The Unbearable Boredom of Marine Asset Prices

The COVID-19 pandemic has been the low-probability-high-impact novel risk that few people had seen coming and warned about it (mostly statisticians and epidemiologists) but the greater business community had ignored it till now.  Coping with COVID-19 is still an evolving process, and the shipping industry has been learning to react  and adjust to the forces the pandemic has unleashed on supply chains and logistics, some with a positive impact, but mostly with adverse or very adverse implications.

We have argued elsewhere on some of those implications, and we will follow up soon with a few more thoughts. However, for now, the subject of marine asset pricing and vessel values, more than six months since the pandemic has started in the West, seems to be too intriguing to pass up.

Once the magnitude of the pandemic started taking shape by March 2020, and the extent of lockdowns and closing of borders and travel restrictions were evident, the first expectations were that this is going to be very bad for the shipping industry and for shipping values. After all, once the industrial base of China and the United States and the European Union coming to a screeching halt, and trade volumes collapsed, one had to expect the worst. And, indeed, the first couple of weeks of the pandemic were brutal in anticipation, from the world stock markets to the long lines snaking outside supermarkets.

The Baltic Exchange [Disclaimer: Karatzas Marine Advisors is a Baltic Exchange member company] freight indices (both for dry bulk and tankers) were edging marginally higher at the beginning of the year on renewed hopes of market recovery. When COVID-19 smote the market, dry bulk freight rates quickly collapsed; it was not that demand for raw materials collapsed simultaneously with the rising of the pandemic, but port operations pushed forward any cargo requirements, thus pulling the freight market down fast in the short term. However, the very same disrupted port operations that pulled the freight market down had a completely different effect for tankers: combined with a glut of crude oil and petroleum products that brought the energy markets into a contango, and quickly tanker rates skyrocketed, at least temporarily.  But, once oil companies and refineries managed to handle their excess inventory, as one would had predicted back in April, the tanker market deflated as well.

From the following graph of the Baltic Exchange Indices, freight rates presently are lower than at the same time last year (2019) and the year before (2018). There is a current, rather seasonal, rally in the dry bulk market (the US Dollar has lost appr. 10% of its value in 2020, and commodities priced in USD being cheaper in local currencies have spurred regional trades), but still below break-even cash levels.  VLCCs are earning appr. $15,000 pd spot now (vs. $45,000 pd average 2019 earnings) and Capesize bulkers are earning $14,000 pd spot now (vs. $14,500 pd average 2019 earnings). Not great numbers, but again, as solace, in 2016 the market was much worse with Capesize vessels  earning the grand sum of $4,500 pd. And, when considering the GDP of many OECD countries has dropped more than 10% in the first half of 2020, and the OECD formally expects global economic activity to drop by 6% to 7.6% annualized in 2020 (based on average scenarios), the current freight market is not bad at all.

Baltic Exchange Tanker & Dry Bulk Freight Indices since 2015

And, accordingly, since freight rates are highly correlated to marine asset prices, one’s attention turns to the secondary value of ships: at least the shipowners, and the shipping lenders and the investors as the use shipping asset prices as their main benchmark for equity (and wealth) creation, as collateral to shipping loans (Loan-to-Value or LTV) and the Net Asset Value (NAV) of the company. In the two graphs herebelow, we are using values of five-year old both dry bulk and tanker vessels, the major asset classes per market sector as a proxy, although prices for older and newer vessels show similar characteristics.  The data were provided by the Baltic Exchange and Karatzas Marine Advisors.

For Capesize, Panamax and Ultramax dry bulk vessels, asset prices have declined since last year; in a sense, this is to be expected given the state of the market, but nominally, one would expect that dry bulk vessel prices to be lower at present than where they really stand. Not only freight rates are low, but also several complimentary factors (i.e. momentum, financing, etc) are worse than the freight market may imply. What is noteworthy is that although the overall marine asset pricing curve is negative, in the last several months, it’s effectively flatlined, showing signs of minimal variance and volatility. If the shipping industry is known for one thing is that it’s that flat lines rarely exist in shipping.

 

Tanker Vessel Assets Prices (5yr-old Vessels)

 

Likewise for tanker asset pricing, for five-year old VLCC, Suezmax, Aframax, Panamax LR1 and Medium Range MR2 and MR1 tankers, the overall trend is negative, but again, the several last months show a flat line as well. Minimal movement in tanker asset pricing, in a market that is known to move around widely.

Dry Bulk Vessel Assets Prices (5yr-old Vessels)

If any conclusions could be drawn from the current pricing activity (and a weak secondary market activity in the sale & purchase market) is that there is a tug of war between buyers and sellers that  currently stands at equilibrium. Both buyers and sellers trade along the status quo and “last done” pricing as neither group has the upper hand. Despite the weak freight market, sellers still earn  enough to pay their bills (and possibly their lenders, too), and buyers do not really have a reason to pay up to acquire tonnage (but also, they do not find “distressed” opportunities to feast on).

We would think that the market is bound to move, and rather strongly, in either direction in the near future. Both industry idiosyncratic variables (financing, banks, newbuilding activity, etc) or exogenous variables (the upcoming elections in the US are expected to be unusually contentious and impactful worldwide) could move the market and marine asset values, and the current boredom in the vessel value pricing  is deceiving.

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© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website.Whilst every effort has been made to ensure that information herewithin has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

Karatzas Marine Advisors & Co Hosts Shipping Conference in Athens on January 24th, 2019

We are looking forward to seeing you on Thursday January 24th, 2019 at the Karatzas Slide2Open Shipping Conference at the Divani Caravel in Athens, Greece!

A high-powered conference with highest caliber speakers and industry experts convening to discuss shipping finance and shipping technology topics that are at the top of the list for all involved in the shipping industry!

Proudly organized by Karatzas Marine Advisors & Co.!

© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

How to Qualify a Vessel Appraiser

The shipping industry has been bobbing along ever since the financial crash of 2018. There is, of course, the expected market sector rotation with certain asset classes coming in and getting out of favor; at present, dry bulk vessels are cash flow positive, containerships rather weak, and tankers and offshore assets downright miserable. Following the whims of the freight market, values of ships fluctuate up and down; when certain sectors are out of favor, there have been sales on occasion at eye-popping low levels – and when the market improves, there may even be a chance for a shipowner’s favorite game, the famous “flipping of assets” to monetize on asset appreciation.

While the shipping market keeps doing what it does best – being volatile, shipping banks and capital for shipping are getting even tighter and costlier, which impacts not only vessel asset prices but also the volume of sale and purchase of vessels in the secondary market. For instance, at present, given the state of the tanker market, there have been months without the sale of tanker vessels in certain asset classes (there have been almost six months without the sale of modern VLCC, suezmax, aframax, LR2, MR2 and MR1 tankers that were not between affiliated parties or not subject to financing), which makes pricing and valuing of vessels all more complicated. All along, regulatory requirements keep piling on the industry (IMO2020 is the latest concern), while new technologies and innovation keep raising the technological risks for the industry.

Commercial considerations aside, the current state of the market is impacting not only vessel valuations but also the process of arriving at an accurate (and, some even say honest) vessel valuation. The standard definition of Fair Market Value (FMV) is premised upon the existence of a liquid secondary market; when the last comparable sale was six months ago, it might as well it had been six years ago given the volatility of the industry. As a result, delivering an accurate vessel appraisal when there is dearth of data, it can be considered an “art” at the very least, or worse, the subject of intense scrutiny of not only the outcome of the valuation but also of the process of the valuation, including questioning the qualification of the vessel valuator themselves. Valuation is not just the outcome, the value of something, but also, the qualification and the standards of the valuation process as well – the integrity of the process.

When times were easier for shipping… STS Leeuwin II in Fremantle, Perth, Australia. Image credit: Karatzas Images

Standard industry practice is that vessel valuations are commissioned from shipbrokers on the assumption that they have their finger on the pulse of the market. On the other hand, one has to keep in mind that there are concerns of the integrity of the process of deriving a number, especially when data is old and have to be “interpreted” and judgement comes into play. And, as uncomfortable as it is talking about it, there are conflicts as shipbrokers make much more money on commissions by selling vessels than providing valuations for vessels, thus, they may ensure when providing valuations to ingratiate themselves to the party that likely will give them more sale-and-purchase (“S&P”) business in the future. There are cases where shipbrokers and vessel valuators in the same  shipbrokerage company are often at odds, given that they have conflicting interests: vessel valuations are a loss leader for many shipbrokerage companies (at a typical $1,000 per desktop valuation) while a commission of 1% on the sale of the same vessel can generate a much higher bonus. One does not want to upset the owner / seller of a vessel with a tight valuation of their property.

Of course, there have been online platforms whereby automated vessel valuations can be provided instantly via an algorithmic process. Such an automated approach would presume there is no bias, such as un-intentional personal judgement of interpreting the data or intentional skewing the results of the valuation to favor a certain party. While such a presumptions seem credible, on the other hand, one has to be aware that the algorithmic process is backward looking (historical data with historical bias), and still it has to depend on judgement as certain sales should be adjusted or disqualified since they may not be true comparable sales (judicial sales, auctions, subject to financing, sale-and-leaseback transactions, etc) In our experience, and convenience aside, algorithmic valuations overall do not provide much higher accuracy than qualified, unbiased actual vessel appraisers.

As we have discussed elsewhere in previous post, there are also additional valuation methods to be considered than the market comparable approach, such as the income approach method and the replacement cost method. However, such methodology often gets beyond the realm of expertise of a shipbroker as concepts of finance, economics, accounting, and possibly taxation may come into play.  We have seen in the past, a partner at a shipbrokerage shop googling for Net Present Value (NPV) formulas in order to provide an income approach for a vessel valuation; we feel disheartened for such practices and for people being so cavalier with asset values; and, coincidentally, we would love to see such partner explain themselves in a court of law under oath in a scenario of litigation, where they would had to explain their methodology – when it’s clear they lacked any fundamental understanding for the valuation process. There is clearly legal liability for poorly prepared valuations.

Reflections on watery matters… Image credit: Karatzas Images

Most U.S. banks, leasing companies, commercial asset finance and equipment finance companies have now raised the bar for the firms and the people providing valuations; as such firms have a fiduciary duty to ensure that they look diligently after the money of their depositors and investors, it would make absolute sense that whoever is providing ship valuations has to meet certain academic standards, are subject to continuing education and that they have to abide by a set of professional rules and code of ethics. “Gray lenders” such as credit funds and other investment firms active in shipping seem to keep working with their preferred brokers, but this can be a liability claim in the waiting. The Securities and Exchange Commission (SEC) have been known to have taken an extra look in the last few years at certain publicly listed entities and their vessel valuation methodology and accounting practices. When investors lose money with their shipping investments, it’s hard to see what would stop them from pursuing legally asset managers for not credentialing properly their vessel valuation practices.

We do not want to be warmongers but in an environment of higher regulations for banks and investors, as well as people in shipping, one should be surprised to see how vessel appraisals are delegated as a matter of favor or a matter of inconvenience. Reality should be expected to soon catch up.

The sponsor of this blog, Karatzas Marine Advisors & Co., is pleased to announce that they have taken the matter of ship valuations or vessel valuations or ship valuations or ship appraisals – however valuation of marine assets is called, to a higher level. The firm employs Accredited Senior Appraisers (ASA) for Machinery and Technical Specialties who have met high academic standards, have passed qualifying exams, and most importantly, have to strictly abide to an extensive code of ethics. The firm also employs Fellows of the Institute of Chartered Shipbrokers (FICS) who have passed extensive exams and had to demonstrate years of experience in the maritime industry to qualify for such accreditation. Additional qualifications for the firm’s personnel include Accredited in Business Valuation (ABV) by the American Institute of Certified Public Accountants (AICPA) and Certified Marine Surveyor (CMS) by the National Association of Marine Surveyors (NAMS). The firm is a member of BIMCO and the Baltic Exchange among several professional memberships.  The firm also employs Ivy League MBAs and graduates who can provide an income approach valuation without having to google the NPV formula!


© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website.Whilst every effort has been made to ensure that information herewithin has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

 

Basil M Karatzas Has Been Appointed Liquidation Trustee for the Sale of Two Pelagic Tuna Purse Seiner Vessels

Basil M. Karatzas                                                          FOR IMMEDIATE RELEASE  One World Financial Center, 30th Floor                                                                         200 Liberty Street                                                                                                              New York, NY 10281 USA                                                                                              Liquidation Trustee

Basil M Karatzas Has Been Appointed Liquidation Trustee for the Sale of Two Pelagic Tuna Purse Seiner Vessels

Majuro, Republic of Marshall Islands, April 28th, 2018Basil M Karatzas has been appointed Liquidation Trustee by the High Court of the Republic of Marshall Islands for the sale of two pelagic tuna purse seiner vessels F/V ‘Fong Seong 668’ and F/V “Fong Seong 696’ (the “Vessels”). The Vessels have been under arrest since November 2017 in the Majuro Lagoon. Under the High Court’s order, the Vessels are to be sold in the immediate future under the direction of the Liquidation Trustee.

On the announcement of the court appointment, Basil M Karatzas stated: “We are delighted to be designated the Liquidation Trustee for the sale of these two well-regarded and good performers of pelagic purse seiner tuna fishing vessels. We are looking forward to exercising diligently our duties as Liquidation Trustee and maximizing value for all parties involved. We are honored that our known expertise as shipbrokers with exceptional track-record of maximizing value and having consummated impeccably difficult transactions in several segments of the maritime industry have been acknowledged via this appointment by the honorable High Court of the Republic of the Marshall Islands.”

About the Liquidation Trustee: Basil M Karatzas is the Founder and CEO of Karatzas Marine Advisors & Co, a NY-based shipping finance and shipbrokerage firm. Mr Karatzas has worked extensively with financial institutions and shipowners in the fields of shipping and shipping finance, and has executed complicated transactions including vessel sales under duress, vessel auctions, sales via insolvency administrator, etc, and also arranging for debtor-in-possession financing, etc Mr Karatzas is an alumnus of Harvard Business School and the Jones Graduate School of Management at Rice University, a member of the Baltic Exchange in the UK, a Senior Accredited Appraiser (ASA) with the American Society of Appraisers, Chapter of New York, and a Fellow of the Institute of Chartered Shipbrokers in the UK.

About the Liquidation Process: The fishing vessels will be prepared and offered for sale under the direction of the Liquidation Trustee. To learn more about the Vessels and the terms of the sale, one may contact the Liquidation Trustee via email at < info@bmkaratzas.com >. Additional information on the vessels and the liquidation process are provided at www.karatzas.auction

About the Vessels: Fishing vessels F/V “Fong Seong 668” and F/V “Fong Seong 696” are pelagic purse seiner fishing vessels of appr. 90 m in length, registered in Vanuatu, and engaged in the purse seiner method of fishing of tuna, and registered under the Western and Central Pacific Fisheries Commission (WCPFC).

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Press release was originally posted on the judicial sale website.

To download the press release, please click here!

Image of pelagic tuna purse seiner fishing vessel FV ‘Fong Seong 696’ in the Majuro Lagoon, the Republic of Marshall Islands. Image credit: Karatzas Auctions

© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website.Whilst every effort has been made to ensure that information herewithin has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

PR – Basil M Karatzas Appointed Liquidation Trustee

Thoughts from Posidonia 2018

It’s an even-numbered year and it’s June, which – for those in shipping – can only mean one thing: it’s Posidonia time! And, Posidonia it was, the 50th occasion of the international shipping community convening to Athens for the industry’s flagship event.

The cold facts: it has been reported that more than 100 countries have been represented, more than 1,800 exhibitors showcased their trades and more than 22,000 visitors attended the event with an estimate of half of those visitors originating outside Greece. No one could doubt, based on such enormous numbers, the significance of the event to the maritime industry, and, by association, the importance of Greece and the Greek shipping community to the maritime industry. Posidonia has been a truly “must attend” shipping event for its size, the wealth of market info available, and, this being Greece, for its fun, party scene and the great weather!

Having attended Posidonia for numerous times now, one can get a “feel” of the market and observe a lot by just watching, in the immortal words of Yogi Berra. Here have been a few of our observations:

In June 2008, when the shipping markets were white hot and the BDI was topping 12000 points, the Posidonia attendance was standing at just 16,000 visitors; now, ten years later and the BDI at a tenth of its former glory (presently appr 1300 points), the Posidonia attendance was higher by almost 36%. It does seem that Posidonia 2018 was marginally better attended than Posidonia 2016 which was better attended than 2014, which was … Posidonia once again proves that it’s an exhibition with eternal appeal, in good and bad times, where participants congregate to seek market intelligence.

Given the state of the freight market in the last decade, there has been no exuberance this time around with the by-now famous “Posidonia party scene”, since long are the times when company parties were esteemed by the number of Russian models in attendance. However, we have noticed that there have been many more corporate events and receptions than in previous times, quite often discreet and with less noise; mostly dinner receptions where guests could discuss market developments under the full moon in the Greek summer breeze with a drink in their hands. Seeing greater social activity but of less noise and of higher caliber has been an encouraging observation, in our opinion, as it’s a sign that the market gets back to fundamentals and away from the pretense of the past times.

Although freight markets are weak, and frankly the crude tanker freight rates downright painful, we noticed an air of solid perseverance and mild enthusiasm. Posidonia traditionally has been one of the most optimistic conferences in shipping, in our opinion; however, this time we did not notice vainglorious enthusiasm of “bring it on” but rather guarded optimism that since we have survived these terrible markets so far, there is little else that can shock us. Things are getting better, or at least they will get better. Probably this weird mix of sarcasm, resilience and enthusiasm is another sign that the market is reverting back to the fundamentals and logic and away from unfounded enthusiasm and speculation.

And, what a better sign of speculation than newbuilding orders? While in the good times Posidonia was a time of announcing of massive newbuilding orders – just to keep up with the Joneses – this time around, there barely have been any newbuilding announcement; for sure, there have been a couple of them, mostly from well established shipowners and with an LNG focus, but the majority of the market has been keeping clear of new orders. Probably another encouraging observation that the market is slowly shifting back to fundamentals.

Newbuilding orders cannot take place without plentiful and cheap financing, and speaking of the devil, there barely were any financiers in the whole greater Athens region! In the past, shipping banks hosting Posidonia parties used to be a parallel event of its own; this time around, just a handful of banks held discreet dinner parties for their clients and closed advisors with little outward attention. And, even more importantly, a complete dearth of equity fund, hedge funds, mezz funds, credit funds, alternative capital funds and other representatives of “master of the universe” species… Most of the financiers we saw were traditional long-term shipping market players who have been through the ups and downs of the industry a couple of times. Gone were the opportunistic or speculative investors who were de rigueur in previous Posidonia, another sign of the market’s efforts to revert to the mean. On the funny side of things, shipping financiers seem to be getting special attention as shipping finance is very hard to come by these days, and shipping financiers are as precious as the apple in one’s eye these days.

Shipping finance has been a hot topic of the exhibition, as one would expect. Despite selective activity, most shipping banks keep exiting the industry and dumping shipping loans, while the cost of capital keeps going up for most, not to mention the increasing interest rates that pose an additional risk to the industry at a time of soft freight rates. Chinese leasing has been a strengthening trend as well as preference by shipping banks for corporate loans (instead of asset-based ship mortgages), while institutional investors kept bearing the deriding scorn of “dumb money” in shipping and the sinners of a tonnage oversupplied market.

But the critical topic of Posidonia 2018 has been the upcoming regulations for fuels and emissions; and, here, we left the exhibition as uncertain as we were when landing in Athens at the beginning of Posidonia. Multiple panels and presentations and opinionated discussions on emissions, but we drew the conclusion that no-one really has a crystal ball on the subject; the possible outcomes ranged from this being a non-event (postponement into the future) to being a catastrophic event (too costly and not enough volumes clean fuels) that would reset the industry to this being the greatest thing in shipping in the last decade (accelerated scrapping and disappearance of less-capitalized shipowners.) A wide range of opinions indeed that render decision-making in such a challenging environment not dear for the meek in the heart; but again, that’s how money is made.

The Greek shipping community still stands strong, and, in general, in the news in the last few years, especially when it comes to opportunistic vessel acquisitions in the secondary market. Despite market challenges, Greek shipowners keep buying ships (occasionally even at high financing costs), and this purchasing activity contrasts them to other shipping nations that have been less active, or even net sellers of vessels. Thus, a few self-congratulatory remarks were to be expected here and there.

Posidonia is for sure the shipping event to attend; so much info to be learned as the as the vastness of the big ocean itself!

Posidonia 2018. Image credit: Karatzas Images

© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website.Whilst every effort has been made to ensure that information herewithin has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.