The Institution of Shipping

Posted on February 6, 2018 by Karatzas Marine Advisors & Co.

For someone to get an academic degree in accounting, for instance, it does not automatically qualify them to represent clients on accounting matters. This approach to qualification is not a judgment against the institution granting the degree, but the premise that the professional society of accountants – wherever they may be – make the effort to ensure that their members have to meet certain standards – professional, academic, legal, ethical, etc – and practice the profession under a certain set of rules. There are people who have studied accounting but failed to pass the professional exam, and as a consequence, they ended up slaving in the back office doing book-keeping at a substantially lower pay scale. For the professionals in law or medicine, “passing the bar” is even more critical and demanding. Professional societies go to a great length to ensure that their members are knowledgeable and current and of a certain standing; and they do weed out the “bad apples”. In exchange for maintaining (certain) standards, the profession enjoys a high degree of reputation and its members earn a respectable living.

Having ourselves being in the shipping profession for almost two decades, and only becoming a member – after passing a series of exams – of the Institute of Chartered Shipbrokers (ICS) in the UK in the last three years, and now in the final stages of becoming an accredited appraiser (valuator) with the American Society of Appraisers (ASA) (after again passing series of exams of law, ethics and subject matter) in the USA, it got us thinking that the shipping industry really lacks professional organizations whose credentials are a sine qua non in the industry.

To be a practitioner shipbroker, there are really no professional certifications to hold or minimum body of knowledge to possess in order to practice the profession. True, most young shipbrokers usually have studied a subject matter related to the maritime industry, but there are no minimum standards of the breadth and depth of such knowledge or some uniformity. And, given that ship-brokerage involves aspects of law and finance, the actual field of knowledge can be quite substantial. Most ship-brokerage offices would hire people apparently good at selling and getting compensated on commission and let Darwin’s law of survival do the rest of the work. And, true, certain ship-brokerage houses have their own in-house training, but again, this rests with the employer, who still can opt how to train young professionals.

Why there should not be a mandatory license in order to practice the profession of a shipbroker? Why there should not be professional assurances of standards of practice and also of ethics – including consequences for breaking the rules?

Likewise, almost all shipbroker houses advertise their vessel valuation service as part of their set of services offered. Most of vessel valuations are so-called “desktop valuations” where no physical inspection of the asset is required, and typically ships are valued based on the “last done” – a process shipbrokers should be good at. However, when valuing an asset to the tune of millions of dollars, one would expect more effort and detail to reach a complete valuation, and, actually assurances of the integrity of the valuation process. Ship valuations and appraisals are used for loan documentation and on-going loan-to-value (LTV) tests for the loan, are used for insurance and claims purposes, for arbitration and court proceedings, and many other factions, where small detail is crucial. Yet, the ship appraisal process is approached in a cavalier way in terms of competence, or even worse. It has been known that vessel valuations services can be used to curry favor with principals and shipowners for shipbroking business, and there have been known instances of “broker shopping” for vessel valuations that will render the highest vessel value (dear reader, please keep in mind when asset prices are low and sometimes “underwater” in terms of LTV, vessel values are critical for triggering default clauses with severe consequences). Once again however, there is no professional body ensuring accuracy and integrity of ship valuations. The “loss leader” model seem to work for many parties when it comes to vessel valuations, with the exception of US banks and lessors and equipment finance companies that steadily are demanding that vessel appraisers to be certified, qualified and obeying by a professional code of ethics by the American Society of Appraisers.

The Baltic Exchange’s –another venerable maritime organization to which Karatzas Marine Advisors is a member of – keystone premise is “Our word our bond”, an expression that is rather encompassing of the mentality of the shipping industry. In an industry of perfect competition, it’s an open field for providing services in the maritime industry: the qualified and less-qualified, the competent and not, the good and the bad… There is room for many a “cowboy” and “buccaneer” in the shipping industry, and sometimes lots of caveat emptor, along with people in shipping whose word is their bond.

For strangers new to the shipping industry, sometimes it’s a learning curve before finding one’s bearings in terms of people to depend on. The push for new technologies in shipping is offering a quick bypass to professional credentials as now an agnostic algorithm can be programmed to provide the services; an algorithm build (hopefully) by experts in the field, an algorithm that obeys a set of rules (but not a code of ethics).

Besides technology, there is an underlying trend to bring shipping into an age of an “institution” where services and products are better defined and where the buccaneer and un-predictability element of the business go away. Charterers want to see bigger shipowners with efficiencies and critical mass and predictability of service, shipping financiers want to see bigger shipowners with better practices and efficiencies, etc, Taking inefficiencies and un-predictability out of the system, professional accreditation for services would go a long way.

A new day, a new epoch for shipping? Image credit: Karatzas Images

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.

A Ship-brokerage ‘App’ Soon?

Posted on December 8, 2013 by Karatzas Marine Advisors & Co.

Ever since Steve Job’s iPad tablet brilliantly defined a market segment that didn’t exist before (or at least a customer need/want that had not been decently exquisitely addressed before from a technological point), many companies have been offering their products as an ‘app’ version, from publishers to messaging services to providing updates on traffic conditions. Why then not a ‘ship brokerage app’ to provide both info on commercial vessels and mainly allow for an ‘exchange’ for buyers and sellers to buy vessels?

Why this has not been done so far? Why not eliminate the ‘hassle’ of dealing with (and cutting out) shipbrokers and save on the broker commissions? About one thousand vessels were sold in the secondary market in 2012 having a collective value of $13 billion and generating nominally $130 million in shipbrokerage commissions (again, nominally speaking, and assuming just 1% commission per transaction). There were also about 1,500 orders for newbuildings and another 1,350 vessels sales in the demolition market in 2012. Obviously, a platform that could streamline the sale & purchase process could provide significant savings to the buyers / sellers, and also make the market more efficient from an economic point of view. Why not then?

Moving the shipbrokerage business online has been tried before, by several parties actually, in the frenzy days of ‘dot com’, and all those efforts failed miserably; given such poor track record, any attempt to try again with an ‘app’ platform this time would make many a prospect app developers twice hesitant.

What’s the point?

First, shipbrokerage, like many aspects of shipping, is an extremely personable business and depends heavily on relationships, personal interaction and trust. The average price of a vessel sold in 2012 was about $13 million, which especially in a down market like the one we are experiencing, is a sizeable chunk of money for a piece of equipment/property. What’s the best price each time, ‘price discovery’ as economists like to say, is a trial-and-error attempt, each time there is a transaction, no matter how recent the ‘last done’ has been and how ‘commonplace’ the vessel is; vessels, unlike a bottle of Coke – used as a ‘typical’ transaction in a previous post – do not come with an official price tag. The seller, within the prevailing market conditions, is trying to maximize the price they can get the buyer(s) to pay, and vice versa. Even small slips during the negotiations on pricing can result in several hundred thousand dollars ‘left on the table’; and $130,000 is just 1% of the price of last year’s average price, but still it pays a captain payroll for a year from the company’s operating budget. Negotiating the price is always a sensitive matter and takes skill and expertise; sometimes there is only one buyer, and a sense of urgency has to be created in order to put pressure on that lonely buyer to warm up and pay up; maybe keep marketing the vessel and ‘threaten’ to bring more buyers to the ‘bidding’; sometimes, when there are no other buyers around, some ‘bluffing’ may do the trick; sometimes, the seller can give up on few points that have little value to the seller but real value to the buyer (allow crew onboard a bit longer, changing the jurisdiction of the sale by delivering the vessel to a different port, etc). Buyers are not known to put their best number forward for the purchase of a vessel, and this ‘massaging’ to get a higher price gets a masterful broker to get it done by personal interaction.

Norman Rockwell’s 1951 painting Saying Grace sold for $46 million

Sotheby’s and Christie’s and other auction houses in fine art (mainly) still keep their business model in the physical market with premier real estate locations and high overhead, luxurious style; of course it works best for the auctioneer’s to create the right image for their services, but still it’s difficult envisioning international buyers bidding online for a $200 million Monet masterpiece (or a $46 million Norman Rockwell sold last week.) Buyers have to be ‘put under pressure’ for time, by the market, and the competition, being reminded that this may be a once-in-a-lifetime opportunity (after all, Monet’s do not come to the market often, and neither good vessels at right prices – which also builds up on their value), and the message and feedback while the transaction is developing has to be passed on to buyers very promptly and clearly – which is actually one of the real services brokers of all types provide. eBay’s sale model may work well for mostly inexpensive everyday life stuff, but expensive objects usually are much more ‘labor intensive’ during their transacting.

Then, there is the cause and reasoning for which shipowners may sell their vessels: quiet often, most sellers – for good reasons, we reckon – do not put their vessels on the market for sale; they may not be active or determined sellers, they may not be sellers at all actually, or they may do not want to pass the wrong message to the market (by definition, something up for sale is negotiable on pricing and everything other respect); on the other hand, they may be sellers if the price is right, or the terms of the sale are enticing (let’s say upon termination of a charter sometime in the future, etc). The brinkmanship of good brokers is to ‘dig up’ transactions where none exist by convincing shipowners to be sellers or buyers, to bring them together and to get them to agree on pricing and the terms of a sale. For a shipowner who is looking for a vessel to buy, contacting their preferred shipbroker may be the only way to source vessels for now; what would be the alternative, to do a google search? But, on this, a bit later.

Besides the price, and negotiating on price, usually vessels are not uniformed assets despite a certain degree of standardization; they vary in many respects from the day they were conceived by engineers on a drawing board as newbuildings, to the custom modifications of an attentive shipowner, to the supervision and special care they got during construction, to the maintenance they were privileged to during their trading lives, etc No two vessels are alike, and thus, during the sale, a lot of technical information and records have to be passed between buyers and sellers, physical inspections have to be arranged, a lot of questions have to be answered, and many more exchanges have to take place in order to reach some sort of information symmetry between buyers and sellers. How a seller would otherwise share such info, some of which may be proprietary? Definitely, not by listing it on Craigslist; possibly by setting up ‘secured rooms’ or databases digitally that would be accessed by password, which is a costly and laborious process (that would undermine any cost savings by sidelining the shipbroker.)

Selling Ships on the Rocks – MV „SEALAND EXPRESS”

To the frustration of financial institutions as buyers of shipping assets, a lot of ‘horse trading’ and emails have to be exchanged even for a sale to get any traction. And, then again, once both buyer and seller have agreed on the main terms, still a lot can happen to have everyone associated with the transaction to shift in overdrive; the market may be changing, whether for asset pricing or freight, to favor one side and motivate the other to find ways to walk away from the agreement; the financials of the seller or the buyer may be changing and make the transaction more complicated. Or even, new information comes to the market, or to the attention of the buyer or seller. One of the most memorable experiences in our shipping career has been the discovery, once agreement of main terms had been reached for the sale of a multi-vessel package between a major US-based leasing company to a private Greek buyer a few years ago, that one of the vessels, several years before the transaction, had run aground on soft sand in South Africa; while the damages from the grounding per se were minimal, the grounded vessel shifted with the tide and hit a centuries-old canon buried in the sand, which cannon penetrated the hull causing some shaft damage. It took many many long hours on the phone to get all the issues resolved and salvage the transaction – which past damages were reflected on vessel records and affected insurance premiums, and the transaction closed indeed as planned (and delivering exceptional value to our client.) If this brokerage transaction was taking place through an ‘app’, there is no that would have closed, since all the ‘soft shoe-ing’ took place once agreement of main terms had been reached.

A shipbroker, besides brokering the ‘asset’, actually provides transaction brokerage by negotiating the asset and also the terms relating to the sale and exchange of ownership and providing consulting work for having the sale conclude successfully. And to close a transaction with many moving parts in an ever moving market, transaction brokerage often means managing the transaction and the principals of the transaction, too. As we saw in previous article about the main terms of a Memorandum of Agreement based on the Norwegian Sale Form (NSF 93), there are many terms to be agreed upon for the sale, a lot of details to be tended to, and most of these terms and details are not always easily quantifiable and invariably expensive in properly settling them. Thus, transaction brokerage in shipping is one of the reasons that still maintains a ‘moat’ around the profession. But as in every other industry, the digital age is an indiscriminant industry disruptor; possibly, sooner or later, there may be a new mouse trap based on an ‘app’. Who would ever thought that commercial loans, annuities and insurance policies could be sold in the secondary market not only through brokers but by establishing an digital exchange and have the documentation and paperwork streamlined and securely posted online for buyers to see and evaluate and eventually bid high pricing? There is no need for googling for loans and loan terms, but there is an Exchange for it! Or, there may be an ‘app’ for brokering vessels!

Any suggestion for a lucky name of such an ‘app’?

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.

How to Buy a Ship – Getting the MOA Penned

Posted on November 1, 2013 by Karatzas Marine Advisors & Co.

In a previous posting, we reviewed a typical Sale & Purchase (S&P) transaction assuming that once the Memorandum of Agreement (MOA) has been signed by both parties, all is smooth sailing afterwards, figuratively-speaking and, hopefully, realistically-speaking for the vessel herself.

From the moment there is an ‘agreement on main terms’ and a ‘recap’, lots of things could go wrong until the time of the actual delivery of the vessel to her new owners and the legal change of ownership. In everyday life, when one buys a can of Coke at a convenience store, timing, payment and change of ownership of the property (can of Coke) are evident and self-explanatory; for a vessel, where there is a present agreement on terms for the asset to be exchanged in the future, many things can go wrong until that point in the future; and that point is almost always in the future (and rarely immediately like with the sale of a can of Coke) since irrespective of how fast and efficient the sale, several weeks of lead time is required for an S&P transaction; or, that still there is some contractual timecharter employment remaining (several days to possibly year) for the vessel to be delivered charter-free or that the vessel has another port call in order to discharge her cargo and finish her voyage charter. Things that could change between signing an delivery can vary from the least expected such as the ship to sink or to be declared Total Constructive Loss (TCL) due to an accident, collision, allission, act of God, etc, or that the market has skyrocketed or plummeted and now buyer and seller either get to leave money on the table or get stuck with an asset (investment) that’s already several million dollars in the hole from day one, respectively. Although not every eventuality can be expected or planned for, shrewd and experienced buyers and sellers and their brokers ensure for a language that expects the unexpected and minimizes the risk from changing conditions and a possible fall-out.

NSF 93 – Sample First Page

The terms of the sale of the vessel are determined by the MOA which most likely is based on the Norwegian Sale Form of 1993 (Saleform 1993 or plainly NSF 93). The NSF 93 has sixteen main clauses and special or additional terms are incorporated in the addenda. In the preamble, there is introduction and definition of sellers, buyers and the vessel, of banking days and classification society. Since sellers and buyers can be special purpose companies (SPC), usually there is a need for a guarantee for the performance by the parent companies.

Clause 1 deals with the Purchase Price, which is the gross price for the selling the vessel; usually ship brokerage commissions are not mentioned here and are dealt privately between the sellers and the brokers (and possibly buyers.)

Clause 2 deals with the Deposit, which typically is 10% of the Purchase Price to be lodged to an escrow account within three banking days from the day of the MOA having signed by both parties. As volatility and prices change, deposit can vary and get more substantial; after the market collapse in 2008 and several defaults, it turned out that 10% was just too low hurdle to jump in such a volatile market. Also, for demolition sales, the standard deposit is 20% to reflect more ‘skin’ for a low Purchase Price (in absolute terms) and also the higher risk for the transaction.

Clause 3 deals with the Payment at the time of the closing, which has to be effected no later than three banking days once the Captain (and sellers) have provided Notice of Readiness (NOR) to buyers hat the vessel is ready in every respect for delivery under the terms of the MOA. At such time, the Deposit from Clause 1 is released in favor of the seller, as well as additional monies due to the sellers from the sale (there is additional payments for bunker onboard, lubes, oils, etc which have already been mutually accounted for and priced in advance of the sale.)

Clause 4 refers to (vessel) Inspections, that the buyers have the right to inspect or inspected or waived such right, or in any event, the vessel was made available for inspection, and buyers have approved the vessel. Most of the time Clause 4 is a formality, as already significant time and effort and resources have been dedicated to inspections and approval of the vessel well before any agreement was made, so, by the time of the closing, Clause 4 is one of the least concerning clauses.

Clause 5 is titled ‘Notices, Time and Place of Delivery’ and states the time and place of the delivery; as the vessel had been trading since the main terms were agreed upon, as the day of the delivery is approaching, the sellers are obligated to keep the buyers apprised of the vessel’s itinerary and her expected delivery time. Usually delivery time is a time window, when buyers cannot deliver before a certain date and buyers are not obligated to take delivery after a certain deadline (Date of Cancelling.) Likewise, place of delivery is usually expressed as a geographic region, between certain ports, where both parties agree to effect the transaction. Obviously, delivery time has to be within certain banking days (defined in the preamble) since purchase money has to change hands, but also delivery place has to be convenient, minimizing bureaucracy and tax matters, which could affect the price (a delivery port closer to a loading port is favorable to buyers, ceteris paribus, as it minimizes the ‘ballast leg’ for the vessel to reach her next cargo (freight)).

Drydock – Getting Wet

Clause 6 deals with Drydocking and Divers Inspection and reflects the possibility of the vessel getting inspected or delivered in drydock. In reality, vessels are getting delivered while afloat, having undergone ‘superficial inspection’ and not an inspection while in drydock. However, at time of delivery, the buyers have the right to undertake underwater inspection of the vessel and her hull by a qualified diver with a closed-caption camera and with a representative of the classification society present. The cost for such inspection is for buyers’ account, unless there is fault found that has to be addressed before the delivery of the vessel; the definition of fault is interpreted strictly by the classification representative’s judgment (it ‘affects class’ or warrants ‘class condition / recommendation’); if the fault affects the seaworthiness of the vessel, the cost of the underwater survey is payable by the sellers, who, in addition, will have to either compensate monetarily the buyers for expected rectification of the fault or rectify the fault and deliver the vessel without ‘class condition / recommendation’.) Buyers also have the right to have the tailshaft pulled out and inspected at their expense, and again, if repairs are required, then sellers have to pay for the inspection related costs and repairs; typically such provision of this clause is almost never exercised given the time required and the tediousness of such inspection. In general Clause 6 can be problematic as, if there is fault, then a whole new discussion has to commence on the expected costs for repairs, easiness of access for ship repair yards, the significance of the damage (structural impact?), loss of hire, etc. This is a discussion that commences un-predictably once main terms have already been agreed, and if there is no much goodwill left between buyers and sellers till now, then, it may very well turn out to be a deal breaking point.

Clause 7 refers to ‘Spares and Bunkers’ onboard and are passed on to buyers. All spare parts onboard the vessel or parts in the possession of the seller ashore at the time of the vessel delivery that were stored / ordered on behalf of the vessel now become property of the buyers along with the vessel; although there is no additional, itemized pricing for the spares, collectively they have been incorporated in the price of the vessel (vessels coming from ‘good stables’ – owners with ample spare inventory onboard and high maintenance standards) routinely command premium pricing in the secondary market, to the tune of millions of dollars on occasion (which is a point not regularly addressed in vessel valuation discussions.) Bunkers onboard, especially at present with high oil prices, can be worth several hundred thousand dollars and therefore fuel tanks having been sounded by mutual survey of buyers and sellers for their quantity and compensation is calculated and effected with Payment under Clause 3; likewise, oils and lubes onboard are passed free of charge to the buyers, but there is additional compensation for ‘sealed’ drums and other such containers. In general, all items onboard the vessel at delivery time become the property of the buyer at no extra cost. There is a list of items explicitly to be excluded from the sale, which is usually stipulated under one of the addenda, and typically includes items proprietary to the sellers / owners / managers, items that bear their logos, stationary, etc items that are onboard at the discretion of the sellers (additional radio / navigational equipment not required by the classification society), and leased / rented items onboard like nitrogen or acetylene bottles.

Under Clause 8, there are provisions on Documentation, the documents that will be produced at the time of the closing by the buyer and the seller. Here, the burden in general is on the seller who have to produce much more paperwork proving proper ownership, certifications, documentation, etc that also has to be proper for the buyers needs in order to properly register the vessel under their chosen jurisdiction. Usually, preparation of documentation is a formality, but it can get very tedious when the vessel is to enter / leave cabotage markets, the ownership structure is more complicated and spread-out, etc

In Clause 9, under Encumbrances, the sellers warrant that the vessel is to be delivered to the buyers free of any and all encumbrances, mortgages, liens, debts, etc. Usually such close is not a brainer, but when the vessel is in bankruptcy proceedings or the owner is passive owner in no position to be aware of any trade debt, this clause can be more critical, and sometimes a judicial sale provides a clean slate.

Clause 10 under the heading of ‘Taxes’ is provided for entertainments purposes (probably shipping is one of the few industries that taxes and entertainment can be used in the same sentence) ensuring that each side will be responsible for their own tax liabilities. However, given shipping is an international industry, the place of delivery (Clause 5) and also the vessel’s registry have already been chosen to be of favorable tax regime and minimal government interference.

Clause 11, headed ‘Condition on Delivery’, partially reflecting Clause 6, stipulates about the condition of the vessel at the time of her delivery, her seaworthiness, which defects have to be addressed before the delivery and how. This could be a tricky clause that has led many a buyer and seller into arbitration and litigation. Again, for clarity, the classification society is the ultimate interpreter of any technical defaults and the repair-related remedies thereof. However, the devil is in the detail, as they say, and not only the cost of repairs can be open to interpretation, but also more subjective factors like loss of hire, cost of repositioning the vessel, third-party contractual liabilities, etc

In Clause 12 under ‘Name / Markings’, the buyers undertake to change the name of the vessel and replace the seller’s house flag / house colors on the chimney stack with their own shortly after the vessel delivery.

Clauses 13 and 14 under ‘Buyers’ Default’ and ‘Sellers’ Default’, respectively, it is stipulated that should either party fail to live up to their obligations under the MOA, buyers may lose their deposit or may have the option the walk away from the sale, etc Further, additional compensation may be warranted depending on the extent of the default.

Under Clause 15, ‘Buyers’ Representatives’, the buyers of the vessels, from the time they lodge their deposit under the MOA, they are entitled to place (usually) two of their representatives (usually chief officer and engineer) onboard the vessel for purposes of getting familiar with the vessel; they are not regular crew and cannot interfere with vessel operations; they are learning the ‘ropes’ of the vessel and her equipment, etc with the rest of the buyer’s incoming crew to join the vessel at the time of the delivery (and at the place of the delivery.)

Lutine Bell – Day of Judgement!

Finally, under the last standard clause of an MOA based on NSF 93 template, Clause 16 stipulates for ‘Arbitration’ in the event of disputes, and typically English Law or United States Law and the Law of the State of New York are the standard language, with London Arbitration (Arbitration Acts 1950 and 1979) the preferred venues.

For additional terms for the sale of a vessel, there may be a list of clauses that are attached to the MOA in the form a addenda and could cover from small formalities / requests from each side to major points such as that sometimes the sale maybe conditional on the buyer’s winning a tender business where the vessel is intended to be employed, and thus, the terms of such addendum have to be clearly stated that the sale is still conditional but only on one very specific condition, which by itself can be dependent on many other events beyond anyone’s control (if the tender is to be awarded by a government and it’s delayed, postponed, canceled or the government has changed or …

Despite all its criticisms and calls for improvements, NSF 93 in its six-page simplicity has managed to condense a complicated transaction on many levels to a transaction that even a ship broker can do! But again, as they say, the devil is in the details, and good, experienced shipbrokers worth their salt who have been through many closings fully know that although an MOA is six-pages long, proper attention to detail can make or cost millions in dollars in arbitration awards, litigation or plain old good will and reputational damage.

IMPORTANT DISCLAIMER: Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer and other important information and terms. 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 and related websites. Whilst every effort has been made to ensure that information herewithin has been received from sources believed to be reliable and 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 kindly for your consideration.

How to Buy a Ship – A Typical S&P Transaction

Posted on October 22, 2013 by Karatzas Marine Advisors & Co.

For people who have never worked in shipping, the concept and the logistics of buying a vessel sounds mind-boggling. How one buys a piece of property in some foreign jurisdiction that likely flies another jurisdiction’s flag and possibly could fly another flag once the sale is concluded, when the holding companies of the buyers and sellers may reside in yet other jurisdictions, the vessel likely is mortgaged by a creditor in a different jurisdiction and the mortgage has to be released so that a free title can be passed to the buyers? How one can ensure that all details are attended to and the sale is smooth, and that the whole transaction does not end up in smoke once the buyers’ funds have reached the sellers’ account (buyers’ funds along with release of escrow deposit and other funds due have to reach sellers’ account before the sellers’ release the title.) Buying real estate or a car may be a mini-version of a shipping transaction and things can go wrong, but at least with real estate, it’s absolutely clear that the property is stationary and in the event of dispute, the jurisdiction is abundantly clear.

For the purposes of this discussion, in our series of discussions on sale & purchase, we assume that this transaction is about the sale and purchase of a vessel in the secondary market, meaning that the vessel is already on the water and trading and the buyer intends to buy her as a trading vessel and immediately put her to work to transport cargo for profit. Transactions for newbuilding contracts to shipbuilders or ‘resales’ (usually novation agreements for the sale of newbuilding contracts to a new buyer while vessel still on contract to be built or under construction) and transactions for the sale of vessels for scrapping (demolition sale) whether directly to the end buyer (a scrap yard) or to an intermediary ‘cash buyer’ are not considered under this scenario; such transactions are still handled by shipbrokers, but there are nuances in such transactions and their contracts that for now fall outside the scope of this essay. Also, for the purposes of this discussion, we will not endeavor to analyze the logic of the seller and the buyer behind the transaction, only that these two parties, acting on their own will, without compulsion and in full knowledge of facts and market conditions, are willing and able to enter into such a transaction.

A typical S&P transaction starts when an operating shipowner (someone who operates / manages their own vessels (as compared to a financial shipowner)) contacts their shipbroker (or ‘S&P broker’) to inquire about a certain type of vessel, market conditions in terms of freight, market and employment prospects, recent transactions and prices, the parties involved in those transactions and the nature of the transactions (such as ‘charter free’ sale, or with ‘charter back’ or with ‘survey due’, with ‘prompt delivery’ or ‘subject to tender’, or ‘subject to financing’, etc.) Likewise, for a potential seller, a similar phone call will be placed with the shipbroker of their choice inquiring about similar information.

Once our friendly owner decides to make a purchase, they will inquire about available tonnage for sale, that is for vessels whose owners have openly been advertising them for sale through the S&P broker market, or sometimes through trade publications, internet, etc. For such available tonnage for sale, usually there is no exclusive broker handling a vessel and their owner is dependent on competitive brokers to find buyers. In certain cases for openly availably tonnage, the seller may have engaged exclusively a third-party, competitive broker to source buyers, but usually the exclusive broker may be ‘in-house’ broker or works for a brokerage office affiliated with the sellers’ group of companies. The buyers’ broker will also send a blast email (a ‘P/E’ or ‘purchase inquiry’ in brokerage parlance) to corresponding brokers worldwide looking for additional similar tonnage for sale, fitting the buyers’ guidelines of potential candidates in terms of size, age, builder, specification, etc. At the age of the internet of instant and extremely cheap telecommunications and under the mode of ‘information wants to be free’, most sales candidates are already well known to players with decent market access and set of skills. Therefore, the main purpose of any purchase inquiry is to find vessels that are not actively in the market for sale, vessels that their owners may need some convincing to consider selling them, vessels that there are certain ‘buttons’ behind their ownership that if pressed could entice their own to sell them. ‘Off market candidates’ are usually the holy grail of shipbrokerage, as these are the vessels that can be sold under certain circumstances but the market doesn’t know yet.

Once a certain sales candidate has been located and there is a general understanding overall ‘price ideas’ between buyer and seller, then the buyer, through the designated ‘broker channel’ would inquiry certain technical information about the vessel for their evaluation, such ‘class printouts’ (copies of the vessel’s maintenance and condition records with their classification society), permission to ‘sight class records’, ‘TC description’ (short for timecharter description, a two-page description of the vessel that usually the owners present to charterers with the vessels pertinent descriptive and commercial information such as cargo capacity, fuel consumption, etc), ‘GA Plans’ (short of General Arrangement plans, a overall arrangement of the vessel), ‘Capacity Plans’ (showing cargo holds or cargo tanks, their arrangement including loading / discharging mechanisms, and mostly their capacity), ‘Mid-section Plan’ (showing a mid-section, vertical cutoff for the vessel), the ‘Q88’ (for tankers, short of Questionnaire 88) and OCIMF report (for tankers, short for Oil Companies International Marine Forum). Once the information provided is met with buyers’ approval, then buyers will ask for ‘permission to inspect’, that is, they will engage an inspector to visit and inspect the vessel. Usually, there is an LOI involved (‘Letter of Indemnity’ that the inspector / inspecting party indemnifies and holds harmless the owners for any damage or accidents), and the inspector in the course of several hours will undertake a superficial, pre-purchase inspection of the vessel, meaning that without interfering with vessel operations and without having the right to open up the engine or any other parts of the vessel for inspection, the inspector is allowed to sight, inspect, copy and take pictures of the vessel certificates onboard, engine room, hotel accommodations (‘superstructure’), cargo holds / tanks, hull, ballast tanks, etc, observe cargo operations and take notes. Inspecting a huge structure like a ship, while she usually undertakes cargo operations (loading / discharging) under tight time constraints, sometimes without natural light and often in dangerous or heavily contained spaces, it’s an art and a skill that often goes under-appreciated; not to mention the stakes that are tied to an inspector’s report.

About a week after the inspection, once the inspector had the opportunity to return to their office and put all the information they collected into a multi-page inspection report, the buyer now has a fairly accurate knowledge of the condition of the vessel, upon which they will base their exact opening ‘firm offer’ to the sellers. The opening offer, contains not only a pecuniary offer for the vessel, but also the ‘main terms and conditions’ for the sale, such as contemplated time and place of delivery, items to be included in the sale, expected protocol, etc, to which the sellers will provide a counter offer about the price and the terms, and items that have to be excluded from the sale (usually rented items such as nitrogen bottles onboard are not the sellers’ property so they have to be excluded from the sale, but the buyer may opt to take over the rental contract to keep them onboard). After a few turns of offering and counteroffering (fascinating ‘horse trading’ ritual this has been called from parties typically associated with shipping), there is hopefully an agreement on all terms, and then there is a ‘main recap’ where a clean email copy of the main terms of proposed sale is prepared and agreement is confirmed once again by both buyer and seller, as this agreement now has the full force of a legal contract.

NSF 93 – Sample First Page

Once the main terms / recap has been confirmed, it’s now the buyers’ broker job to incorporate such terms into a contract to be signed by both parties. For the contract, there are certain boilerplate templates that have been used before; usually, the original ‘firm offer’ is based on such a template and one of the main terms of the recap specifically mentions the template to be used for the contract. The most established form of template or MOA (‘Memorandum of Agreement’) is the ‘NSF 93’ form, short of the Norwegian Sale Form of 1993 which was prepared by the the Norwegian Shipbrokers’ Association and maintained by the Baltic and International and Maritime Council (BIMCO). There is the updated ‘NSF 2012’ form, but NSF 93 has been the most popular template, as people are more familiar with it, and also there is a sizeable body of case law based on the older template. Alternatives to NSF have been the ‘Nippon Sale Form’ which is preferred by Japanese sellers and usually considered a seller-friendlier template (as usually Japanese owners only sell in the second-hand market the vessels they built brand-new at Japanese shipyards), and the ‘Singapore Ship Sale Form 2011’ which is more commercially flexible to accommodate more legal jurisdictions (besides English Law) also the concerns of non-operating shipowners (like leasing companies, etc) who are getting a ever increasing slice of the shipowning pie. Once again NSF 93 is the industry standard despite her age…

Once the MOA is prepared by the buyer’s broker, and reviewed once again thoroughly for any errors or omissions against the ‘recap’ and its main terms, then the buyers’ authorized representative first signs an original, to be exchanged by email or facsimile, and countersigned by the sellers’ authorized representative. Once the MOA has been signed by both parties, still there is lots of work to be done until the delivery of the vessel. However, the most difficult parts of the ‘deal’ are already done with, and now it’s time for buyers to ‘lodge deposit’ usually within three banking days for the sale and look forward to the day of the closing.

What’s Sale & Purchase (‘S&P’) in Shipping?

Posted on October 5, 2013 by Karatzas Marine Advisors & Co.

What does ‘S&P’ stand for in the shipping industry? It definitely doesn’t stand for Standard & Poor’s, although a few shipping companies have been aspiring to be part of the well-respected ‘S&P 500’ index. It doesn’t stand for ‘Salt and Pepper’, although sailors and the Navy are dressed seasonally in Summer Blue (“Salt and Pepper”.) It doesn’t stand for Shipping & Processing, even evocatively, although we are still talking about the shipping industry. It doesn’t stand for Standards & Practices applied in the broadcasting industry, Standards and Protocols or Security and Privacy used in the computer science, Sensation and Perception in psychology, Subcontract and Procurement in workflow analysis, or Strategy and Policy used in consulting and business analysis.

It simply stands for Sale & Purchase (S&P), the business practice of buying and selling commercial ships in the open market. As grandiose ships as they may look, there is a need for their brokerage, whether as newbuilding contracts to be ordered at the shipbuilders when they first are getting built, or as ‘used’ vessels in the secondary market, or finally as old vessels now are destined sale for scrapping (demolition.) The professionals who are brokering the vessels are called ship brokers (or S&P brokers,) and are offering different services from charter brokers (who are brokering the freight / employment for the vessels but not the vessels themselves; brokers focusing on the tanker market are called tanker brokers.)

Capesize Vessel

S&P brokers, much like real estate agents, do not hold any inventory on their balance sheets, that is that they do not own the vessels they sell; they just sell other people’s vessels to buyers without actually undertaking any risk at all (besides the time and effort they put into a transaction) or making any capital commitment in the transaction. As such, the barriers to enter the industry are relatively low, and when times are good, there are many entrants, a great deal of which will wash out during the next market trough. As great as this may be for most of the time for the principals (shipowners) looking to buy or sell vessels, since brokers usually provide liquidity, efficiency and, yes, more transparency than otherwise in the market, it’s not always an accretive situation for the market and its interests; low barriers mean that jetsam and flotsam enters and leaves the market depending on whether quick buck can be made without necessarily contributing value to the market.

S&P brokers may specialize in certain market segments by asset class such as dry bulk vessels or containerships or tankers, of gas carriers, etc; they may specialize in certain geographic markets dealing with clients or types of vessels in certain ‘contained’ markets such as vessels in the cabotage business or customized vessels for a certain trade such as mini-bulkers or shallow draft vessels, etc; ship brokers may also specialize by function such as focus on newbuilding vessels or scrap brokers – there are distinct intricacies dealing with a newbuilding contract to a shipbuilding yard where financing and technical details for a vessel expected to be market competitive for the next twenty-five years are extremely vs. selling a vessel by the pound (actually by lightship deadweight tonnage (ldt)) for her last voyage of no return to the scrap pile. There are specialist ship brokers who have been working with clients lacking shipping market expertise, such as leasing companies or equity investors or lenders, who have to depend on proven track-records of solid experience and dedication at accessing not only top notch ship brokerage services but also hands-on expertise and logistical support (since unlike an operating shipowner cannot depend on in-house expertise.) Finally, ship brokers can be ‘competitive’ brokers offering their services to any potential buyer or seller, while there are also ‘in-house’ brokers who work exclusive for a ship owner (usually larger or active shipowners who trade fairly often and need in-house, dedicated expertise which they can control.)

What are the services that ship brokers usually offer in their regular course of their business? The short, sweet answer is that they ‘broker ships’ between buyers and sellers and make a commission from the sale; that’s life and destiny for most of the ship brokers and fulfillment of many dreams. The degree of competence and success increases exponentially with access to market information in general, and information about the vessels themselves, their owners, the circumstances of the transaction, their skill and dedication to negotiate great price for their client (above-market-level price for a seller, below-market-level price for a buyer), and can follow up the documentation and closing of the transaction in a professional and competent level.

Ship brokerage, is a great and value-added service to the maritime industry. Selecting a ship broker to do business with is more complicated, but often, one of the most rewarding professional relationships that can be built! A great deal of shipowners started out as shipbrokers. And another great deal of shipowners make fortunes based on the dedicate work and advise of their brokers…

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