As mentioned in the previous section, the global financial crisis caused a virtual standstill in the main segments of the ship S&P markets. Thereupon, ship valuators and ship brokers suspended the ship evaluation at the beginning of 2009, which led to constraints on the shipping markets, as reliable data for ship values became more difficult to obtain and no evaluation on basis of mark-to-market could be conducted.
This was the motivation for the Hamburg Shipbrokers Association (Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V., VHSS) to promote the idea of a value assessment, which, apart from short term market fluctuations, reflects the Long Term Asset
Value (LTAV) of a ship. Collaborating with ship appraisers, shipping banks, ship owners,
issuing houses and auditing companies, the Hamburg Shipbrokers Association (HSA), hereinafter referred to as VHSS, created a valuation method, which is determined on the grounds of vessels long term earnings potential. The approach of the newly developed
Hamburg Ship Evaluation Standard (HSES) deploys the present value47 respectively
discounted cash flow method (DCF-method)48 – WACC49 approach -, and is customised
to meet the requirements of ship valuation.
Further, the Hamburg Ship Evaluation Standard, hereinafter referred to as HSES or LTAV, uses a conservative, statistically proven and transparent approach in order to incorporate the volatility of the shipping cycle. Apart from the traditional ship evaluation, the LTAV rests upon the valuation by the earning rate. While considering the fluctuations on the shipping markets, the LTAV allows factoring in future variances in earnings (mark- to-model).
47 Def. Cf. Fitch, T., 2006, Dictionary of Banking Terms, 5th Ed.,Barron’s Business Guides, p. 358. 48DISCOUNTED CASH FLOW
: accounting technique for estimating the present value (market value) of anticipated future income and expenditures,[…], and income from investment securities. It is calculated as either net present value, which expresses future cash flows in terms of current money by applying a discount rate to future receipts, or internal rate of return, which figures the average annual yield or return on capital of an investment or a bank loan over its expected lifetime. Def. Fitch, T., 2006, Dictionary of Banking Terms, 5th Ed.,Barron’s Business
Guides, p. 149.
49WEIGHTED AVERAGE COSTS OF CAPITAL: A calculation of a company's cost of capital in which every source of
capital is weighted in proportion to how much capital it contributes to the company. For example, if 75% of a company's capital comes from stock and 25% comes from debt, measuring the cost of capital weights these accordingly. A high WACC indicates that a company is spending a comparatively large amount of money in order to raise capital, which means that the company may be risky. On the other hand, a low WACC indicates that the company acquires capital cheaply. Def. [Online], Available at: http://financial-
4. The Hamburg Ship Evaluation Standard
However, the VHSS did not intend to replace the traditional evaluation method by the LTAV. The ship appraisal by the reference value is still a sufficient and valid method during times of normal market activity. In fact the LTAV was introduced to establish an alternative method, which is applicable during times of dysfunctional or irregular market
conditions, where a conservative, unbiased and statistically proven approach is needed. Thus, in dysfunctional markets, may these be excessively high or low markets, the evaluation by the LTAV can be used to obtain representative figures.50
Yet, the mathematical structure of the LTAV had to be validated by an independent auditor in order to guarantee applicability under the German commercial code. For this reason, the VHSS consulted the auditor company PricewaterhouseCoopers (PWC).
By examining more than 2.700 ships and calculating over 135.000 ship values, the auditor company validated the plausibility of the new standard. The validation performed by PWC came to the finding that LTAV deviates in 92% of the tested values of the last 10 year by
less than 15% from the traditionally assessed values.51 Claus Brandt Partner at
PricewaterhouseCoopers, Hamburg, mentioned that “The LTAV in future is standing on a
firm, finance mathematical sound foundation that concurs to the standard of the “Institut der deutschen Wirtschaftsprüfer für Unternehmensbewertung” IDW-SI52 (German Institute of Auditors Standard for Corporate evaluation)”.53 Brand and the VHSS believe
that this validation will help to enhance a wide acceptance of the LTAV in the shipping community.
The enclosed graphic,54 a scenario of 1700 TEU-container vessels of the years 2006-2008, shows that, during the years 2006/07, the values estimated by the LTAV are in average higher than the market values. However, to the end of 2007 and with progression of 2008 this proportion gradually changes and displays a tendency of values lower than market value. Further, it is noticeable that to the end of 2008 ship values estimated by the amended LTAV /PWC-version (light-blue) reflect remarkably lower values than the initial LTAV (blue).
50 Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V., [Online] Available at: http://www.VHSS.de ,
[Accessed on 18.01.2010].
51 Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V., [Online] Available at: http://www.long-term-
asset-value.de , [Accessed on 22.02.2010].
52 IDW S 1 - Principles for the Performance of Business Valuations
53 Brandt, C., Shipvaluation on a new foundation Assessment of PricewaterhouseCoopers supports shipbrokers
Long term Asses Value now with the IDW-Valuationstandards, Vereinigung Hamburger Schiffsmakler und
Schiffsagenten e.V., [Online], Availableat: http://www.long-term-asset-value.de/index.php [Accessed on 27.01.2010].
4. The Hamburg Ship Evaluation Standard
However, preceding in 2009/10 the diagram Comparison of Ship Values estimated by
LTAV and reference value 2009/2010 (Age 3 – 5)55 displays that the value assessed by the
LTAV is significantly above the market value estimated by the brokerage house Clarksons. Further, the recorded sales of ships between the age of 3 and 5 years reflect a lower value than the LTAV. Yet, this statistic is based on individual sales, since only few transactions were recorded. Hence theses values may not be convincing, as they may not reflect an objective market value.
Consequently, the LTAV is in the average below the market prices estimated in 2007 to 2008, but above the prices of end-2008 till today. This variance in values compared to the market value is the major point of criticism against the HSES, as this implies the danger of whitewashing struggling ship values.