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. 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.

 

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The Institution of Shipping

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

© 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.

Dry Bulk Ships: To Buy or Not To Buy

The dry bulk market had a great run from the fall of the last year until March this year when the BDI reached 1,338 points on March 29th.  While freight rates still have been hovering at just above break-even levels, the improvement of the market has been impressive in relative terms; freight rates have quadrupled in the last year, admittedly from abysmally low levels.

While still the freight improvement has not been strong enough to justify popping champagne bottles, it has worked miracles in terms of improving the mood and bringing soaring enthusiasm back in a market that was relentlessly bleeding cash for the last few years. The enthusiasm has been so strong that recent sale & purchase activity (s&p) has been the strongest in the last two years, while there are a couple of cases of shipowners doubling their money on ‘asset play’ transactions within the last year.

The market has given up some of its recent earnings as the BDI is now back to approximately 900 points, but the improved mood is still abundantly present. And, given that we are heading into the summer, a seasonally weak season for shipping, there have been some concerns on the direction of the market. And, now that the market seems to be taking a breather and there is some time for introspection, there is some head-scratching on the real reasons for the market bouncing back so strongly in the last year as fundamentals did not seem to justify such a strong (fourfold) freight improvement.  All in all, while the market is still decent and the mood is buoyant, one has to be more cautious at present.

Shipping asset prices have improved since last year when ships, especially when non-modern dry bulk ships were selling at a multiple of their scrap value, irrespective of quality and pedigree. Probably the “easy money” has been behind for those looking for an easy “asset play”, but shipping asset prices are still low by historical standards.  And, there has been serious interest for acquisitions of dry bulk shipping assets whether in the secondary or the newbuilding market.

But again, it’s hard for a buyer or investor to enter aggressively the market. Prices have doubled for a great deal of assets while the freight market barely covers their daily operating expenses. And, there are risks looking forward to justify an aggressive approach. Trade volumes are still anemic to imply a strong market recovery. And, shipbuilders are getting more desperate by the day at building up their orderbook. Lack of competitive shipping finance keeps a dumper on the market, but any export credit incentive or other catalyst would have a tremendous (even catastrophic) impact on the market.

While asset prices look tempting by historical standards, whether for tankers or dry bulk vessels, it’s hard making the argument that the market is in a full recovery swing and buying ships, whether for operating profits or for asset flipping in the future, can b a great strategy. The risks still lurking in the market cannot be ignored. And, in our opinion, the “irrational exuberance” we have seen earlier in the year make us believe that there is still lots of froth in the market.


The article was first published in Seatrade Maritime on June 6th, 2017 under the title “Dry Bulk Ships: To Buy or not to Buy“.


Great looking dry bulk vessel MV ‘Genco Pyrenees’ not making making (sailing in ballast). Recently photographed sailing upstream in Elbe in Hamburg. 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.