AskUs Maritime Services: Valuing Ships
On Tuesday, May 6, 2018, Walter Hank walked into Ronald Mite’s office to discuss a
request he had just gotten from a new client interested in buying a capesize bulk
carrier. Hank, a founding partner, and Mite, the director for projects and finance,
worked at AskUs Maritime Services, a New Jersey–based firm specializing in the sale
and purchase of ships and offshore vessels (“S&P brokers” in the industry parlance),
valuations, recycling and demolition of ships, shipping research, and consulting. In this
case, the potential client was interested in buying a ship, but wanted assistance with
identifying an appropriate ship, assessing its value, and making an offer. As the head of
the firm’s valuation practice, Mite was the key person responsible for advising clients
on sale and purchase transactions. Hank said the client would be calling back later
that day and hoped Mite might have a specific ship in mind, a reasonable price to
offer, and some suggestions regarding the negotiation strategy.
As Mite looked through his own proprietary files of ships for sale and reviewed the “ships for
sale” bulletins he had received from other S&P brokers, he found the Bet Performer, an 11-
year-old (built in 2007), 172,000 deadweight ton (DWT) capesize bulk carrier. This ship had a
Burmeister & Wain (B&W) 6S70MC engine, had nine holds and hatches, and was built by
Nihon Kōkan Kabushiki- Kaisha (NKK) in Japan in 2007. The ship, under a different name
(Mineral Poterne) had been sold two years earlier for $70 million, and the current owners had
expressed an interest in selling the ship through private communications. (Exhibit 1 shows a
picture of the ship.) While this ship appeared to meet the client’s desired physical
characteristics, the question was how much to pay for it.
The Global Maritime Industry
Although cargo transportation by sea had existed for thousands of years, the modern
maritime industry was based in several key cities around the world: New York (U.S.),
Hamburg (Germany), Oslo (Norway), Athens (Greece), London (England), Singapore, and
Shanghai (China). As of 2017, ships transported over 90% of world trade and generated
industry revenues of US$380 billion.
The world merchant fleet consisted of more than 20,000 ships (also known as “vessels,” but
not “boats”) with total capacity of 1.1 billion deadweight tons (DWT). a The industry was
divided into categories based on cargo type: tankers transported liquid products such as oil;
container ships transported containers filled with manufactured goods; and dry bulk ships
carried raw materials such as ore, grains, or coal. Each ship type
a Deadweight tonnage: the total weight in metric tons (1,000 kilograms or 2,204.6 pounds) of cargo, fuel, fresh
water, stores, and crew that a ship could carry when immersed to its load line.
defined a submarket operating on different dynamics. The market for container ships, for
example, was a long-term market with charters lasting up to 10 years, in part due to the
specialized design of container ships and their ports, and the complicated logistics of
capacity management (i.e., running ships full of small containers from different parties with
different cargoes and different destinations). In contrast, the market for bulk carriers was
more of a spot market with short-term charters reflecting the commodity nature of the cargo
and the ability to redeploy ships easily.
The dry bulk segment consisted of almost 7,000 ships in 2018. This category could be
further segmented by size. While the smallest ships had a capacity of less than 10,000 DWT,
the “handysize” and “handymax” categories contained ships ranging from 10,000 to 30,000
DWT and 30,000 to 50,000 DWT, respectively. “Panamax” ships, so named because they
were the largest ships that could pass through the Panama Canal, carried up to 80,000 DWT.
The largest bulk carriers were the “capesize” ships, which carried up to 200,000 DWT or
more. The name “capesize” referred to the fact these ships rounded the capes, Cape Horn off
Chile and the Cape of Good Hope off South Africa. A typical bulk carrier carried 170,000
DWT, was 900 feet long, had a crew of 20 to 25 people, took a year to build, and had a
useful life of 25 years. After 25 years, most ships were demolished and sold for scrap in a
process known as “ship breaking.” Similar size categories existed for other kinds of ships,
and the economics (charter rates and values) differed by ship type and size category.
The sale and purchase of ships typically occurred through brokers. Roberts, who was not
only a founding partner at AskUs Maritime Services, but also the president of the
Association of Ship Brokers and Agents (U.S.), described the role of an S&P broker:
S&P brokers are like real estate agents. We help put buyers and sellers together, help
draft the documents, and then get a commission for completing the sale. It’s a very
competitive business where your reputation—your ability to provide good market
intelligence, to protect confidentiality, and to close deals quickly—matters a lot. And
your ability to close deals depends on having deep knowledge of the industry (ships,
markets, and international trade) and the players, and good relationships with
customers and other S&P brokers. Our relationships with other S&P brokers are very
symbiotic. Although we compete for deals, we regularly collaborate to get them done.
We are also actively involved in the valuation process, providing ship valuations for
clients including owners, lenders, and potential buyers.
Ship Valuation
Ship owners, appraisers, bankers, and brokers valued ships using three main
approaches. The first approach was the market approach where value equaled the
market price of a recently completed sale of a comparable ship between a willing and
knowledgeable buyer and a willing and knowledgeable seller in an arm’s-length
transaction. This approach was also known as the “last done” or “mark-to- market”
approach. Mite described this method:
In normalized and efficient markets, the price of a vessel is simply what a buyer,
cognizant of the relevant facts and under no compulsion to act, would pay to
acquire the asset from a knowledgeable seller equally under no compulsion to
act. [Both] the commercial and the
academic values usually converge to the purchase price that a rational, well-
informed investor (buyer) would pay for the acquisition of the vessel.4
Under the second approach, known as the income approach, value equaled the net
present value of future cash flows. Because this method required a forecast of future
cash flows (i.e., a financial model), people referred to it as the “mark-to-model”
approach. A major determinant of a ship’s cash flows was the daily charter rate
(short-term charter or “rental” rates were set in the spot market, while longer-term
or time charter rates were set in a separate market). (Exhibit 2 shows the daily
spotmarket and one-year time charter rates for capesize ships over the past five
years. Exhibit 3 shows the Baltic Dry Index for both bulk carriers generally (the dry
index) and for capesize ships specifically—the indexes provided a composite measure of
charter rates across ship types and markets. Both charts show rising charter rates due
to a combination of factors, including a booming global economy, increasingly global
supply chains, increased demand for exports from and imports to China, record-high
commodity prices, and a shortage of ships.) A third, but much less common, valuation
methodology was the cost approach where value equaled the cost of replacing a given
ship and its functionality, in essence, the cost to buy and retrofit a ship. Appraisers and
brokers used this approach to value ships with unique functionality or customized
features.
Despite the existence of multiple valuation methods, the market approach was by far the
most commonly used approach. To use this approach, one had to identify a set of
“comparable” ships, where comparability was based on four main factors: ship type (e.g.,
capesize vs. Panamax), age, size (measured in DWT), and condition. The type of ship
mattered because it served as a proxy for the depth of the market (e.g., how many potential
buyers there were) and the charter rates a ship could earn. Other factors such as type of
main engine, confirmed time charter contracts with creditworthy counterparties, loading
equipment (derricks and cranes), shipyard (original builder), and location (where the ship
was at the time of sale) also affected the price.
The next step was to identify the purchase prices for the most recently completed
transactions of comparable ships. In an active market where ships sold frequently, there
were many benchmark transactions, ideally at least five. In slower markets, pricing became
more complicated because there were fewer representative transactions. In these
situations, the appraiser had to relax either the comparability criteria (e.g., the type of
ship) or the time horizon over which prior sales had occurred, or both. Because almost
every transaction provided some information about the market or the relative pricing of
specific ship attributes, it was beneficial to include multiple ships in the analysis.
Conclusion
As Mite sat at his computer, he pulled up a list of capesize ship sales since January 2017
from the firm’s proprietary database and began to estimate a reasonable price for the Bet
Performer, knowing that Roberts wanted to have a conference call later that afternoon to
discuss his preliminary findings with the prospective client and to gather additional
information. As Mite reviewed the list, he was once again reminded of just how volatile the
market had been since 2007. For example, a Greek ship owner had purchased the Cape
Kassos in March 2017 for $100 million without even making a physical inspection (buyers
typically conducted a pre-purchase technical inspection before making an offer). The owner
changed the name to Nightflight and “flipped” (sold) the ship in April 2018 for $158 million,
a profit of $58 million in just 13 months!
In determining a reasonable price for the client, Mite knew the stakes were high. This was a
time when sellers rarely made counteroffers. An offer that was even just a shade below the
asking or market price jeopardized the chance of buying the ship. Moreover, below-market
offers often shut down negotiations, as sellers interpreted low bids as indications the buyer
was not serious. There were just too many serious buyers in the current market to spend
time negotiating insincere offers. And in an era of easy credit, with low rates, non-amortizing
loan structures, and loan-to-value ratios reaching 90% (compared to the historical average
of 60% to 70%), Mite knew that this client would have little trouble financing the
purchase if its bid were accepted.
Exhibit 1 Picture of the Bet Performer Leaving Port
Exhibit 2 Average Daily Charter Rates for 170K DWT Capesize Ships (January 2014–May
2018)
$300,000
$250,000
Charter Rates (USD per Day)
Average Daily Charter Rates
Dates Spot 1-Yr Time
$200,000 2014-16 $ 69K $51K
2016-18 $114K $83K
$150,000
$100,000
$50,000
$0
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18
Spot Market 1-Year Time Charter
Exhibit 3 Baltic Dry Indexes for Bulk Carriers (Dry Index) and Capesize Ships (1999–
2018)
20,000
18,000
Index Averages
16,000 Period Baltic Dry Capesize
2000-09 1,364 n/a
14,000 2010-15 2,409 3,209
2016-18 5,808 8,297
12,000
10,000
8,000
6,000
4,000
2,000 Jan-01Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12 Jan-13Jan-14
Dec-99 Jan-15Jan-16
Jan-17Jan-18
Capesize Index Baltic Dry Index
