Banks Hide Shipping Losses With 'The Hamburg Valuation'


Many banks around the world have been badly hurt by lax loans they made to the shipping industry during its recent boom.

As ship values soared, so did apparent collateral values backing shipping loans. Yet as ship values then collapsed, the collateral disappeared. This threatens to put, and has put, many debtors in breach of banks’ loan covenants.

How can banks avoid coming to terms with the fact that much of their collateral is worth far less than they represent? Scrap mark to market valuation of ships and replace it with a new mark-to-model-driven valuation methodology. Sound familiar?

The proposed system below, which could be called ‘The Hamburg Valuation’, has originated in Europe, but could become standard practice globally since auditor PriceWaterhouseCoopers already gave it their seal of approval according to McQuilling Services.

McQuilling Services: Recently, asset valuation methodologies have been thrust into the centre of a debate surrounding the accuracy of the long relied upon comparable transaction system.

HSH Nordbank and Deutsche Schiffsbank, two of the largest providers of shipping loans are backing the mainstream launch of the Hamburg Shipbrokers’ Association’s ‘Hamburg Ship Evaluation Standard’ (also known as the ‘Long Term Asset Value’ method). The proposed system would value the ships that form the collateral for loans via a discounted future earnings system rather than using the ‘market value’ or ‘last transaction done’ method.

The German backed scheme lies at the heart of any mark- to-market debate as the German container industry as well as the broader shipping markets are under considerable strain as asset values remain severely depressed and underlying rates are currently fluctuating at or below operating costs.

The valuation plan is designed to provide an alternative to mark-to-market asset valuation as a significant proportion of shipping loans are in breach of loan to value covenants due to current low asset rates. The scheme is viewed by many as a creative tool designed by banks and ship owners to inflate the value of their assets and comply with bank credit covenants.

However, going forward specific asset/scenario appropriate valuation metrics may be increasingly used. Lending, accounting, maintenance, demolition, insurance and many other purposes arguably warrant specific valuation considerations. This has been the case in the broader capital equipment marketplace for many, many years.

When set within the context of traditional valuation techniques, the recent introduction of the Hamburg Ship Evaluation Standard fits the previously suggested trend towards purpose specific models. The adoption of the Hamburg Ship Evaluation Standard by the broader shipping community will be closely monitored by bankers, brokers and owners as it will be considered a sign of changes to come.

Ship prices can be extremely volatile, and surely the currently illiquid and distressed ship sale market exacerbates this phenomenon. Thus market values probably don’t represent what ships will actually end up being worth ex-post. Thus they are clearly problematic for banks brimming with bad loans.

Yet it’s peculiar how the banks weren’t complaining about this mark-to-market inaccuracy back when ship market values soared into the stratosphere.

(Via Mcquilling Services Marine Transport Advisors, No.29 Valuation Methodology, November 2009)

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