Poblamiento del Quempe a través de los textos

6. Application of the Hamburg Ship Evaluation Standard

After introducing the Hamburg Ship Evaluation Standard and having discussed the impacts of the traditional ship evaluation in disrupted markets, this paragraph shall outline the impacts of the HSES on ship appraisal.

As mentioned above, the LTAV assess the value by the capitalised income. This present value has to be distinguished from the market value assessed by the reference value method. While the reference value displays the current average market value of the ship, the LTAV calculates the future cash flows and discounts them to the date of appraisal. Hence, a net present value is calculated, which, as such, reflects the value of the investment autonomously from current market fluctuations. This is the reason why the LTAV became so attractive for banks, issuing houses, and ship owners.

The effects of the shipping crisis, described in section 3., led to the problem of finding a suitable approach for the estimation of ship values. Especially for the container segment, market values were difficult to obtain, as few transactions led to a difficulty in assessing representative reference values.

The Long Term Asset Value however, features a transparent and plausible estimation of a ship value, as it is based on a mathematical formula and allows a preview on prospected revenues. Furthermore, the LTAV enables an appraisal even in disrupted markets, since the evaluation is based on the present value, and a reference value is not needed. Thus, benchmarking against fire sales does not come into question, as values are not based on recent sales, but on the future income. Consequently, the question of availability of willing buyer and willing seller is not required. Additionally, ship values calculated, using the LTAV, are not as volatile as if estimated by the reference value, since they are not influenced by subjective conditions of sale. On the contrary, the estimations by the LTAV are based on the principle that a ship is a sustainable and lasting asset, which is represented by the amount of the internal rate of return, rather than the liquidation price. Hence, it reflects long-term prospects and cushions periods of bull markets and economic downturns, since it does not represent a short-minded outlook in profitability, but in fact rests upon the 10-year-average in charter rates. In consequence, the LTAV does not “live” the heights and lows of the market cycles as much as the reference value does.

6. Application of the Hamburg Ship Evaluation Standard

6.1 Impacts of the HSES

While the evaluation of ship values in active S&P markets is correctly undertaken by the reference value method, the LTAV can alternatively be used for the appraisal in dysfunctional markets. But, when applied, what exactly are the impacts of the Long Term

Asset Value on the ship evaluation in disrupted markets (certain segments)?

As described in section 3., several parties face problems when the traditional ship evaluation is to be undertaken in dysfunctional markets for the appraisal of ship values. The necessity of ship values, even if there is no intention of selling the ship, clearly indicates the dependence on a well-performing method for ship appraisal during any kind of market condition. Fortunately, the LTAV is an instrument, which enables a plausible approach to ship values, even if no reliable data on the S&P market is available or if there is no intention of selling the ship.

However, it [the LTAV] is not directly used as a book value but rather as an useful

addition in the determination of valuations for, amongst others covenant assessment, especially in illiquid markets.92

Hence, the LTAV provides an addition for the periodical estimation of the collateral value of ship mortgages by banks. By applying the LTAV in disturbed shipping markets, the thereof resulting ship values may cause proportionally higher collateral values, as opposed to the collateral values being assessed on foundation of the reference value including fire sales as a benchmark. However, this has the effect that ship owners are not threatened by increased cost of the mortgage, resulting from additional mortgage insurance to protect the lender from credit default. Thus, in disrupted or weak markets, using a mark-to-model procedure like the LTAV could prevent ship owners from performing distress sales and therefore stabilises the ailing ship values, as borrowers or ship owners would not face cash flow problems resulting from debt capital. Yet, in periods of boom conditions, where ship values may be unrepresentatively high, the LTAV caps the ship values to a reasonable level, since it reflects the long term prospects and is not solely based on extraordinary high short-term revenues. Consequently, banks assessing the collateral value would find a more conservative foundation in the LTAV as opposed to the traditional ship evaluation. As a result, the proposed market-to-model-driven valuation methodology in the prevailing troubled markets assists the banks in preserving the collateral values, and in return

92 _{Cf. Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V. , [Online], Available at:}

http://www.vhss.de/ltav/press_release_engl.pdf , [Accessed on 16.02.2010].

6. Application of the Hamburg Ship Evaluation Standard stabilises the position of the debtors, that is ship owners and issuing houses i.e., as the banks are not forced to ask for additional mortgage obligations or increased interest rates. Digression on application of the LTAV in the SchiffsBelWertV:

However, before using the LTAV as starting point for the assessment of the collateral value, it has to be questioned whether the SchiffsBelWertV permits the valuation on basis of a mathematical formula, which includes the prospected earning rate of the asset.

§ 3, I of the SchiffBelWertV stipulates that the underlying value for the collateral value shall be free from any “speculative elements”. Thus the question is, whether the assumption of prospected revenue and the future market situation, such as in the calculation of the LTAV, comprise these “speculative elements”, or whether the LTAV is in line with the policy of § 3, I SchiffBelWertV.

Yet, the same paragraph states that the value which forms the basis for the evaluation of the collateral value, shall foot on empirical data, which, independently from economic market fluctuations, can be assumed as the market value. As the idea of the LTAV is to calculate ship values isolated from the cyclical volatility, and since the parameters rest upon empirical statistical proven data, one could conclude that the LTAV is in line with § 3, I,2 SchiffsBelWertV.

However, as mentioned in 3.2, the central provision on the evaluation of the collateral value of ships is outlined in § 4 of the SchiffBelWertV. The directive of § 4, I states the constitutional parameters for the evaluation of the collateral value. For this purpose, the market value, the 10-year-average market value, and the price for a newbuilding or – for second-hand vessels - the contractual price determines the upper limit of the collateral value. However, by appointing these values solely as upper limit (cf. § 4, II, III SchiffBelWertV), the mortgage lending institutions (Pfandbriefbank) are not committed to the exact method on the evaluation of the collateral value. This is essential, because – unlike for the evaluation of real estate – a specific method for ship appraisal does not exist. Moreover, § 4, IV urges the mortgage lending institutions to apply another adequate method, if neither a current market value nor a average market value can be assessed.

Consequently, even though the LTAV does not comply in all respects with the provisions of §9 and § 3,I SchiffBelWertV, it is worth it to consider the accreditation of its application in distressed markets, where a ship appraisal on basis of the traditional method is not possible.

Furthermore, the introduction of the LTAV has an effect on the risk management of ship lending banks. As described, Basel II comprises a heavy burden for banks. The example of Mr. Stoltenberg in 3.2 indicated the high ratio of banks equity requirements. The capital resource rules of Basel II display how the capital-intensive financial operations affect the capital key ratio.93 As a result, the lending institutions may be restricted in their core business, to wit lending capital to debtors, as they have to increase the equity for the RWAs.

Yet by introducing the LTAV, loans could be kept “alive”, since ship values would not decrease as much during the crisis, and asset backing would not absorb as much equity. Consequently, banks do not have to ask ship owners for increased collaterals, bar deposits

93 _{CAPITAL RATIO: key financial ratio measuring a bank’s}

CAPITAL ADEQUACY or financial stability. As a general rule, the higher the ratio the more sound the bank. A bank with high capital-to-asset ratio is protected against operating loss more than a bank with lower ratio, although this depends on the relative risk of loss of each bank. […]., Def. Fitch, T., 2006. Dictionary of Banking Terms, 5th ed., Barron’s Business Guides, p. 75.

6. Application of the Hamburg Ship Evaluation Standard

54 or even partial repayment of the credit in order to cope with higher risk premiums. Thus,

owners do not face the risk of breaching loan covenants or additional cash-flow problems, and the danger of forced sales could be prevented. Banks on the other hand are able to continue to provide loans, as their capital adequacy permits to do so. Additionally, the LTAV would spare the ship lending banks to realise value adjustments on collaterals, as the valuation by the LTAV counters the decadence of ship values in weak markets.

Further, assessed ship values calculated by the LTAV could keep the balance sheets of ship owners and KGs even balance, since the values often represent reserves. Therefore, the mentioned hazard of excess of liabilities over assets could be avoided.

However, the instrument of the LTAV is by far not able to bring about a miracle. The values of badly calculated ships, which exist in heaps especially in the container segment, cannot be forged, as their economic viability in the long run prohibits the calculation of a positive profitability by the LTAV. These ship values face the extended risk of loss of capital, resulting from excessive soft costs and too optimistic future prospects.

This is the reason, why the LTAV also bears the danger of manipulation. As a matter of fact, it has to be stressed that the Long Term Asset Value, unlike the market value, is calculated on basis of ratings. The parameters concerning future prospects and risk structure (i.e. discount rate) may vary with regard to the rating of the individual user. Consequently, the perils of faulty input parameters (“garbage in garbage out” mentioned in 2.4.3) can result in inaccurate ship values, and therefore could lead to a misuse in terms of rigging.