring values. As a result we have suspended price guidance. If

21

3. The application of the traditional ship appraisal in the prevailing markets you wish to discuss, please call Clarkson Valuation Limited.". 39 This created even more constraints on the markets, as ship owners faced the evaluation of their vessels by loan-tovalue, while banks looked lost in their attempts to assess their assets. Ship financing banks, for example, need accurate ship values for the evaluation of the collateral value, thus for the internal rating of their assets. In Germany, banks that issue ship mortgage bonds 40 are obliged, as of the “Pfandbriefgesetz”, to periodically assess the collateral value of their assets. 41 The evaluation of the collateral ship value is regulated in the German “Schiffsbeleihungswertverordnung” (SchiffsBelWertV). § 4, I of the SchiffsBelWertV state that the collateral value is to be assessed by reference to either the market value, the average market value of the past ten years, the price for a newbuilding or by the contractual price. Yet, as mentioned above, the ship values, assessed by application of the traditional ship appraisal in malfunctioning markets, can turn out to be unrepresentatively low, since they use fire sales as a benchmark and cover far to view transactions in order to be representative for the market. Therefore, in times of malfunctioning markets, the assessment of the collateral value on basis of the traditional ship evaluation can lead to delusive and sometimes destructive results. The ship, as the borrower’s asset pledged security to ensure the payment or performance of the obligation under the mortgage agreement, could be of less value on the market as the registered collateral value. As a result, increased interest rates could lead ship owners to be in breach of loan covenants. Thus irretrievable write-offs and distress sales or insolvency can be the consequence. Another requirement for banks to appraise ship values lies within the framework of the Basel II convention. 42 The Basel II regulation dictates the capital adequacy. 43 This is the

39

Cf. Clarksons Valuation Ltd., [Online], Available at: http://www.shipvalue.net/guidance/default.asp [Accessed 26 January 2010]. 40 Mortgage Bond:Bond issue secured by a mortgage on the issuer’s property, the lien on which is conveyed to the bondholders by a deed of trust. A mortgage bond may be designated senior, underlying, first, prior,overlying, junior, second, third, and so forth, depending on the priority of the lien. Most of those issued by corporations are first mortgage bonds secured by specific real property and also representing unsecured claims on the general assets of the firm. As such, these bonds enjoy a preferred position relative to unsecured bonds of the issuing corporation., Def. Downes, J., Goodman, J.E., 2006. Dictionary of Finance and Investment Terms Seventh Edition, Barron’s Financial Guides, p. 435. 41 Cf: §§ 6 and 28 of the German “Ptandbriefgesetz” 42 BASEL II CONVENTION: Effective by 2008, the International Capital Accord, as it is also called, is based on three mutually supported pillars or concepts of capital adequacy. The first is a regulatory capital requirement, a minimum capital-to-asset ratio equal to at least 8% of risk weighted assets. The second pillar is that bank supervisory agencies have the authority to adjust capital levels for the individual banks above the 8 % minimum when necessary. The third concept enhances provisions on transparency in order to improve the market discipline. Def. Fitch, T., 2006, Dictionary of Banking Terms, 5th Ed.,Barron’s Business Guides, p. 51.

22

3. The application of the traditional ship appraisal in the prevailing markets amount of capital, which has to be deposited by the financing institution for loans or other assets. The convention was designed to promote uniformity, to make regulatory capital more risk sensitive, and to encourage enhanced risk management among large, internationally active banking organisations. Basel II rules that a minimum 8% of the loans have to be pledged as security for long-term loans by so called “Risk Weighted Assets” (RWA).

44

The ship financing banks therefore need to appraise the ship values in

order to assess the amount of assets, which have to back the mortgages and bridge loans granted to the ship owner. However, these loans become harder to justify, since ship values are decreasing during the crisis, whereas the amount of the RWAs as to Basel II increases. Dr. Klaus Stoltenberg, head of shipping and aviation at Nord/LB, ostensively illustrated the effects of the asset backing according to the Basel II convention in relation with the decline in ship values on the 13.Hansa-Forum 2009. 45 He gave the example of a 5,300 TEU containership ordered in 2006 and to be delivered in 2009. Under Basel II, the capital required in 2006 was € 481,000,-. Yet, supposing the vessel would remain without employment after delivery, the RWAs would compute to € 12.600.000,- in mid 2010. This sample calculation reveals the acute problem banks are facing. While trying to avoid depreciations in order to keep bad loans alive and protect ship owners from insolvency, banks have to rate their portfolio at least once a year to ensure a correct value. Moreover, banks are obligated to act in compliance with the Basel II convention, which imposes a heavy burden in terms of solvency and risk management. Yet, if ship values are solely based on a limited number of distressed sales, owners may face the risk of breaching covenants, forcing banks to demand increased collaterals, bar deposits or even partial repayment of the credit. Forced ship sales may be the consequence, which additionally speed up the downward spiral of falling asset values. 46 In addition, the assessment of ship values is of great importance for the balance sheets of ship owners and KGs, as the values display reserves. The decline of values, resulting from

43

CAPITAL ADEQUACY amount of capital relative to a financial institution’s loans and other assets. Almost all banking regulators require that banks hold a certain minimum of equity capital against their risk weighted assets. […],Def. Fitch, T., 2006, Dictionary of Banking Terms, 5th Ed.,Barron’s Business Guides, p. 74. 44 Cf. Winter, H. [et al.], 2008. Grundlagen der Schiffsfinanzierung. Frankfurt School Verlag, pp. 708 f.. 45 Appendix 3: in reference to: Statement of Dr. Klaus Stoltenberg, Nord/LB, at 13.Hansa-Forum 2009. 46 Porter,J.,Hagen,P., Hamburg brokers seek new standard for ship prices,2009 Lloydslist, [Online] Feb.20., Available at: http://www.lloydslist.com/ll/news/hamburg-brokers-seek-new-standard-for-shipprices/20017620612.htm , [Accessed on 18 January 2010].

23

3. The application of the traditional ship appraisal in the prevailing markets the application of the traditional ship evaluation in absence of S&P fixtures, can lead to excess of liabilities over assets, which inevitably leads to the question of insolvency. However, while the past years were characterised by a market sentiment, where liquidity was easy to obtain, issuing houses easily found investors for their shipping funds and banks, inflicted by the glory prospects, financed ships by loan-to-value ratios (LTV ratio) with up to 90 %, today, ship owners (including issuing houses and investors) face a dryout of their cash flow. They either have to remargin their household for the upcoming period of unemployment by equity or by bond capital, or they sell their liabilities, to wit their ships. Yet, injecting fresh capital by debt seems very difficult at the present, as the capital market hit rock-bottom. Therefore, an additional impact of the ship appraisal using the market value as a benchmark, in times of dysfunctional markets, is that ship owners face loss of capital, and in the worst case insolvency, if banks do not grant overdraw of credit. This leads to another question concerning the applicability of the conventional evaluation of ship values. As the purchase of a ship signifies an investment with a long lifespan, how is the market sentiment reflected when evaluating the ship? For the ship owner, the value of a ship is characterised by the added value, which it is able to generate when utilised in the charter market. Yet the determinant for the appraisal of a ship by the traditional ship evaluation is the market price at the date of purchase. In times of market turmoil however, this price reflects the amount that permits to afford to run the vessel below operating costs for a period of time, which is reasonably expected to represent the market downturn before charter revenues would cover the OPEX and CAPEX. Hence, the values estimated by the traditional ship evaluation simply give reference to market values, but do not necessarily reflect the intrinsic ship value, as the lifespan of a ship, which customarily is characterised by several economic cycles, is only considered to a certain degree. Yet, this bears the danger of boosting the ups and downs of the ship values, since a reference value which is based on short-term market fluctuations (in good and bad terms), and will reflect only short-minded investment opportunities. This shortminded outlook on the profitability of a ship therefore adds force to economic turbulences and bull markets. The distinctive and typical intrinsic value of a ship, which is attributable to the long lifespan and to the reoccurring (periodic) variations in demand, is not reflected. Therefore, the traditional evaluation of the ship value in dysfunctional and heavily distressed markets does not necessarily display the sustainable market value, but merely 24

3. The application of the traditional ship appraisal in the prevailing markets reflects a market value relevant for the reference date and with short-sighted outlook. Consequently, an evaluation of a ship in dysfunctional market solely based on the reference value may reflect a faulty estimation of a durable economic good.

25

4. The Hamburg Ship Evaluation Standard

4.

The Hamburg Ship Evaluation Standard

4.1 Development and introduction of the HSES As mentioned in the previous section, the global financial crisis caused a virtual standstill in the main segments of the ship S&P markets. Thereupon, ship valuators and ship brokers suspended the ship evaluation at the beginning of 2009, which led to constraints on the shipping markets, as reliable data for ship values became more difficult to obtain and no evaluation on basis of mark-to-market could be conducted. This was the motivation for the Hamburg Shipbrokers Association (Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V., VHSS) to promote the idea of a value assessment, which, apart from short term market fluctuations, reflects the Long Term Asset Value (LTAV) of a ship. Collaborating with ship appraisers, shipping banks, ship owners, issuing houses and auditing companies, the Hamburg Shipbrokers Association (HSA), hereinafter referred to as VHSS, created a valuation method, which is determined on the grounds of vessels long term earnings potential. The approach of the newly developed Hamburg Ship Evaluation Standard (HSES) deploys the present value 47 respectively discounted cash flow method (DCF-method) 48 – WACC 49 approach -, and is customised to meet the requirements of ship valuation. Further, the Hamburg Ship Evaluation Standard, hereinafter referred to as HSES or LTAV, uses a conservative, statistically proven and transparent approach in order to incorporate the volatility of the shipping cycle. Apart from the traditional ship evaluation, the LTAV rests upon the valuation by the earning rate. While considering the fluctuations on the shipping markets, the LTAV allows factoring in future variances in earnings (markto-model). 47

Def. Cf. Fitch, T., 2006, Dictionary of Banking Terms, 5th Ed.,Barron’s Business Guides, p. 358. accounting technique for estimating the present value (market value) of anticipated future income and expenditures,[…], and income from investment securities. It is calculated as either net present value, which expresses future cash flows in terms of current money by applying a discount rate to future receipts, or internal rate of return, which figures the average annual yield or return on capital of an investment or a bank loan over its expected lifetime. Def. Fitch, T., 2006, Dictionary of Banking Terms, 5th Ed.,Barron’s Business Guides, p. 149. 49 WEIGHTED AVERAGE COSTS OF CAPITAL: A calculation of a company's cost of capital in which every source of capital is weighted in proportion to how much capital it contributes to the company. For example, if 75% of a company's capital comes from stock and 25% comes from debt, measuring the cost of capital weights these accordingly. A high WACC indicates that a company is spending a comparatively large amount of money in order to raise capital, which means that the company may be risky. On the other hand, a low WACC indicates that the company acquires capital cheaply. Def. [Online], Available at: http://financialdictionary.thefreedictionary.com/WACC [Accessed on 03.02.2010]. 48

DISCOUNTED CASH FLOW:

26

4. The Hamburg Ship Evaluation Standard However, the VHSS did not intend to replace the traditional evaluation method by the LTAV. The ship appraisal by the reference value is still a sufficient and valid method during times of normal market activity. In fact the LTAV was introduced to establish an alternative method, which is applicable during times of dysfunctional or irregular market conditions, where a conservative, unbiased and statistically proven approach is needed. Thus, in dysfunctional markets, may these be excessively high or low markets, the evaluation by the LTAV can be used to obtain representative figures. 50 Yet, the mathematical structure of the LTAV had to be validated by an independent auditor in order to guarantee applicability under the German commercial code. For this reason, the VHSS consulted the auditor company PricewaterhouseCoopers (PWC). By examining more than 2.700 ships and calculating over 135.000 ship values, the auditor company validated the plausibility of the new standard. The validation performed by PWC came to the finding that LTAV deviates in 92% of the tested values of the last 10 year by less than 15% from the traditionally assessed values. 51 Claus Brandt Partner at PricewaterhouseCoopers, Hamburg, mentioned that “The LTAV in future is standing on a firm, finance mathematical sound foundation that concurs to the standard of the “Institut der deutschen Wirtschaftsprüfer für Unternehmensbewertung” IDW-SI 52 (German Institute of Auditors Standard for Corporate evaluation)”. 53 Brand and the VHSS believe that this validation will help to enhance a wide acceptance of the LTAV in the shipping community. The enclosed graphic, 54 a scenario of 1700 TEU-container vessels of the years 2006-2008, shows that, during the years 2006/07, the values estimated by the LTAV are in average higher than the market values. However, to the end of 2007 and with progression of 2008 this proportion gradually changes and displays a tendency of values lower than market value. Further, it is noticeable that to the end of 2008 ship values estimated by the amended LTAV /PWC-version (light-blue) reflect remarkably lower values than the initial LTAV (blue). 50

Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V., [Online] Available at: http://www.VHSS.de , [Accessed on 18.01.2010]. 51 Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V., [Online] Available at: http://www.long-termasset-value.de , [Accessed on 22.02.2010]. 52 IDW S 1 - Principles for the Performance of Business Valuations 53 Brandt, C., Shipvaluation on a new foundation Assessment of PricewaterhouseCoopers supports shipbrokers Long term Asses Value now with the IDW-Valuationstandards, Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V., [Online], Available at: http://www.long-term-asset-value.de/index.php [Accessed on 27.01.2010]. 54 Appendix 4: Comparison between LTAV and Market value.

27

4. The Hamburg Ship Evaluation Standard However, preceding in 2009/10 the diagram Comparison of Ship Values estimated by LTAV and reference value 2009/2010 (Age 3 – 5) 55 displays that the value assessed by the LTAV is significantly above the market value estimated by the brokerage house Clarksons. Further, the recorded sales of ships between the age of 3 and 5 years reflect a lower value than the LTAV. Yet, this statistic is based on individual sales, since only few transactions were recorded. Hence theses values may not be convincing, as they may not reflect an objective market value. Consequently, the LTAV is in the average below the market prices estimated in 2007 to 2008, but above the prices of end-2008 till today. This variance in values compared to the market value is the major point of criticism against the HSES, as this implies the danger of whitewashing struggling ship values.

4.2

Principles of application

The above-mentioned lack of reliable ship values reveals a general flaw of the traditional ship evaluation. The constraints on the shipping markets led to an imbalance between willing seller and willing buyer, which caused that disproportional few transactions in certain segments of the S&P market were concluded. Some market players would like to make a bargain and buy a vessel, but lack the funds to finance such, because the above mentioned reasons lead to the situation were financing via bank loans is not viable. Others do not want to sell their ships to prices were they have to realise losses and others again are busy enough with staying “alive” and resolving their troubled financial situation. Hence, one can assume that the market situation for the participants is everything else but ideal. Moreover, the market situation could be described insofar as to call it irregular or even disturbed. For exactly this situation the VHSS developed the Hamburg Ship Evaluation Standard. However, in order to ensure a correct application of the LTAV, one has to determine the principles of application. Thus the question, of when the LTAV should be applied, comes to mind.

55

Appendix 5: Comparison of Ship Values estimated by LTAV and reference value 2009/2010 (Age 3 – 5).

28

4. The Hamburg Ship Evaluation Standard As to the VHSS, a dysfunctional market, which makes traditional ship evaluation impossible, enables the application of the LTAV. The VHSS states that dysfunctional markets exist when at least two of the following scenarios apply: 56

a) An uncharacteristically low number of Sales candidates in comparison to the overall fleet within a category of vessels, over a period of at least three months means that there is a severe imbalance between willing sellers and willing buyers.

b) Transactions in which either the Seller or Buyer are knowingly under time pressure, constraint or urgent need to conclude a deal, driven by personal or corporate distress. Prices do not reflect vessels characteristics.

c) A difference of 30% between current transaction price and the “Long term Asset Value” lasting for at least three months.

d) An uncharacteristically low number of market participants, based on total number of parties, within a market over a three month period.

e) The absence of essential, regular market conditions (e.g. unavailability debt financing for a large number of market participants).

The market conditions, described in section 3 reflect the scenarios a), e) and to some extent b). Consequently, for the purpose of this thesis, the LTAV is considered to be applicable. However, as to the definition of the VHSS, besides periods characterised by disproportional weak market conditions, dysfunctional markets can occur during periods of extraordinary firm market conditions.

56

Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V., [Online] Available at: www.vhss.de, [Accessed on 27.01.2010].

29

4. The Hamburg Ship Evaluation Standard

4.3 Principles of calculation and definition of parameters Yet the application of the LTAV requires the definition of the parameters. Therefore, this section explains the principles of calculation and defines the parameters for the LTAV. In support and for further illustrations please find an example of the LTAV in appendix 6. For the computation of the Long Terms Asset Value (LTAV), the following formula has been derived: 57

T

LTAV = ∑ t =1

(Ct − Bt ) RVT + t (1 + idisc ) (1 + idisc )T

Figure 5: Formula of the Long Term Asset Value developed by VHSS

Ct = Current Net-TC-Rate in running year (Base: ConTex; Baltic Dry Index (BDI); other proven data etc.) Bt = current OPEX per running year idisc= Discount rate t = period (t1: current year; t2-T: period end) T= Remaining period until Age 20/25 Years (dependable on age of vessel)

RVT = Residual value, based on LDT, average USD scrap price/ldt, multiple and Iinfl (ldt in long tons, 1t= 0.9842 lt)

4.3.1 Charter income For the prognosis on the future charter income economical assumptions concerning •

Future gross-charter rates,

•

Brokerage and Management fees, and

•

Occupancy rate

have to be made.

57

Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V., [Online] Available at: www.vhss.de, [Accessed on 27.01.2010].

30

4. The Hamburg Ship Evaluation Standard ¾

Future gross-charter rates

It has to be distinguished between a charter-free vessel and a vessel with existing charter for the consideration of the gross-charter rates.

Charter-free vessel:

C = Using current indices (Base: ConTex; Baltic Dry Index (BDI); own date etc.). t1−3

Ctt >3 = (10-year average charter rate/day)*occupancy rate*( 1 + i Infl ). Existing Charter

C = With an existing charter fixed to a Charterer with a reliable credit rating, the existing charter should t1−x be considered until its completion.

C = After completion of the charter, the income for the remaining period should be calculated based on tt >x the 10 year average charter rate for the given vessel type. (e.g. (10-year average charter rate/day*occupancy rate)*( 1 + i Infl )).

However, for the purpose of calculating the charter revenue of a charter-free vessel, the derivative of the charter rate for the period of the first three years (t1-3) requires a reference market rate. Freight indices (e.g. ConTEx, Baltic Dry Index) and sub-indices as well as own data serve as reference values for these charter rates. Yet, beginning from the fourth year (tt>3), the charter income is calculated on the basis of a sustainable charter rate, which is derived from historical average rates of the past 10 years. Thus, the 10-year-average charter rate/day is multiplied by the days of employment, which than has to be validated by the rate of inflation (e.g. (10-year-average charter rate/day*occupancy rate)*( 1 + i Infl )).

Yet, if a vessel has a fixed charter, the existing rate should be used as basis for the calculation until completion of the charter party. However, the charterer must have a reliable credit rating, so that dependable future prospects are presumable. The income for the period after completion of the charter shall be calculated based on the 10 year average charter rate for a similar vessel. The detailed period of consideration (first three years) assumes the inclusion of the inflation rate into the charter rate. However, upon application of the 10-year-average in charter rates, the rate of inflation ( 1 + i Infl ) has to be added as well. 31

4. The Hamburg Ship Evaluation Standard ¾

Brokerage and management fee

Additionally, brokerage and management fee accrue for the chartering of a vessel. The amount of the applicable brokerage may be determined by the charter party or respectively to the discretion of the user. However, as to HSES an acceptable range for brokerage is between 1,25 % and 5 % of the gross charter revenue, whereas the management fee is allowed to vary between 3 % and 5 % of the gross charter revenue (cf. TKL. Fonds (2009), guide to SFI TKL.Ship Fund Index). The brokerage is to be deducted from the inflated gross revenue. ¾

Occupancy rate

Concerning the occupancy rate, the HSES calculates on 358 days, acknowledging an unemployment rate of 1 % for technical issues. However, the years of class inspection (5 year period) allow only an occupancy rate of 343 years. ¾

Fusion rate

Additionally, the VHSS mentions that if a maximum lifetime of 25 years is assumed, an individual fusion rate on the charter income is required. This fusion rate will apply for ages 21-25. Thus, the charter rate for bulk carriers will be reduced by 30 %, while Container vessels and Tankers require a reduction by 15 % for this period of time. Consequently, the charter revenue (Ct) p.a. is calculated as follows: Ct = [(actual and/or average charter rate/day)*occupancy rate*( 1 + iInfl )] *(100% -

∑

brokerage)*(100% - poss. Fusion rate)

4.3.2 Operation costs

The operating costs Bt are calculated on the actual and individual operating expenses and include a linear distribution of the regular expenses for class inspection and docking. Basis for the operating expenses are prices assessed by experience or current market prices. The daily operational expenses have to be multiplied by the occupancy rate and the inflation rate ( iInfl ), in order to calculate the total operation costs.

Bt = daily OPEX * Occupancy rate * ( iInfl ) 32

4. The Hamburg Ship Evaluation Standard 4.3.3 Discount rate

The evaluation of a ship by the Long term Asset Value demands to discount the future net income by a suitable rate of interest to the date of evaluation. This capitalised rate adjusts to the expected revenue and orientates itself by reference to adequate alternative risks for the use of capital. Thus, the rate of interest displays the minimum interest, which has to be obtained by the appraised object, in order to gain more return than an alternative investment. The discount rate of the LTAV as of the HSES results from the free cash flow discounted by the weighted average cost of capital (WACC). The weighted average costs of capital, however, depend on the amount of the equity and debt capital as well as on the debt-equity ratio (measured by the market value of the equity and the market value of the debt). rwacc = rE *

E F + rD * G G

E:

Market value of the ship’s equity

F:

Market value of the ship’s debt

G:

Total market value of ship’s assets

rE:

Cost of equity capital

rD:

Cost of debt capital

a)

Cost of equity (r E ):

The costs of equity are calculated on the basis of a differentiation between risk free basic rate of interest and a risk premium. Therefore, the costs of equity capital are determined by the Capital Asset Pricing Model (CAPM) 58 , as indicated in the formula below. 59

r E =r Rf + MRP * β rE:

cost of equity capital

r Rf :

risk free basic rate of interest

MRP:

market risk premium

β:

beta coefficient

58

Capital Asset Pricing Model independently developed by Sharpe (1964), Lintner (1965) and Mossin (1966). Cf. Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V., [Online] Available at: www.vhss.de , [Accessed on 27.01.2010].

59

33

4. The Hamburg Ship Evaluation Standard ¾

Risk free basic rate of interest (r Rf )

The (virtually) risk free basic rate of interest is calculated by reference to yield curves of government loans for the previous three months. Yet, the duration of the yield curves has to be congruent to the lifetime of the appraised object. 60

¾

Market risk premium (MRP)

For the calculation of the cost of equity on basis of the CAPM, a market risk premium (MRP) has to be computed. This market risk premium displays the systematic risk 61 (market risk) of the ship that cannot be eliminated by diversification. 62 Resulting from the average long-term difference between the rate of return of a stock index and the rate of return of risk-free governmental bond, the MRP expresses the expected “excess return” of investments in risky, instead of risk-less, stocks. The MRP derives from the empirical observation of the monetary markets, 63 where a range of 4 % 6 % appears to be suitable. However, the VHSS applies a statistically proven MRP of 5 % for the US market. 64

¾

The beta coefficient ( β )

The beta coefficient 65 indicates the specific risk of an asset (i.e. a ship) in proportion to the market risk. Hence, the beta coefficient displays the individual and specific risk of a ship. A beta coefficient greater than one implies that the value of the equity of the appraised 60

Cf. Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V., [Online] Available at: www.vhss.de , [Accessed on 27.01.2010]. 61 SYSTEMATIC RISK: that part of a security’s risk that is common to all securities of the same general class (stocks and bond) and thus cannot be eliminated by DIVERSIFICATION; also known as market risk. The measure of systematic risk in stocks is the BETA COEFFICIENT. , Def. Downes, J., Goodman, J.E., 2006. Dictionary of Finance and Investment Terms 7th ed., Barron’s Financial Guides, p. 702. 62 DIVERSIFICATION: 1. spreading of risk by putting assets in several categories of investements – stocks, bonds, money market instruments, and precious metals, for instance, or several industries, or a mutual fund, whith its broad range of stocks in one portfolio. […].,, Def. Downes, J., Goodman, J.E., 2006. Dictionary of Finance and Investment Terms 7th ed., Barron’s Financial Guides, p. 185. 63 Cf. Dimson/Marsh/Staunton (2006), The Worldwide Equity Premium: A Smaller Puzzle; Welch (2008), The Consensus Estimate for the Equity premium by Academic financial Economists. 64 Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V., [Online] Available at: www.vhss.de , [Accessed on 27.01.2010]. 65 BETA coefficient is the covariance of a stock or portfolio in relation to the rest of the stock market. The Standard & Poor’s 500 Stock Index has beta coefficient of 1. Any stock portfolio with higher beta is more volatile than the market, and any with a lower beta can be expected to rise and fall more slowly than the market. A conservative investor whose main concern is preservation of capital should focus on stocks with low betas, whereas one willing to take high risks in an effort to earn higher rewards should look for high-beta stocks. Def. Downes, J., Goodman, J.E., 2006. Dictionary of Finance and Investment Terms 7th ed., Barron’s Financial Guides, p. 61.

34

4. The Hamburg Ship Evaluation Standard object in average reacts disproportional on fluctuations of the markets, however a beta coefficient below one changes the value of the equity to a disproportional smaller extent. For the purpose of the LTAV the beta coefficients are determined by peer groups. These peer groups are formed by ship owners listed on the stock markets. However, in order to enable comparability, these ship owners have to be specialised in similar shipping segments (e.g. similar ship type, size??) as the ship of concern. Basis for a selection of ship owners can be companies, which are listed in the below mentioned indices: •

Bloomberg Dry Ship Index (Bulk Carrier)

•

Clarksons Liner Share Price Index (Container)

•

Clarksons Tanker Share Price Index (Tanker)

Yet, the VHSS states that the applicant of the LTAV may apply a different procedure to identify the risk premium.

b)

Cost of debt (r D )

The financing of a ship is often based on variable interest rate agreements linked to the 3months-LIBOR. 66 Therefore, basis for the assessment for the costs of debt are interest rate swaps curves. 67 These interest rate swaps display the expenses for hedging interest rate risks by swapping fixed rate obligations against floating rates, provided that they have the same duration. Consequently, the differences in life of the interest rate swaps and in the residual economic life of the ship enable a detailed consideration on the reference date, and provision for the floating rate risks. Additionally, the VHSS mentions fictive and company individual bond yields 68 , as an alternative basis for the derivation of cost of debt capital. 69 By enlisting of risk-less basic

66

LONDON INTERBANK OFFERED RATE, key rate in international bank lending. LIBOR is the rate at which major banks in London are willing to lend Eurodollars to each other. It is used to determine the interest rate charged to creditworthy borrowers […]., Def. Fitch, T., 2006. Dictionary of Banking Terms, 5th ed.,Barron’s Business Guides, p. 281. 67 INTEREST RATE SWAP contract in which two counter-parties agree to exchange interest payments of different character based on an underlying NOTIONAL PRINCIPLE amount that is never exchanged.[…] Typically, a swap contract exchanges fixed rate obligations for a floating rate instrument in the same currency. […]., Def. Fitch, T., 2006. Dictionary of Banking Terms, 5th ed.,Barron’s Business Guides, p. 248. 68 BOND EQUIVALENT YIELD investment yield of a bond purchased at discount from face value, such as a U.S. Treasury bill or municipal bond, expressed as a percentage. […]Yield equals face value minus the purchase price, divided by the purchase price; multiplied by the number of days to maturity., Def. Fitch, T., 2006. Dictionary of Banking Terms, 5th ed., Barron’s Business Guides, p.62. 69 Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V., [Online] Available at: www.vhss.de , [Accessed on 24.02.2010].

35

4. The Hamburg Ship Evaluation Standard rates of interest, which are congruent to the lifespan of the ship, these can proximately be ascertained by yield curves. However, in any case, an appropriate credit spread 70 has to be added to the interest for the debt capital. The amount of the credit spread is evaluated by the ship lending bank, and depends on the securities of the financed vessel. For this, on basis of an equity-debt ration of 30/70 % the, VHSS arrived at a credit spread of 1,375 %.

4.3.4 Inflation rate

The calculation of the LTAV as of the HSES contains an inflation rate ( iInfl ). This iInfl is used, in order to effectively display rising expenses for charter revenue C, for operation expenses B, or for the residual value RV. The operator of the formula has the opportunity to adjust the iInfl to his own preferences. Thus height and configuration of the inflation rate can be modified for each of the abovementioned parameters (C, B, RV). However, the VHSS indicates an inflation rate of 2 % for each parameter. This rate of inflation is derived from the stated inflation target of the European Central Bank (ECB). 71

4.3.5 Residual value

The residual value RVT is derivate by the current market value or by assessment of the user. The selected residual value is to be multiplied by the inflation rate specified for the residual value: Scrap value in USD * (1+ iInfl )

However, two methods are offered to calculate the residual value. Up to a vessel’s age of 15 years method a) should be used, while for vessels older than 15 years method b) should apply. 70

CREDIT SPREAD 1. yield difference between Treasury securities and comparable non-Treasury securities, such as mortgage-backed bonds, expressed in basis points. Credit spreads widen in recessions and grow tighter in economic expansions. 2. difference in value of two options on the same underlying security when the value of the option written (or sold) exceeds the value of the one bought., Def. Fitch, T., 2006. Dictionary of Banking Terms, 5th ed., Barron’s Business Guides, p.123. 71 Cf. (2009), Hamburg Ship evaluation Standards (HSES), VHSS, Sept. 22, [Online] Available at: http://www.vhss.de/ltav/Erlaeuterungen_LTAV_20091222.pdf [Accessed on 01.02.2010].

36

4. The Hamburg Ship Evaluation Standard

a)

20 Years Period:

Using an investment horizon until the vessel has reached 20 years of age, the residual value (RV 20 ) of the relevant vessel shall be determined by the inflated scrap value per ´light-weight (ldt) multiplied by a coefficient. RV 20 a = [Scrap value in USD *( 1 + i Infl )] * ldt * coefficient

The “scrap value surcharge coefficient” for different vessel types is based on proven statistical data of market transactions for 20 year old vessels. It is calculated by putting actual ship sales or appraisals in proportion to the scrap value of even-aged vessels.

The statistical data, currently allow the following coefficients Container Ships

3.7

Bulk Carriers

3.45

Tankers

2.0

If no statistical data is available for specialised vessels, a conservative coefficient of 2

72

should be used. 73

b)

25 Years Consideration Period

Using an investment horizon until the vessel has reached 25 years of age, the residual value (RV 25 ) of the relevant vessel should be evaluated by the inflated scrap value multiplied by the light-weight (ldt). RV 25 a = [Scrap value in USD *( 1 + i Infl )] * ldt

The VHSS recommends that a ship appraiser should use method a) for vessels up to the age of 15 years. However, if best judgement and expertise of the user leads to a doubt in the application of either method, the more plausible method, whichever provides more reliable data, should be applied. 72

The residual value – coefficients are validated by PricewaterhouseCoopers (Feb. 2009) and base on data of the VHSS. 73 Cf. (2009), Hamburg Ship evaluation Standards (HSES), VHSS, Sept. 22, [Online] Available at: http://www.vhss.de/ltav/Erlaeuterungen_LTAV_20091222.pdf [Accessed on 01.02.2010].

37

5. Analysis of the parameters

5.

Analysis of the parameters

As described in 2.1.2, principally, the evaluation of ships takes place without factoring in a charter income. However, the mathematical approach of the LTAV includes the calculation of the charter revenue in order to assess ship values. This is a renunciation of the traditional ship evaluation to a ship appraisal on the net present value. Yet, indeed the evaluation of a vessel by the earning rate is typically undertaken in-house prior to purchasing. The calculation on how much revenue an investment will generate is the fundamental economic question of a willing buyer before investing in a ship. Further, usually a risk-return analysis is undertaken, which reflects the risk structure of the investment. A higher systematic risk and a greater specific risk of the investment, implies that an investor would require a higher expected return to hold it, and vice versa. Therefore, the approach by the earning rate principally reflects the value of a ship, since it represents the amount, which an investment into a ship will gain in return under the premises of stipulated market risks.

5.1 Charter income Nonetheless, the assumptions on future return contain jeopardises of incorrect predictions. However, as mentioned in 4.3.1, the LTAV makes a distinction between the calculation of charter income of charter-free (a) vessels and of vessels, which are in an existing charter contract (b). Further, the net charter income is calculated by considering the rate of occupancy (c), and deducting the management fee and brokerage (d). If a fusion rate (e) is applicable, this has to be taken into account as well. a)

Charter-free vessels are calculated by using an index charter rate at time of

evaluation. This charter rate reflects the market sentiment and is assumed to prevail for the proximate three years. Then the proceeding years, until the end of the life of the ship, are simulated by the use of a 10-year average charter rate. Initially, this is a sufficient approach, since the market sentiment of the charter market has significant influence on the value of a ship. Furthermore, the evaluation on the basis of the discounted cash flow is commonly used for the appraisal of real estate, and as such is in line with IDW S1. However, the prospected earnings of the assessed vessel are subject to 38

5. Analysis of the parameters change, and thus have to be regarded with a certain degree of wariness. These earnings are only assumptions and require accurate predictions of the trend on the charter market. Even though these predictions gain a higher dependability, due to the introduction of a detailed planning phase of three years, multi-layered factors have to be regarded in order to predict the trend. The function of the future earning rate, for instance, includes the supply and demand ratio of tonnage. While demand is driven by the global economy, seaborne commodity trades, the average haul, random shocks and transport costs, the supply function is impelled by the size of the world fleet, the fleet productivity, shipbuilding production, scrapping and the fright revenue. 74 Hence, a wide variety of factors have to be predicted in order to estimate a sound base for the future rate of return of a ship. The simplified shipping market model illustrated below demonstrates how demand and supply affect the freight rate.

Figure 6: Simplified shipping market model Source: Referring to Tasto, M., 2009, Institute of Shipping Economics and Logistics (ISL), Bremen, Based on: Stopford, M., 2009. Maritime Economics 3rd ed., Routledge, p. 137 ff..

However, whereas the supply side is assessable by looking at figures concerning the existing fleet, the orderbook and the prospected scrapping rate, demand is much more difficult to predict, as the development of the world economy and seaborne commodity trades is dependable on the sentiment and conditions on the market, and requires a deep knowledge on international economics. Changes in interest rate and economic growths play a role as well as commodity prices and the accommodation of loans or letter of credits by banks. Hence, the function for demand depends on various factors, which make an explicit prognosis very difficult, and thus complicates the accurate prediction of charter income. Although supply may adjust to the level in demand, it is to some extent

74

Cf. Stopford, M., 2009. Maritime Economics 3rd ed., Routledge, p. 137 ff.

39

5. Analysis of the parameters constricted as shipbuilding requires certain time. Yet, adjustments of supply may also include slow-steaming or lay up and are therefore comparatively fast. Mr. Plankar uses the illustration below in order to explain the freight rate mechanism. The charter rate results from the utilisation capacity of the fleet and thus from supply and demand. 75 Supply for Transportation: Existing fleet Orders - Capacity of the yards - Prognosis on newbuildings Fleet productivity - Speed - Laytime and idle time Scrapping - Age structure - Statutory requirements

Demand for Transportation: Economic growth - Importregions o Iron ore/ coking coal/ steal cons. o consumption of energy ƒ Crude oil, oil prodcts ƒ Coal ƒ Liquefied gas - Minor Bulks - Consumer products Export/Routing

Degree of utilization of the fleet

Charter Rate

Figure 7: Formation of charter rate resulting from supply and demand Source: Referring to Plankar, M., Branchenrisikomanagement am Beispiel der Schifffahrtsbranche, in: Bankrisikomanagement: Mindestanforderungen, Instrumente und Strategien für Banken , 2008, pp. 325-362.

This scheme appoints various factors for demand and supply of transportation, which affect the degree of utilization and consequently have effect on the charter income. As a result, conclusions on the future charter rate can be drawn by examining the individual supply and demand drivers. Plankar confirms that the demand is affected by the world economy, through business cycles and regional growths trends. Therefore, especially commodity trades may modify the growth trends. Here in particular the development in the steel industry or the consumption of energy is mentioned, since that may influence the iron ore and crude oil trade. Therefore, the predictions of the charter revenue have to be undertaken by reference to the individual trade. While, some segments are more likely to be influenced by certain factors (e.g. steel productions – iron ore), others may need different demand drivers. 75

Cf. Everling, O., [et al.], 2008, Bankrisikomanagement : Mindestanforderungen, Instrumente und Strategien für Banken, Gabler.

40

5. Analysis of the parameters However, in addition the relevant fixtures of freight future agreements (FFAs) can reflect the future market trends. Consequently, these fixtures may be useful for the prediction of the future level in charter rates, since, due to their nature, they are traded well in advanced. Yet, on the other hand the application of a 10-year average rate after termination of the initial charter contract is coined by uncertainty. Even though shipping cycles have always existed and thus are reoccurring “events”, the amplitudes always changed and especially the latest decline on the shipping markets showed how unpredictable and volatile the shipping economy has become. Therefore, a 10-year average of the charter rates does not necessarily reflect the future income.

b)

However, the calculation of the charter income for vessels, which are in a valid

charter agreement, seems to be more accurate, since these revenues are more probable.

The charter income can accurately be presumed for the period of the charter agreement, which enables a precise estimation on the earning potential of the ship. Thus, inaccuracies resulting from assumptions on the prospected supply and demand ratio occur to a lesser extent. Yet, as mentioned in 4.3.1, the charterer must have a reliable credit rating in order to accept the charter contract as a valid piece of evidence. Further, the application of the 10-year average, after completion of the opening charter, is containing the same weaknesses in the calculation of the charter income as mentioned in (a). The question of whether or not historical charter levels enable a conclusion on future earning potentials of ships remains in force. This may be especially challenged if one took a look at the charter level of the past 5 years in contrast to the last 50 years. Especially the container segment and to some extent the bulker segment have seen an unprecedented boom throughout the past years, which could pervert the 10-year average rate. However, if one alleges that the current crisis is nothing but a dent, and charter revenues will eventually prosper as they did before the economic crisis, the 10-year average of the charter rates appears suitable to display future earning potentials. c)

The LTAV divides the rate of occupancy into two parts. On the one hand, allowing

a 1 % rate of unemployment resulting from technical issues, 358 days per year are taken as a basis for the calculation of the charter revenue. This deduction by 1 % properly reflects the frequency of loss of hire resulting from technical insufficiencies. Yet, on the other 41

5. Analysis of the parameters hand the years of class inspection acknowledge a rate of occupancy of only 343 days per annum. This subdivision also seems to be suitable, as the years of class inspections notably permit less employment of the vessel. d)

The management fee and brokerage are reflected adequately by the formula of the

LTAV. This thesis orientates towards the data of the Leitfaden zum SFI TKL.Ship Fund Index by TKL Fonds Gesellschaft für Fondsconception und –Analyse MBH in cooperation with Prof. Dr. Wolfgang Drobetz 76 , and therefore considers the range of 3 % to 5 % for management fee and 1.25 % to 5 % for brokerage as marketable. e)

Furthermore, for vessels with a period under consideration of 25 years, the

mentioned fusion rate has to be applied. This fusion rate accommodates the circumstance that vessels, after having exceeded the economic life of 20 years, obtain significantly lower charter rates. That is because of the fact that these ships are more likely to have technical insufficiencies, usually have higher operating costs, and are often below the technical standard, which causes negative effects on the charter rate. Consequently, the average charter rate Ctt >3 is reduced by 30 % for bulk-carriers, as well as by 15 % for containerships and tankers for the purpose of the calculation of the charter income in the years of age 21 – 25. 77 In fact, the size of the vessel is not as relevant and consequently is not as important for the fusion rate. Moreover, the fusion rate is determined by the experiences of the members of the VHSS. Upon maturity, Bulk carriers are often in a worse condition than container ships or tankers at the same age, as they carry a choice of cargo, which has a higher potential to inflict damage to the ship (e.g. scrap). Hence, their average charter income has to be reduced to a higher degree, since their condition may limit their ability to operate on the market.

5.2 Operation costs The calculation of the operation costs is a determining factor for the calculation of the LTAV of a ship. Principally, the expenses originate in costs for personnel, consumable 76

CF. TKL Fonds Gesellschaft für Fondsconception und –Analyse MBH, Drobetz, W., Leitfaden zum SFI TKL.Ship Fund Index, [Online] Available at: http://www.hamburgmaritime.de/Leitfaden_SFI.pdf?PHPSESSID=gdhvmqxe , [Accessed on 16.02.2010]. 77 Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V., [Online] Available at: www.vhss.de , [Accessed on 19.02.2010].

42

5. Analysis of the parameters goods (e.g. oil, bunker, gas, etc.), spare parts, insurance, maintenance, repair, routine docking and class renewal. The variety of cost positions lead to very individual operation expenses for every ship. This is the reason why the operation costs are assessed by experience of the ship owner, and cannot be assessed by average. However, by factoring in the operation costs, the LTAV reflects the expenses, which are deducted from the charter income in order to calculate the net charter. Consequently, the LTAV reflects the idea mentioned in 2.1.3. The effect of high operation expenses is more relevant in a low charter market, whereas the OPEX are of minor relevance when high charter revenues are achievable. Thus, the evaluation as to the LTAV correctly displays the idea of Stopford that, in a weak charter market, vessels with higher operating costs will simply get pushed out of the market earlier, while vessels with low operation expenses are able to operate longer, since they are able to realise a positive net charter income due to less operation expenses. 78 Subsequently, the LTAV comprises the importance of the OPEX in the calculation of the charter revenue and consequently for the achievable internal rate of return of the investment. Hence, the ship-specific risk of high operation costs is reflected in the ship value. A ship, which is only able to operate on high expenses, does not achieve as much return as a ship with lower OPEX. Consequently, the ship value of a ship with higher OPEX has to be less than the value of the same ship with less OPEX.

5.3 Discount rate The evaluation of the discounted cash flow (WACC approach) is a common attempt for the appraisal of assets (e.g. property/real estate). Therefore, ship appraisal by the Hamburg Ship Evaluation Standard concurs to the standard of the Institut der deutschen Wirtschaftsprüfer für Unternehmensbewertung (IDW S1). 79 Further, the application of a discount rate enables an accurate consideration of the ship values to the date of reference. As referred to in 4.3.3, the LTAV is based on the WACC approach and relies on the costs of equity capital, the costs of debt capital, and the dept-equity ratio. The LTAV utilises the Capital Asset Pricing Model for the calculation of the cost of equity capital. The CAPM is an established and the predominant model for the capital market-oriented derivation of costs of equity capital, and suitably reflects the value of the 78 79

Cf. Stopford, M., 2009. Maritime Economics 3rd ed., Routledge, p. 160 ff.. German Institute of Auditors Standard for Corporate Evaluation.

43

5. Analysis of the parameters cost of equity on the target date. Specifically, the utilisation of current yield curves for the calculation of the risk free basic rate of interest ensures an appraisal to a reference date, because the yield curves 80 reflect the current basic market risk. However, apart from the (virtually) risk free basic rate of interest, the costs of equity capital are also depending on risk premiums. While the unsystematic risks are not remunerated for by the interest rate, as they can be eliminated by diversification, the systematic risk is reflected by the market risk premium. Hence, the discount rate considers the amount of interest which reflects the risk of the investment. The CAPM determines the market risk premium by ascertaining the market value for the acceptance of a risk (MRP) based on data of the capital markets. Hence, the MRP is the expected return subtracted by the (virtually) risk free rate of interest. In other words, the MRP expresses the expected “excess return” of investments in risky instead of risk less stocks. Reason for the dependence on data of the US monetary markets, mentioned in 4.3.3 a), is the equivalence to the discounted cash flows, which in shipping are usually generated in USD. 81 Additionally, the MRP is multiplied by the specific risk (β -coefficient). The thereof resulting risk add-on is customised for the individual project, and considers the projectspecific risk structures. Still, as mentioned in 4.3.3, the individual beta coefficient for the assessment of ship values by the LTAV are determined by peer groups listed on the stock markets, and accordingly relate to indebted companies. Apart from the operational risk, they depict also the risk of the capital structure of the respective shipping companies in the peer group. Therefore, the beta coefficients have to be unlevered in order to illustrate the beta of the shipping company without any debt (so called raw beta). ⎧ ⎩

βUnlevered = β Levered / ⎨1 +

D⎫ ⎬ E⎭

By unlevering the beta any beneficial effects gained by adding debt to the firm's capital structure are removed. A comparison of the companies’ unlevered betas therefore gives an overview on the risks of the individual company irrespective to the liabilities. 80

There are three main economic theories attempting to explain how yield curves develop over time. However, explaining these theories would exceed the scope of this thesis. Yet, they have to be mentioned for the sake of completeness. There is the market expectations (pure expectations) hypothesis, the liquidity preference theory, and the market segmentation theory. 81 i.e. charter rate and operation costs are manly calculated in USD

44

5. Analysis of the parameters

In conclusion, the unindebted median of the peer group’s beta coefficients is ascertained, and again has to be adjusted to the alleged capital structure of the appraised ship. Usually, the above mentioned formula is inverted in order to enable an utilisation for the conversion. Consequently, β Levered of a ship appraised by the LTAV is calculated as follows:

β Levered = βUnlevered

*

⎧ D⎫ ⎨1 + ⎬ ⎩ E⎭

However, as mentioned the beta coefficient quantifies the MRP, whereby the beta coefficient of the investment is measured by the covariance between specific and systematic risk of shipping. Consequently, variances in the project specific risk structures can lead to a change in the coefficient. As a result, a change may cause either lower (β1) cost of equity capital. Therefore, a variation of the beta coefficient results in a change of the interest of principal for the equity. While higher risks lead to a higher discount rate, a low risk of the investment is reflected by a lower discount rate. Accordingly, on the fundamental of an equal net income, the LTAV can result in different ship values. If the LTAV of a vessel was calculated on basis of an increased systematic risk, the LTAV would lead to a lower ship value. Yet, on the contrary low systematic risks result in a higher ship value, as the lower costs of equity capital would allow a smaller discount rate and therefore lead to a higher net present value. However, an alteration of the beta coefficient can be induced by a variance in the specific risk of the shipping company. Since the beta coefficient depicts the covariance between the ship-specific risk and the systematic or market risk of shipping in general, a variety of economy-wide risk factors can lead to a change in the beta coefficient. Yet, in spite of the economic importance of the shipping sector, related analyses were hardly undertaken until Grammenos and Markoulis (1996). By using stock market beta and firm-specific factors they explained the cross section of shipping returns and in conclusion reported a market beta below one for the sample of 11 shipping companies in the timeframe of 1989 to 1993. Analogously, Kavussanos and Markoulis (1997/1) investigated the market risk on firm level and tried to detect a coherence between the average beta in shipping and the overall US-stock market (S&P 500) during 1985-1995. In conclusion they were not able to establish a significant difference. In an additional study, 45

5. Analysis of the parameters Kavussanos and Markoulis (1997/2) compared the return structure of water transportation and other transport industries. They recorded a market beta lower than unity in the water transportation sector. However, Grammenos and Arkoulis (2002), for the first time, 82 demonstrated a relationship between international shipping stock returns and macroeconomic variables, while Kavussanos et al. (2002) investigated sources of risk factors in different international industries. Both articles argue that global risk factors are crucial for an investment decision. Additionally, they proved that, due to the international nature of shipping, these macroeconomic factors are consistent throughout various companies in the shipping industry. Yet not until Kavussanos et al. (2003) a comparison between stock returns of shipping-related industries has been undertaken. This study revealed to which extent systematic risk, defined as market beta, differed between segments. 83 For this reason, they used the single-factored approach of the CAPM and estimated market betas for each shipping segment using regression analysis. The result revealed shipping segments react differently to systematic risk. Finally, Kavussanos and Marcoulis (2005) underlined this thesis, and the current consensus concerning the shipping stock returns, confirms a relation between both firm-specific and common macroeconomic factors. Hence the LTAV is in consensus with the predominant opinion, as the beta coefficient distinguishes between the three major shipping segments (cf. 4.3.3). However, it was not until Westgaard et al. (2007) that stock returns in a defined shipping segment (tankers) were explained by introducing a set of various macroeconomic risk factors. 84 Yet, their work neglected the bulk and container trade, as they focussed on the risk factors in tanker shipping. Eventually, Drobetz, Schilling and Tegtmeier explored “Common Risk Factors In The Return Of Shipping Stocks” in 2009. 85 Their empirical findings followed the pattern of the previous studies investigating on the risk of shipping sectors. For this, the shipping sector displays lower risk in terms of beta than the overall stock market (a beta lower than one) and a high ratio of systematic risk. 86 Yet, their findings included also that risk in the shipping sector is multi-dimensional, as market risk alone is not sufficient to price an equity universe that includes shipping stocks. 87 Thus, a break down of the risk

82

Westgaard, S. [et al.], 2007, Economic and Financial Risk Factors and Tanker Shipping Stock Returns. Westgaard, S. [et al.], 2007, Economic and Financial Risk Factors and Tanker Shipping Stock Returns. 84 Cf. Westgaard, S. [et al.], 2007, Economic and Financial Risk Factors and Tanker Shipping Stock Returns. 85 Cf. Drobetz, W. [et al.], 2009, Common Risk Factors In The Returns Of Shipping Stocks., March. 86 Drobetz, W. [et al.], 2009, Common Risk Factors In The Returns Of Shipping Stocks., March. p.17. 87 Drobetz, W. [et al.], 2009, Common Risk Factors In The Returns Of Shipping Stocks., March. p.17. 83

46

5. Analysis of the parameters structure in a shipping segment requires fundamental analysis, since the risks are multilayered. However, even though shipping segments are highly specialised and experience great differences with regards to the exposure to various risk elements; several comprehensive risks affecting all shipping segments can be defined. Among others, there are changes in interest rates, changes in the oil price and the supply-demand-ratio. Drobetz, Schilling and Tegtmeier also included a change in the industrial production and the change of the tradeweighted value of the US-$ into their multifactor model to establish a comparison of the risk profile in the shipping sector. By using the median of the beta coefficients gathered from the peer groups determined by the indices mentioned in 4.3.3 a), the approach of the Hamburg Ship Evaluation Standard displays and includes the risk factors in shipping into the appraisal. Due to their permanent accessibility, shipping stocks properly reflect the prices to which investors appreciate the systematic risk and specific risks of shipping. Hence, the beta coefficients gathered from the peer groups suitably reflect the risk structures in the overall markets of tanker, container and dry bulk shipping. However, a break down of the sub segments in terms of size and, or cargo (i.e. tanker: product or dirty) is not undertaken. For example, the portfolio of the average small container feeder shipping company from the German river Elbe is usually not included into the peer group (or at least not suitably reflected), and consequently their specific risk structure cannot be taken into account. Nonetheless an average amount is considered, and this is as close as it gets to a universal approach of a definition of shipping risk structures. As mentioned the WACC includes also the cost of debt. These costs of debt capital likewise depend on the aforesaid economic risks. While the 3-months-LIBOR is not affected by the specific risk structure of the appraised ship, the credit spread applied by the ship lending banks certainly depends on the risk concerning the financed object. Yet, the estimation of a general credit spread of 1.375 % may not be appropriate. The cash flow, which is generated by the vessel, as well as the performance of the ship owners or the security of lasting charter agreements have a significant influence on the amount of the credit spread. Furthermore, the amount of the credit spread depends on an internal rating of the lending institutions and thus varies. A change in the market fundamentals may lead to a shift in the banks risk rating and consequently change the amount of the credit spread. 47

5. Analysis of the parameters As a result, the project specific circumstances under consideration of current market conditions determine the amount of the credit spread. This is the reason why a general credit spread may inadequately reflect the given risk structures, in terms of risk-return estimation.

5.4 Inflation rate Including an inflation rate enables the adjustment of the parameters. Charter revenue, Opex or the residual value may increase or decrease over the years. The monetary phenomenon of the inflation rate therefore incorporates the economic condition characterised by an increase of prices and wages, and declining purchase power into the calculation of the LTAV. 88 Consequently, comprising the inflation rate improves the accuracy of the LTAV of a ship, and enables a calculation with reference to the effective date.

5.5 Residual value The residual value reflects the value of a ship at determination of its lifespan. It is calculated by multiplying the light-weight (ltd) of the ship with the scrap price. The Hamburg Ship Evaluation Standard uses two options (asset depreciation range of 20 and 25 years) for the determination of the residual value at the end of the economic life of a ship. The age of the ship is decisive for the selection of the respective option. Vessels below the age of 15 years are assumed to have an economic life of 20 years (method a)), whereas ships above the age of 15 years are supposed to have an asset depreciation range of 25 years (method b)). For vessels which fall under the regulation of method a), a “scrap value surcharge coefficient” has been calculated. This “scrap value surcharge coefficient” displays the proportion between the actual ship prices and the scrap value (ltd. x scrap price/ltd.).

88

Fitch, T., 2006. Dictionary of Banking Terms, 5th ed.,Barron’s Business Guides, p. 241.

48

5. Analysis of the parameters However, the coefficients mentioned in 4.3.5 generate from the quotient of the average in executed sales or ship appraisals and the average in scrap value. 89 While the actual ship sales and ship evaluations were figured by statistics and data resource, the average scrap value is the product of the scrap price per light-weight. Yet, as mentioned in 4.3.5, each ship type (e.g. tanker, container, bulk-carrier) has its “own” “scrap value surcharge coefficient”. This is owed to the fact that each of the mentioned segments has different levels in value once they approach the end of their economic life. Tankers for example, will hardly find employment above the age of 20 years, as these old vessels are usually not fitted to meet the requirements of OPA 90, and consequently are often rejected at the charter market.

90

Therefore, tanker values rapidly

decline at the end of their lifespan, whereas containerships, due to their acceptance on the charter market and their overall better condition, are able to achieve higher prices at the same age. However, the proportion between the actual ship prices and the scrap value has to be calculated for each sub segment of the individual ship types 91 , in order to display an absolute “scrap value surcharge coefficient”. The individual average of these coefficients then represents the “scrap value surcharge coefficients” for the ship type displayed in 4.3.5. Yet, the coefficients are subject to change and therefore have to be permanently verified. Volatile market conditions may lead to variances in market values, which then would alter the proportion between the actual ship prices and the scrap value. This would lead to different coefficients and in consequence results in higher or lower residual values. Yet, if the method b) is applied, and a period under consideration of 25 years is taken as basis, the LTAV does not provide the application of a “scrap value surcharge coefficient”. The reason is that for these ships only the scrap value is taken into account. A hypothetical factor, displaying the potential market value of the ship in contrast to the scrap value, shall not be calculated as the LTAV constitutes the economic life of a ship to be terminated by attaining the 25th year of age.

89

Scrap value surcharge coefficient = (Executed sales or ship appraisals) / average scrap value

90

Cf. Oil Pollution Act of 1990 (OPA 90). e.g. Container: 0-500 TEU, 500-999 TEU, 1000-1499 TEU, 2000-2299 TEU, 2300-3399 TEU, 3400-3999 TEU, 4000-4999 TEU, etc. . 91

49

5. Analysis of the parameters Accordingly, if an existing market for ships of 25 years and above can be stipulated, the difference in the market value and the scrap value reflect hidden reserves and is not considered by the LTAV.

50

6. Application of the Hamburg Ship Evaluation Standard

6. Application of the Hamburg Ship Evaluation Standard After introducing the Hamburg Ship Evaluation Standard and having discussed the impacts of the traditional ship evaluation in disrupted markets, this paragraph shall outline the impacts of the HSES on ship appraisal. As mentioned above, the LTAV assess the value by the capitalised income. This present value has to be distinguished from the market value assessed by the reference value method. While the reference value displays the current average market value of the ship, the LTAV calculates the future cash flows and discounts them to the date of appraisal. Hence, a net present value is calculated, which, as such, reflects the value of the investment autonomously from current market fluctuations. This is the reason why the LTAV became so attractive for banks, issuing houses, and ship owners. The effects of the shipping crisis, described in section 3., led to the problem of finding a suitable approach for the estimation of ship values. Especially for the container segment, market values were difficult to obtain, as few transactions led to a difficulty in assessing representative reference values. The Long Term Asset Value however, features a transparent and plausible estimation of a ship value, as it is based on a mathematical formula and allows a preview on prospected revenues. Furthermore, the LTAV enables an appraisal even in disrupted markets, since the evaluation is based on the present value, and a reference value is not needed. Thus, benchmarking against fire sales does not come into question, as values are not based on recent sales, but on the future income. Consequently, the question of availability of willing buyer and willing seller is not required. Additionally, ship values calculated, using the LTAV, are not as volatile as if estimated by the reference value, since they are not influenced by subjective conditions of sale. On the contrary, the estimations by the LTAV are based on the principle that a ship is a sustainable and lasting asset, which is represented by the amount of the internal rate of return, rather than the liquidation price. Hence, it reflects long-term prospects and cushions periods of bull markets and economic downturns, since it does not represent a short-minded outlook in profitability, but in fact rests upon the 10-year-average in charter rates. In consequence, the LTAV does not “live” the heights and lows of the market cycles as much as the reference value does.

51

6. Application of the Hamburg Ship Evaluation Standard

6.1 Impacts of the HSES While the evaluation of ship values in active S&P markets is correctly undertaken by the reference value method, the LTAV can alternatively be used for the appraisal in dysfunctional markets. But, when applied, what exactly are the impacts of the Long Term Asset Value on the ship evaluation in disrupted markets (certain segments)? As described in section 3., several parties face problems when the traditional ship evaluation is to be undertaken in dysfunctional markets for the appraisal of ship values. The necessity of ship values, even if there is no intention of selling the ship, clearly indicates the dependence on a well-performing method for ship appraisal during any kind of market condition. Fortunately, the LTAV is an instrument, which enables a plausible approach to ship values, even if no reliable data on the S&P market is available or if there is no intention of selling the ship. However, it [the LTAV] is not directly used as a book value but rather as an useful addition in the determination of valuations for, amongst others covenant assessment, especially in illiquid markets. 92 Hence, the LTAV provides an addition for the periodical estimation of the collateral value of ship mortgages by banks. By applying the LTAV in disturbed shipping markets, the thereof resulting ship values may cause proportionally higher collateral values, as opposed to the collateral values being assessed on foundation of the reference value including fire sales as a benchmark. However, this has the effect that ship owners are not threatened by increased cost of the mortgage, resulting from additional mortgage insurance to protect the lender from credit default. Thus, in disrupted or weak markets, using a mark-to-model procedure like the LTAV could prevent ship owners from performing distress sales and therefore stabilises the ailing ship values, as borrowers or ship owners would not face cash flow problems resulting from debt capital. Yet, in periods of boom conditions, where ship values may be unrepresentatively high, the LTAV caps the ship values to a reasonable level, since it reflects the long term prospects and is not solely based on extraordinary high short-term revenues. Consequently, banks assessing the collateral value would find a more conservative foundation in the LTAV as opposed to the traditional ship evaluation. As a result, the proposed market-to-model-driven valuation methodology in the prevailing troubled markets assists the banks in preserving the collateral values, and in return

92

Cf. Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V. , [Online], Available at: http://www.vhss.de/ltav/press_release_engl.pdf , [Accessed on 16.02.2010].

52

6. Application of the Hamburg Ship Evaluation Standard stabilises the position of the debtors, that is ship owners and issuing houses i.e., as the banks are not forced to ask for additional mortgage obligations or increased interest rates. Digression on application of the LTAV in the SchiffsBelWertV: However, before using the LTAV as starting point for the assessment of the collateral value, it has to be questioned whether the SchiffsBelWertV permits the valuation on basis of a mathematical formula, which includes the prospected earning rate of the asset. § 3, I of the SchiffBelWertV stipulates that the underlying value for the collateral value shall be free from any “speculative elements”. Thus the question is, whether the assumption of prospected revenue and the future market situation, such as in the calculation of the LTAV, comprise these “speculative elements”, or whether the LTAV is in line with the policy of § 3, I SchiffBelWertV. Yet, the same paragraph states that the value which forms the basis for the evaluation of the collateral value, shall foot on empirical data, which, independently from economic market fluctuations, can be assumed as the market value. As the idea of the LTAV is to calculate ship values isolated from the cyclical volatility, and since the parameters rest upon empirical statistical proven data, one could conclude that the LTAV is in line with § 3, I,2 SchiffsBelWertV. However, as mentioned in 3.2, the central provision on the evaluation of the collateral value of ships is outlined in § 4 of the SchiffBelWertV. The directive of § 4, I states the constitutional parameters for the evaluation of the collateral value. For this purpose, the market value, the 10-year-average market value, and the price for a newbuilding or – for second-hand vessels - the contractual price determines the upper limit of the collateral value. However, by appointing these values solely as upper limit (cf. § 4, II, III SchiffBelWertV), the mortgage lending institutions (Pfandbriefbank) are not committed to the exact method on the evaluation of the collateral value. This is essential, because – unlike for the evaluation of real estate – a specific method for ship appraisal does not exist. Moreover, § 4, IV urges the mortgage lending institutions to apply another adequate method, if neither a current market value nor a average market value can be assessed. Consequently, even though the LTAV does not comply in all respects with the provisions of §9 and § 3,I SchiffBelWertV, it is worth it to consider the accreditation of its application in distressed markets, where a ship appraisal on basis of the traditional method is not possible.

Furthermore, the introduction of the LTAV has an effect on the risk management of ship lending banks. As described, Basel II comprises a heavy burden for banks. The example of Mr. Stoltenberg in 3.2 indicated the high ratio of banks equity requirements. The capital resource rules of Basel II display how the capital-intensive financial operations affect the capital key ratio. 93 As a result, the lending institutions may be restricted in their core business, to wit lending capital to debtors, as they have to increase the equity for the RWAs. Yet by introducing the LTAV, loans could be kept “alive”, since ship values would not decrease as much during the crisis, and asset backing would not absorb as much equity. Consequently, banks do not have to ask ship owners for increased collaterals, bar deposits 93

CAPITAL RATIO: key financial ratio measuring a bank’s CAPITAL ADEQUACY or financial stability. As a general rule, the higher the ratio the more sound the bank. A bank with high capital-to-asset ratio is protected against operating loss more than a bank with lower ratio, although this depends on the relative risk of loss of each bank. […]., Def. Fitch, T., 2006. Dictionary of Banking Terms, 5th ed., Barron’s Business Guides, p. 75.

53

6. Application of the Hamburg Ship Evaluation Standard or even partial repayment of the credit in order to cope with higher risk premiums. Thus, owners do not face the risk of breaching loan covenants or additional cash-flow problems, and the danger of forced sales could be prevented. Banks on the other hand are able to continue to provide loans, as their capital adequacy permits to do so. Additionally, the LTAV would spare the ship lending banks to realise value adjustments on collaterals, as the valuation by the LTAV counters the decadence of ship values in weak markets. Further, assessed ship values calculated by the LTAV could keep the balance sheets of ship owners and KGs even balance, since the values often represent reserves. Therefore, the mentioned hazard of excess of liabilities over assets could be avoided. However, the instrument of the LTAV is by far not able to bring about a miracle. The values of badly calculated ships, which exist in heaps especially in the container segment, cannot be forged, as their economic viability in the long run prohibits the calculation of a positive profitability by the LTAV. These ship values face the extended risk of loss of capital, resulting from excessive soft costs and too optimistic future prospects. This is the reason, why the LTAV also bears the danger of manipulation. As a matter of fact, it has to be stressed that the Long Term Asset Value, unlike the market value, is calculated on basis of ratings. The parameters concerning future prospects and risk structure (i.e. discount rate) may vary with regard to the rating of the individual user. Consequently, the perils of faulty input parameters (“garbage in garbage out” mentioned in 2.4.3) can result in inaccurate ship values, and therefore could lead to a misuse in terms of rigging.

54

7. Conclusion

7.

Conclusion

The problematic situation of ship appraisal in dysfunctional markets consists upon the fact, that an uncharacteristically low number of ship sales were performed in comparison to the overall fleet within a category of vessels over a relative long period (year 2009). The reason for this is the absence of regular market conditions (e.g. unavailability of debt financing for a large number of market participants) and to a certain degree a disproportional ratio between willing buyer and willing seller resulting in a lack of price formation. Therefore, this thesis comes to the conclusion that the applicability of a ship evaluation based on the reference value is restricted by the market conditions. Ship values solely based on fire sales as benchmark pervert the market value of ships. In a market atmosphere with limited access to fresh capital, this may consequently cause an acceleration of the downward spiral of falling asset values. Yet, if the contrary is the case, and the shipping market is reflected by boom conditions, bull speculations may be enforced and ship values may be overrated. Therefore, ship appraisals based on the Long Term Asset Value can be a suitable alternative. The ability of the Hamburg Ship Evaluation Standard to appraise vessels separate from current market fluctuations, avoids the problematic situation resulting from the dysfunctional markets stated at the beginning of this bachelor thesis. Though the marketability of this calculated ship value is questionable, the LTAV correctly represents the added value for the ship owner. Hence, the LTAV reflects the intrinsic value of the durable asset “ship”, because the historical and periodical variations of the shipping cycles allow the anticipation of positive future revenues. Yet, the “lasting” value calculated by the LTAV may be a double-edged sword, as the LTAV is no market value and therefore does not represent a liquidation price. Furthermore, as mentioned in 5.1 the prediction of future market developments is difficult, and may lead to wrongful ship values. Therefore the critique mentioned in 4.1 is justified to a certain degree, as a model usually does not reflect the diversity of the market. In fact, the approach of the LTAV provides much more an approximate value, which by specification of the parameters may gain higher accuracy. Therefore the applicability of the LTAV for the assessment of the collateral value is debatable. Unfortunately, within the scope of this thesis only a marginal discussion concerning application of the LTAV in the SchiffsBelWertV could be accomplished.

55

7. Conclusion Yet, an approval of application of the LTAV for the evaluation of the collateral value would equip banks with an additional tool to assess their risk exposure resulting from long-term liabilities. However, in contrast to the traditional ship evaluation, the appraisal by the HSES requires a detailed risk-return analysis. For this, the explorations in section 5 represent an analysis of the input parameters. While OPEX and charter revenue seem to be available parameters for the calculation of each segment, the risk structure of the appraised ship reflected by the parameter “discount rate” reveals segment specific inaccuracies. As ascertained by numerous dissertations, the general problem of the approach by the Capital Asset Pricing Model is the difficulty in defining the input parameters and the dependability of the beta coefficient over time. This thesis agrees with the results revealed by previous researches, since the risks in shipping are multi-layered and consequently an evaluation of the risks in shipping requires a more exact diversification of the single risk factors. Although the common risk factors have been stipulated and in the LTAV are reflected by the CAPM, the beta coefficient derives from representative peer groups, an evaluation of the sub segments (e.g. container < 1000) or of specialised vessels ( offshore supply, heavy-lift, etc.) would require a specification of the peer groups. Since the peer groups are made up by shipping companies listed on the stock markets, an individual and ship specific beta coefficient cannot be stipulated. Although a break down into the three major divisions containership, tanker and bulk carrier has been made, the portfolio size of the companies comprised by the peer groups prevent an accurate estimation of the specific risk. This is because the portfolios of the companies included into the peer group usually contain a wide range of different ship types or size segments and consequently reflect a broad range of specific risk factors. Hence the portfolios do not necessarily display the risk structure of the appraised ship, as the ship of concern may differ in size (sometimes even purpose e.g. MPP, tanker), or trades in a different region than the main part of the peer group’s portfolio. However, for the purpose of analysing the LTAV, this thesis concludes that the common risk factors introduced by Drobetz, Schilling and Tegtmeier among others are sufficiently reflected by the peer groups. Further, the permanent accessibility of shipping stocks enables continuous adjustment of the beta coefficient, and therefore enhances the dependability over time. Yet, a more profound examination of the systematic and specific risk structures of the different subsegments would enable a more detailed appraisal by the LTAV. Therefore, 56

7. Conclusion subject for further research may be the definition of specific risks in specified shipping segments. Additionally, the question on how shipping companies, which are not listed on the stock market, may be reflected can be subject of further studies. Hence, in order to enable the evaluation of risk and to facilitate a down or upgrading of the beta coefficient, gathered from the peer group used as basis for the LTAV, a regression analysis may be conducted. All things considered, the LTAV seems adequate in appraising a ship value to a reference date. The approach of the LTAV is an attempt to uncover the unknown factors in the traditional ship evaluation and plausibilizes the rule of thumb, which is often used by ship brokers and appraisers in dysfunctional or nebulous markets. Therefore the attempt of the LTAV to deliver a more transparent method of estimation of ship values is helpful for the whole shipping industry.

57

II. List of abbreviations

II. List of abbreviations abt. BDI CAPEX CAPM Cf. ConTex DCF Dwt E3 ed. e.g. et al. FFA HSES i.e. IDW S1 IRR KG Ldt. LGD LTAV MPP NPV OBO-carrier OPA 90 OPEX PfandbriefG Pub. PWC RWA SchiffsBelWertV S&P TC-rates TEU USD VHSS VLCC WACC

About Baltic Dry Index Capital expenses Capital Asset Pricing Model Confer / compare Container Ship Time Charter Assessment Index of the VHSS Discounted Cash Flow Deadweight tons Arctic class Edition Example given Et aliae Freight Forward Agreement Hamburg Ship Evaluation Standard In example Principles for the Performance of Business Valuations established by the German Institute of Auditors Standard for Corporate Evaluation Internal Rate of Return The Kommanditgesellschaft is a limited commercial partnership Light weight Loss Given Default Long Term Asset Value Multipurpose Net Present Value Ore-Bulk-Oil - carrier Oil Pollution Act of 1990 Operation Expenses German Bond Certificate Act Publisher PricewaterhouseCoopers (Auditor company) Risk Weighted Assets Schiffsbeleihungswertverordnung Sales and purchase Time Charter rates Twenty-foot Equivalent Unit US Dollar Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V Hamburg Shipbrokers Accosiation Very Large Crude Carrier Weighted average costs of capital

III

III. Table of Figures

III. Table of figures Figure 1:

World Fleets & Orderbooks

16

Figure 2:

Second-hand Prices '00-'10

17

Figure 3:

Development from mid-2008 to 01/2010

18

Figure 4:

Development of Time Charter Rates and Market Values

19

Figure 5:

Formula of the Long Term Asset Value developed by VHSS

30

Figure 6:

Simplified shipping market model

39

Figure 7:

Formation of charter rate resulting from supply and demand

40

IV

IV. Bibliography

IV. Bibliography Clarksons Valuation Ltd., [Online], http://www.shipvalue.net/guidance/default.asp [Accessed 26 January 2010]. Crowe,T., 2010, Liner Review – The Case Of The Missing Cargo, Clarksons research, [Online], 15 January, http://www.clarksons.net/markets/feature_display.asp?section=&news_id=29659&title=Li ner+Review+-+The+Case+Of+The+Missing+Cargo , [Accessed 04.03.2010]. Definitions of International Valuation Standards Committee, 2000, p. 96., [Online] 1 July, http://www.romacor.ro/legislatie/07-ivs1.pdf [Accessed 7 January 2010]. Dimson, E., Marsh, P., Staunton, M., 2007, The Word Equity Premium: A Smaller Puzzle. In Handbook of the Equity Risk Premium. Dipl.-Ing. Gerd Weselmann, 2010, Ingenieurbüro Weselmann GmbH, Hamburg, Development of Time Charter Rates and Market Values. Dipl.-Ing. Gerd Weselmann, 2010, Ingenieurbüro Weselmann GmbH, Hamburg, Development from mid-2008 to 01/2010. Dobert, J., 2009, Glaskugel Schiffswert, Hansa International Maritime Journal Nr. 10, p. 62. Downes, J., Goodman, J.E., 2006. Dictionary of Finance and Investment Terms 7th ed., Barron’s Financial Guides. Drobetz, W., Schilling, D., Tegtmeier, L., 2009, Common Risk Factors In The Returns Of Shipping Stocks. Everling, O., 2009, LTAV zur Schiffsbewertung, Everling Advisory Sevices, [Online], 7 October. http://www.everling.de/?p=1214 [Accessed 6 January 2010]. Everling, O., Theodore, S., 2008, Bankrisikomanagement: Mindestanforderungen, Instrumente und Strategien für Banken, Gabler. Fitch, T., 2006, Dictionary of Banking Terms, 5th ed., Barron’s Business Guides. Garfield, G., 2009, Move to uncover ‚real’ ship values: German banks and shipping bodies are working on a new way to assess vessel values, Tradewinds, Feb. 27. Hagen, P., 2009, German ship valuation formula adds up, says PwC: Testing against over 2,000 historic ship values reveals accuracy in 92% of cases. Lloyd’s List. [Online], 23 Sept., http://www.lloydslist.com/ll/news/viewArticle.htm?articleId=1253563330332 , [Accessed 04.03.2010].

V

IV. Bibliography Kavussanos, M.G., Marcoulis, S., 1997/1, Risk and Return of U.S. Water Transportation Stocks over Time and over Bull and Bear Market Conditions. Maritime Policy & Management, Vol. 24. Kavussanos, M., Marcoulis, S., 1997/2, The Stock Market Perception of Industry Risk and Macroeconomic Factors: the case of US Water Transportation Industry versus other Transportation industries., Logistic and Transpot Review, Vol 33. Kavussanos, M.G., Juell-Skielse, A., Forrest, M., 2003, International Comparison of Market Risks across Shipping-Related Industries. Maritime Policy & Management. Küster Simic, A., Thönnessen, R., 2008, Working Paper No.:03/2008, Geschlossene Schifffonds – Portfolio- und Marktrisiken- Eine empirische Untersuchung anhand von Zweitmarktkursdaten, HSBA. Shipping Intelligence Weekly, 2008, Claksons Research, 26 Sept.. Shipping Intelligence Weekly, 2010, Clarksons Research, p. 8; 26 Feb.. Stopford, M., 2009, Maritime Economic. 3rd Edition, Routledge. Svenning, S., 2009, What is She Worth?, Fearnleys Monthly, Fearnresearch, Oct. Porter, J.,Hagen, P., 2009, Hamburg brokers seek new standard for ship prices, Lloyd’s List, [Online], Feb. 20., http://www.lloydslist.com/ll/news/hamburg-brokers-seek-newstandard-for-ship-prices/20017620612.htm., [Accessed on 04.03.2010]. TKL Fonds Gesellschaft für Fondsconception und –Analyse MBH, Drobetz, W., Leitfaden zum SFI TKL.Ship Fund Index, [Online], http://www.hamburgmaritime.de/Leitfaden_SFI.pdf?PHPSESSID=gdhvmqxe , [Accessed on 16.02.2010]. Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V., http://www.vhss.de . Welch, I., 2008, The Consensus Estimate for the Equity premium by Academic financial Economists., Brown University. Westgaard, S., Frydenberg, S., Mitter, K., Jensen, E., 2007, Economic and Financial Risk Factors and Tanker Shipping Stock Return. Winter, H., Henning, C., Gerhard, M.,[pub.], 2008. Grundlagen der Schiffsfinanzierung., Frankfurt School Verlag.

VI

V. Appendix

V. Appendix Appendix 1:

9

Source: www.juris.de Verordnung über die Ermittlung der Beleihungswerte von Schiffen und Schiffsbauwerken nach § 24 Abs. 1 bis 3 des Pfandbriefgesetzes (Schiffsbeleihungswertermittlungsverordnung - SchiffsBelWertV) Ausfertigungsdatum: 06.05.2008 Vollzitat: "Schiffsbeleihungswertermittlungsverordnung vom 6. Mai 2008 (BGBl. I S. 851)" Eingangsformel Auf Grund des § 24 Abs. 5 Satz 1 und 2 des Pfandbriefgesetzes vom 22. Mai 2005 (BGBl. I S. 1373) in Verbindung mit § 1 Nr. 4 der Verordnung zur Übertragung von Befugnissen zum Erlass von Rechtsverordnungen auf die Bundesanstalt für Finanzdienstleistungsaufsicht vom 13. Dezember 2002 (BGBl. 2003 I S. 3), § 1 Nr. 4 zuletzt geändert durch Artikel 7 Nr. 1 des Gesetzes vom 22. Juni 2005 (BGBl. I S. 1698), verordnet die Bundesanstalt für Finanzdienstleistungsaufsicht im Einvernehmen mit dem Bundesministerium der Justiz nach Anhörung der Spitzenverbände der Kreditwirtschaft: Teil 1 Allgemeine Bestimmungen und Verfahrensgrundsätze § 1 Anwendungsbereich Bei der Ermittlung der Schiffsbeleihungswerte nach § 24 Abs. 1 bis 3 des Pfandbriefgesetzes und bei der Erhebung der für die Wertermittlung erforderlichen Daten sind die Vorschriften dieser Verordnung anzuwenden. § 2 Gegenstand der Wertermittlung Gegenstand der Schiffsbeleihungswertermittlung sind Schiffe und Schiffsbauwerke, die in einem öffentlichen Register eingetragen sind. § 3 Grundsatz der Schiffsbeleihungswertermittlung (1) Der Wert, der der Beleihung zugrunde gelegt wird (Schiffsbeleihungswert), ist der Wert des Schiffes oder Schiffsbauwerks, der erfahrungsgemäß unabhängig von vorübergehenden, etwa konjunkturell bedingten Wertschwankungen am maßgeblichen Markt und unter Ausschaltung von spekulativen Elementen bei einer Veräußerung voraussichtlich erzielt werden kann. (2) Bei der Ermittlung des Schiffsbeleihungswerts sind die dauernden Eigenschaften des Schiffes, sein Alter und seine Einsatzmöglichkeiten zu berücksichtigen. § 4 Verfahren zur Ermittlung von Beleihungswerten für Schiffe und Schiffsbauwerke (1) Zur Ermittlung des Schiffsbeleihungswerts für ein Schiff sind der aktuelle Marktwert (§ 9), der durchschnittliche Marktwert der letzten zehn Jahre (§ 10) und der Neubaupreis (§ 11) oder Kaufpreis (§ 12) des zu bewertenden Schiffes zu ermitteln. (2) Der Schiffsbeleihungswert darf weder den aktuellen Marktwert des Schiffes noch den durchschnittlichen Marktwert der letzten zehn Jahre übersteigen. Sind Marktwerte nur für einen kürzeren Zeitraum als zehn Jahre verfügbar, ist der durchschnittliche Marktwert für diesen kürzeren Zeitraum zu ermitteln; in diesen Fällen ist Satz 1 mit der Maßgabe anzuwenden, dass der aktuelle Marktwert um 15 Prozent zu mindern ist; lässt sich der durchschnittliche Marktwert nur für drei oder weniger Jahre ermitteln, beträgt dieser Abschlag mindestens 25 Prozent. (3) Bei Schiffsneubauten stellt der Neubaupreis eine weitere Obergrenze für den

VII

V. Appendix Schiffsbeleihungswert dar. Bei Schiffsankäufen darf der Schiffsbeleihungswert den Kaufpreis nicht übersteigen. (4) Ist ein aktueller Marktwert nicht verfügbar oder ist ein durchschnittlicher Marktwert eines gleichartigen Schiffes nicht zu ermitteln, ist ein anderes angemessenes Verfahren anzuwenden. In diesen Fällen darf der Schiffsbeleihungswert nicht den um mindestens 25 Prozent geminderten Neubaupreis oder ebenso geminderten Kaufpreis überschreiten. (5) Die Ermittlung des Schiffsbeleihungswerts für ein Schiffsbauwerk hat nach Maßgabe des § 13 zu erfolgen. Teil 2 Gutachten und Gutachter § 5 Gutachten (1) Der Schiffsbeleihungswert ist mittels eines Gutachtens zu ermitteln. (2) Das Gutachten muss durch einen oder mehrere Gutachter erstellt werden, die von der Pfandbriefbank allgemein oder von Fall zu Fall bestimmt werden. In besonderen Fällen, etwa im Rahmen von Kooperationen oder bei Portfoliokäufen, können für andere Kreditinstitute erstellte Gutachten zugrunde gelegt werden, wenn 1. diese Gutachten den Bestimmungen dieser Verordnung entsprechen, 2. ein nicht mit der Kreditentscheidung befasster, fachlich kundiger Mitarbeiter der Pfandbriefbank eine Plausibilitätsprüfung, auch im Hinblick auf die einzelnen angesetzten Bewertungsparameter, durchführt und 3. das Ergebnis der Plausibilitätsprüfung dokumentiert wird. Gutachten, die vom Darlehensnehmer oder Schiffseigentümer vorgelegt oder in Auftrag gegeben worden sind, dürfen nicht zugrunde gelegt werden. (3) Im Gutachten ist auf die in § 4 genannten Parameter einzugehen. (4) Im Gutachten sind der Schiffstyp und seine praktische Verwendbarkeit, insbesondere hinsichtlich Fahrtbereich, Einsatzmöglichkeit und Ladefähigkeit, unter Berücksichtigung der vorhandenen Ausrüstung, insbesondere in Bezug auf Lade- und Löscheinrichtungen, darzustellen. Auf Vorzüge und Mängel des Schiffes ist hinzuweisen. (5) Bei der Ermittlung des aktuellen Marktwerts und des durchschnittlichen Marktwerts der letzten zehn Jahre kann das Gutachten auf die Schätzung eines im Bereich der Schiffswertermittlung tätigen und anerkannten Brokers oder Schätzers Bezug nehmen. Falls eine Besichtigung durch einen anerkannten technischen Sachverständigen vorgenommen worden ist, kann das Gutachten auch auf den Besichtigungsbericht Bezug nehmen. § 6 Besichtigung (1) Das zu bewertende Schiff ist im Rahmen der Wertermittlung zu besichtigen. Dabei sind sämtliche an Bord befindliche Schiffspapiere einzusehen. Hierbei sind die Klassifikationen von Schiffskörper und Maschinenanlage zu ermitteln; die Gültigkeitsdauer der Klassifikationszertifikate ist festzustellen. Die Besichtigung kann auch durch einen anerkannten technischen Sachverständigen erfolgen. (2) Auf eine Besichtigung kann verzichtet werden, wenn 1. der Pfandbriefbank von dem Schiffseigentümer die Klassifikationsunterlagen einer anerkannten Klassifikationsgesellschaft vorgelegt werden und sich hieraus ergibt, dass das Schiff von der Klassifikationsgesellschaft innerhalb der letzten 15 Monate besichtigt worden ist, 2. das Schiff nicht älter als drei Jahre ist und das Klassifikationszertifikat bei Ablieferung vorgelegt wird, oder 3. das Schiff nicht älter als fünf Jahre ist und neben dem Klassifikationszertifikat bei Ablieferung das Zertifikat über die Interimsklasse vorgelegt wird. Die Pfandbriefbank hat die Klassifikationsunterlagen auf Echtheit zu überprüfen. § 7 Gutachter (1) Der Gutachter muss nach seiner Ausbildung und beruflichen Tätigkeit über besondere Kenntnisse und Erfahrungen auf dem Gebiet der Bewertung von Schiffen verfügen. Bei der Auswahl des Gutachters hat sich die Pfandbriefbank davon zu überzeugen, dass der Gutachter neben langjähriger Berufserfahrung in der Bewertung von Schiffen speziell über die zur Erstellung von Schiffsbeleihungswert-Gutachten notwendigen Kenntnisse, insbesondere bezüglich des Schiffsmarkts, verfügt.

VIII

V. Appendix (2) Wenn der Gutachter die Besichtigung nicht selbst vornimmt, ist eine technische oder ingenieurmäßige Berufsausbildung nicht erforderlich. § 8 Unabhängigkeit des Gutachters (1) Der Gutachter muss sowohl vom Kreditakquisitions- und Kreditentscheidungsprozess als auch von Vermittlung, Verkauf, Vermietung und Vercharterung des zu bewertenden Schiffes unabhängig sein. Er darf nicht in einem verwandtschaftlichen, sonstigen rechtlichen oder wirtschaftlichen Verhältnis zum Darlehensnehmer stehen und darf kein eigenes Interesse am Ergebnis des Gutachtens haben. Der Gutachter darf auch nicht den Beleihungswert festsetzen oder den Kredit bearbeiten. Die Sätze 1 bis 3 gelten auch für anerkannte Schätzer, Broker oder technische Sachverständige, auf deren Schätzung oder Besichtigungsbericht im Gutachten Bezug genommen wird. (2) Gutachten von bei der Pfandbriefbank angestellten Gutachtern dürfen nur dann der Schiffsbeleihungswertermittlung zugrunde gelegt werden, wenn die betreffenden Gutachter im Rahmen der Aufbauorganisation der Pfandbriefbank nur der Geschäftsleitung verantwortlich sind oder ausschließlich Teil einer Gutachtereinheit sind, die unmittelbar der Geschäftsleitung unterstellt ist, oder Teil einer alle betreffenden Gutachter zusammenfassenden Einheit und auch im Übrigen bis einschließlich der Ebene der Geschäftsleitung nicht einem Bereich der Pfandbriefbank zugeordnet sind, in dem Schiffskreditgeschäfte entweder angebahnt oder zum Gegenstand des einzigen Votums gemacht werden. Teil 3 Wertermittlungsverfahren § 9 Aktueller Marktwert (1) Der aktuelle Marktwert ist der geschätzte Betrag, für welchen ein Schiff am Bewertungsstichtag zwischen einem verkaufsbereiten Verkäufer und einem kaufbereiten Erwerber, nach angemessenem Vermarktungszeitraum, in einer Transaktion im gewöhnlichen Geschäftsverkehr verkauft werden könnte, wobei jede Partei mit Sachkenntnis, Umsicht und ohne Zwang handelt. (2) Für die Ermittlung des aktuellen Marktwerts ist von einem charterfreien Schiff auszugehen. Wenn aus den Verkäufen gleichartiger Schiffe ein Basispreis abgeleitet worden ist, ist dieser den Besonderheiten des zu bewertenden Schiffes anzupassen. § 10 Durchschnittlicher Marktwert Der durchschnittliche Marktwert ist der Durchschnittsbetrag der Marktwerte eines gleichartigen Schiffes für die zugrunde zu legenden letzten Kalenderjahre vor dem Jahr der Wertermittlung. § 11 Neubaupreis Der Neubaupreis ist der mit der Werft vertraglich vereinbarte Baupreis zuzüglich Nebenkosten wie Bauzeitenzinsen, Kosten der Bauaufsicht sowie der Erstausrüstung, sofern die Nebenkosten angemessen und üblich sind. § 12 Kaufpreis Der Kaufpreis ist der vertraglich vereinbarte Preis für den Erwerb des zu bewertenden Schiffes. Kaufpreis ist auch der Preis, der für den Erwerb eines Bauvertrags über ein Schiffsbauwerk oder ein in Zukunft zu bauendes Schiff vereinbart wird. § 13 Wertermittlung bei Schiffsbauwerken Bei Schiffsbauwerken ist als Schiffsbeleihungswert der Zustandswert zu ermitteln. Der Zustandswert entspricht dem Bautenstand, der durch einen technischen Sachverständigen oder die Werft schriftlich zu bestätigen ist. Im Rahmen der Beleihungswertermittlung sind die Baubeschreibungen, die Bauzeichnungen und die mit der Werft geschlossenen Verträge einzusehen. Teil 4 Überprüfung der Schiffsbeleihungswertermittlung und Inkrafttreten § 14 Überprüfung der Grundlagen der Schiffsbeleihungswertermittlung

IX

V. Appendix (1) Bestehen Anhaltspunkte, dass sich die Grundlagen der Schiffsbeleihungswertermittlung nicht nur unerheblich verschlechtert haben, sind diese zu überprüfen. Dies gilt insbesondere dann, wenn das allgemeine Preisniveau auf dem jeweiligen Schiffsmarkt in einem die Sicherheit der Beleihung gefährdenden Umfang gesunken ist. Der Schiffsbeleihungswert ist bei Bedarf zu mindern. (2) Soweit nach anderen Vorschriften eine weitergehende Verpflichtung zur Überprüfung des Schiffsbeleihungswerts besteht, bleibt diese unberührt. § 15 Inkrafttreten Diese Verordnung tritt am 1. Juli 2008 in Kraft.

X

V. Appendix

Appendix 2:

17

Executed sales of container ships 2009 – 02/2010 200 - 499 TEU Name

IMO

Baltic Tern Ute Johanna Van Phuc

8714114 1989 Daedong Shipb. 9118355 1995 Kröger Werft 9131008 1996 Dae Sun Shipb.

Blt.

Yard

Korea Deutschland Korea

Country

IMO

Country

TEU 357 366 404

TEU 14 t 220

Reef cranes Sales - date Price US-$ Source

48

0 19.06.2009 0 04.12.2009 0 15.01.2010

1,2 Clarkson 1,625 Clarkson 2,8 Clarkson

500 - 999 TEU Name

Blt.

Yard

TEU

CMA CGM North Africa 2 8403595 1984 Sietas Deutschland Tugela 8405921 1985 Sietas Deutschland CMA CGM North Africa 1 8411281 1985 Sietas Deutschland Believer 9031454 1992 Sietas Deutschland Cape Horn I 9004229 1992 MTW Schiffswerft Deutschland Caravel Pride 9037264 1994 Fosen Mek Verkste Norwegen Cocopalm Isle 9103154 1994 Shin Kurushima Japan

856 754 856 510 923 585 662

Hibiscus Isle

9088641 1994 Shin Kurushima

662

Rio Bogota ID Tuxpan MOL Ambition West Scent Leo Island Glenmoor Sky Bright Hannes C Sky Light Bright Gold K-Wind

9100243 9065297 9077202 9132703 9146792 9118575 9141089 9138666 9129457 9154830 9160944

Agaman Kaido

9212448 1999 Yichang Shipyard 9209908 1999 Murakami

China Japan

1994 1994 1994 1995 1996 1996 1996 1996 1996 1997 1999

Japan

Orskov Yard Dänemark Orskov Yard Dänemark Iwagi Zosen Japan Iwagi Zosen Japan Murakami Japan Singmarine Singapur Neue Brand Werft Deutschland Mawei Shipyard China Husumer Schiffswe Deutschland Kyokuyo Shipyard Japan Qingshan China

703 703 818 954 500 605 724 740 746 848 518 518 566

Shimanami

9196345 1999 Murakami

Japan

580

Resolution

9202780 1999 Hakata Zosen

Japan

855

The Alder

9200031 2000 Celik Tekne

Türkei

797

TEU Reef cranes Sales - date Price US-$ Source 14 t 2x80 629 27.11.2009 1,7 Clarkson 80 2x40 532 12.06.2009 2,1 Clarkson 50 2x80 629 03.11.2009 1,5 Zachariassen 50 0 30.10.2009 335 1,5 Clarkson 635 204 2x40 27.11.2009 2 Clarkson 408 75 2x35 08.01.2010 4,25 Clarkson 520 150 2x40 02.10.2009 6,5 Clarkson 06.10.2009 5 Zachariassen 520 150 2x40 02.10.2009 6,5 Clarkson 06.10.2009 5 Zachariassen 432 120 2x40 28.08.2009 2,5 Clarkson 432 120 2x40 08.01.2010 2,25 Compass 100 2x35 22.05.2009 5,25 Clarkson 744 100 2x35 27.03.2009 6,4 Clarkson 100 2x36 06.03.2009 5,75 Clarkson 425 50 2x40 15.01.2010 5,5 Clarkson 465 70 2x40 20.11.2009 4,5 Compass aber 60 2x40 430 27.02.2009 6,4 Compass 514 65 0 20.11.2009 4,5 Compass aber 50 2x36 06.02.2009 7 Clarkson 84 2x40 280 30.10.2009 4 Compass 03.11.2009 3 Zachariassen 2x40 270 05.10.2009 5 THB 100 2x36 17.04.2009 7 Compass 27.03.2009 6,75 Clarkson 396 100 2x36 17.04.2009 7 Compass 650 13.05.2009 4 104 2x40 Clarkson 505 23.10.2009 2,5 157 2x40 Compass

1000 - 1999 TEU Name

IMO

Blt.

Yard

Marcommander Seven Seas Aurora Scio Star Ocean Hope 2 GO 1 Cape Town Bridge Cape Arago Durban Bridge Anna E Albedo Kapitan Byankin Marcatania SITC Hakata Sunman Danu Bhum Bani Bhum Montania OOCL Ability Crillon Yuriy Ostrovskiy MOL Bright Fremantle Bridge Java Bridge ACX Dahlia

8203581 8417211 8513819 8717518 8908521 9014107 9041174 9014080 9007518 9041162 9088902 9070046 9104990 9104512 9112698 9106895 9117181 9159842 9159854 9101792 9162423 9181730 9181754 9167473

1983 1985 1987 1989 1990 1991 1992 1992 1992 1993 1994 1994 1995 1995 1996 1996 1996 1997 1997 1994 1998 1998 1998 1998

HDW Deutschland Flender Deutschland Bremer Vulkan Deutschland Bremer Vulkan Deutschland Sietas Deutschland Shin Kurushima Japan MTW Schiffswerft Deutschland Shin Kurushima Japan Warnow Werft Deutschland MTW Schiffswerft Deutschland Szczecinska ShipyaPolen Schichau Seebeck Deutschland Szczecinska ShipyaPolen Shin Kurushima Japan Singapore Shipb. Singapur Singapore Shipb. Singapur Lenina Stocnia GdaPolen Imabari Japan Imabari Japan Szczecinska ShipyaPolen Imabari Japan Naikai Zosen Japan Naikai Zosen Japan Kanasashi H.I. Japan

Country

TEU 1.033 1.190 1.586 1.799 1.048 1.380 1.066 1.380 1.452 1.066 1.012 1.687 1.012 1.613 1.018 1.018 1.504 1.560 1.560 1.012 1.032 1.064 1.064 1.675

ACX Magnolia Ocean Prosper Ocean Progress I Sunrise Express Fesco Ayon Fesco Aleut Johanna Russ Martha Russ HS Schubert Viking Eagle MSC Singapore Fesco Agun X-Press Annapurna

9167461 9152923 9289051 9330769 9334966 9324954 9346574 9346562 9337597 9312640 9324978 9406831 9357535

1998 1998 2004 2006 2006 2006 2006 2006 2006 2006 2007 2008 2008

Kanasashi H.I. Japan Szczecinska ShipyaPolen Guangzhou Wench China Dae Sun Shipb. Korea Jinling Shipyard China Jinling Shipyard China Jiangdong ChangjiaChina Jiangdong ChangjiaChina Guangzhou Wench China Guangzhou Wench China Jinling Shipyard China Jinling Shipyard China CSBC Taiwan

1.675 1.684 1.740 1.043 1.102 1.102 1.118 1.118 1.740 1.740 1.118 1.080 1.700

X-Press Dhaulagiri Cynthia

9357547 2008 CSBC 9348182 2009 Wadan Yards

Taiwan Deutschland

1.700 1.698

Driever

9354648 2009 Wadan Yards

Deutschland

1.698

Wan Hai 172 Wan Hai 171

9380269 2009 CSBC 9380257 2009 CSBC

Taiwan Taiwan

1.800 1.800

TEU Reef cranes Sales - date Price US-$ Source 14 t 75 2x40 700 30.10.2009 2,7 Clarkson 75 0 20.02.2009 954 1,8 Clarkson 70 3x40 1.128 13.11.2009 2,7 Compass 70 3x40 1.353 03.07.2009 2,3 Clarkson 750 100 1x50, 1 03.11.2009 3,1 Zachariassen 0 27.03.2009 1.182 200 3,75 Clarkson 0 06.10.2009 755 100 3 Zachariassen 0 27.03.2009 1.182 200 3,75 Clarkson 75 0 31.08.2009 1.000 3 THB 0 06.10.2009 755 100 3 Zachariassen 640 90 0 08.01.2010 3,25 Clarkson 1.191 152 0 06.11.2009 4 - 4,5 Clarkson Auktio 640 90 0 08.01.2010 4 Clarkson 1.258 206 2x40, 1 15.01.2010 6,6 Compass 100 2x40 23.01.2009 5,9 Zachariassen 100 2x40 30.01.2009 5,9 Compass 0 27.11.2009 1.180 200 6 Clarkson 0 21.08.2009 1.218 200 6,5 Clarkson 0 12.06.2009 1.218 200 6 Clarkson 640 90 0 08.01.2010 3,25 Clarkson 900 100 0 08.01.2010 6,8 Clarkson 960 150 03.11.2009 6,5 Zachariassen 0 08.05.2009 960 150 7,3 Clarkson 100 0 25.09.2009 6,5 Clarkson 08.05.2009 7 Compass 100 15.01.2010 7,75 Clarkson 1.079 160 3x45 25.09.2009 7,5 Clarkson 1.300 300 2x45 25.09.2009 13,25 Clarkson 0 14.07.2009 655 180 14 Zachariassen 698 220 2x45 06.02.2009 15 Bruhn 700 220 2x45 08.01.2010 13,25 Clarkson 692 220 2x45 15.01.2010 13 Clarkson 692 220 2x45 15.01.2010 13 Clarkson 1.295 300 2x45 02.01.2009 18,5 Clarkson 1.295 300 2x45 20.11.2009 15,5 Platou incl. TC 700 220 2x45 26.01.2010 13,5 Clarkson 700 220 2x45 21.07.2009 14,5 Clarkson 2x40 1.100 30.06.2009 20 Platou 11.08.2009 17,25 Zachariassen 2x40 1.100 26.06.2009 20 Clarkson 0 31.07.2009 1.230 330 22 Platou 02.10.2009 € 15,00 Clarkson 0 02.10.2009 € 15,00 Clarkson 1.230 330 30.04.2009 20 0 Platou 0 31.01.2009 20 Barry Rogliano

XI

V. Appendix Fehler! Keine gültige Verknüpfung.

Source: Holst, B.,2010, Ingeneurbüro Weselmann, Hamburg , Germany

23

Appendix 3: Source: in reference to: Statement of Dr. Klaus Stoltenberg, Nord/LB, at 13.Hansa-Forum 2009: Example of Containership 5.300 TEU, Delivery 2009, amounbt of credit USD 62 m.

Oktober 2006

Juni 2008

April 2009

August 2009

Juni 2010

Ship Value in USD

80,5 m.

90 m.

50 m.

56,5 m.

?

Charter level (market)

39.000

39.000

30.225

7.300

Auflieger

Rating

1(AA+)

2

10

12

15

LGD

19,1%

45,6%

48,3%

48,3%

48,3%

Asset backing (as of SolvV.)

481.000 €

1.160.000 €

5.400.000 €

7.600.000 €

12.600.000 €

XII

V. Appendix

27

Appendix 4:

Comparison of deviation from market value (initial HSES / HSES-PWC Version)

Source: 2009, Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V. (Hamburg Shipbrokers Association)

Appendix 5: Comparison of Ship Values estimated by LTAV and reference value 2009/2010

28

XIII

V. Appendix

$ m.

Comparison of Ship Values estimated by LTAV and reference value 2009/2010 Age 3 - 5

100 90 80 70

LTAV

60 Clarson estimates

50

Sales

40 30 20 10 0 725

1000

1700

2750

4250

6500

TEU

Source: 2010, Data: Ingenieurbüro Weselmann GmbH, Hamburg, Germany Appendix 6: Example of a Long Term Asset Value by Ingenieurbüro Weselmann

30

XIV

V. Appendix

XV