What’s it worth?

Republished by kind permission of: A&A Thorpe, 131a Furtherwick Canvey Island, Essex SS8 7AT Tel: +44 (0) 1268 511300 Fax: +44 (0) 1268 510467 shipaat@aol.com

 The views of the Publishers do not necessarily correspond to the views of Lambos Maritime Services Ltd. 

Since last September and the collapse in shipping markets, the plunge in vessel values has been truly astonishing. And with sound employment opportunities of any duration increasingly hard to find, it’s no surprise that more tonnage has been sold for scrap so far this year than throughout the whole of 2008. Demo rates have, of course, fallen sharply from their peaks of $700-plus per ldt last year, but in historical terms, they are still holding up reasonably well, in the mid to high $200s.
    Analysts are predicting that high scrapping rates will continue in the months ahead. With so much new tonnage now available at cheap rates, charterers hold the whip hand. Elderly bulkers are right at the back of the employment queue and mid-sized container ships are also proving difficult to fix. In terms of trading assets in the current market, they have practically no value.
    Ship values are important for everyone and it is no surprise that London valuations experts have been inundated with business so far this year. However, valuing ships today is a major challenge when yesterday’s deal – even if there was one – has no relevance to the market today. But owners with financed assets need to keep an eye on values – their bankers may well be watching loan covenants, and temporary waivers may not get extended for much longer. Owners whose assets are fully written down, meanwhile, may be asked for additional security: the value of their unmortgaged fleet is also pretty important.
    This week, shipping accountants Moore Stephens warned that shipping companies must be able to substantiate any decision to use a ship’s present value as calculated on the basis of future earnings, rather than a broker’s valuation. Whatever accounting policy is adopted, says the firm, vessels will always need to be written down if they are worth less than their current carrying value. “Market values will always be the starting point for such assessments,” it says, “although in limited circumstances, it may be possible to look at future long-term income streams.”
    This could come as music to the ears of those struggling with loan to value covenants and increasingly at loggerheads with bothered bankers. But they shouldn’t get too excited too soon.  Moore Stephens explains that so-called “asset impairment” is determined by comparing the book value of an asset with its recoverable amount. In this market, that could be very difficult to determine. The starting point is a broker’s valuation but the firm says these have been called into question by some shipping companies for several reasons. One, in a thin market, there is little data to work on; two, some say that brokers’ valuations do not reflect “fair value”; and three, the market has over-reacted.
    Moore Stephens says that if broker valuations are below book value, companies can still try to demonstrate that future cash flow exceeds that value. Here, different accounting rules apply, however. The International Financial Reporting Standards (IFRS) test is based on the present value of future cash flows, whereas the US Generally Accepted Accounting Principles (GAAP) test uses nominal amounts. Ships valued in this way are therefore worth more under GAAP and asset impairments are less likely. 
     Moore Stephens says that, in some instances, future cash flows can be used to support a valuation – after all, a long-term charter with a sound counterparty at a good rate has a value. Without any employment, companies could try to demonstrate why likely future earnings mean their ship is worth more today, but they will have to survive the sceptical scrutiny of the auditor!