So much has already been written about the pros and cons regarding the Hamburg Model that one starts to wonder, what is the real intention of the German Government’s mixed signals? Is it to give some relaxation to the owners/banks or as reported at the end of July: “The country’s financial regulator BaFin said lenders had not done enough to tackle their legacy of bad loans following the financial crisis and maritime slump.”
It is pretty clear that there will be a continued drop in values of tonnage in the 5 to 10 year category which has not been experienced previously, as more vessels with better fuel efficiency join the fleet.
Without the necessary culling of ‘older’ and less economically viable assets, the sheer number of vessels that continue to enter the fleet in just about all sectors will result in the freight markets continuing to hit speed bumps along the way. What was considered to be a safe bet – i.e. backing five year old assets with a life of another 10 years at least – needs serious evaluation! Some assets that are clearly not viable and are under water, so far as their values go, are either being re-bundled between KG structures and banks or within the banks’ portfolios, or given a temporary reprieve by Private Equity/Hedge funds. Whichever way it is done, the bottom line is that there are more vessels afloat than are required, and the oft repeated refrain that the industry needs massive scrapping continues to echo all around.
The Hamburg Model relies on a TC rate and not on other factors that affect asset values, such as technical obsolescence or new regulations constantly being introduced for the ‘betterment’ of the industry’s green footprint. Furthermore, it gives a standard 15% haircut for 20-25 year old assets – not taking into account that the 15% haircut has proven to be inadequate since the model was first introduced and soundly lambasted more than four years ago.
Even the one-year TC rate that is quoted by a research house is not representative, as the majority of the fleet operates on the spot market. The one-year TCE rate quoted by the same research house is used as a benchmark by many banks and forecasters, but again is based on a very small sample. The main sources used for their database are estimations and market information collected from their broking desks on a weekly basis. Their disclaimer states: “Currently information for 49 tankers and 34 bulkcarrier spot voyages are taken into account. Best estimates of likely fixing levels are provided where no market fixture is made. It is important to note that these earnings are only intended as benchmark indicators of the direction of the market. As such they should not be taken to represent the precise earnings of specific vessels.” Furthermore, the TCE rate quoted does not factor in waiting days between voyages, or ballast legs or canal transit times and costs if any, which can be very misleading if extrapolated to assume a 350 day utilisation rate.
The same caution needs to be applied when using their TC rate, which states; “With respect to timecharter rates, data is collected in the same way as for spot market rates; namely, by requesting brokers to fill in a weekly pro-forma with the latest rate for each ship type or by estimating the likely rate acceptable to an owner in the absence of any fixtures.”
Those who use the rate to calculate their cash flows need to factor in that not every vessel will be able to achieve the same rate, as the average rate used is derived from a very small sample.
Let us assume that the TC rate is against an actual charter! Since the crash of Lehman Brothers in September of 2008, first class charterers, as well as shipping companies like KLC, Sanko have reneged on their long term charter commitments due to severe adverse market conditions. So the question is, just how secure is the cash-flow that the Hamburg Model uses to give additional value to a vessel, without also factoring in the condition of the asset, or what the costs are that are associated with the asset? The Hamburg Model can provide a valuation of any vessel at any price, but who realistically will accept such a valuation in the real world of buying and selling of ships! So, is this just a bookkeeping exercise and for whom and for what purpose?
For the model to work in reality and be accepted, it should be able to also factor in the concept of prices being affected by yard forward cover, exchange rates, ship construction costs, steel plate pricing, engine type, speed and consumption, existing fleet profile, the age of the vessel, the vessel’s ownership history, technical managers, commercial managers, opex levels, dry docking and special surveys – in addition to what was the actual scope and the quality of work carried out during such times!
In short, changing the rules of the Loan to Value concept to comply with the Hamburg Model is the equivalent of applauding ‘The Emperor’s New Clothes.’