Problem Valuations

In the current market it is inevitable that some principals will simply be disappointed by the broker’s view of what their ship is likely to obtain.

The fall in values may create issues due to the terms on which the vessels have been financed. The commercial pressures on brokers are evident. ITIC received a number of copies of a message requesting brokers to show values to the ship owner prior to submission to the bank. The message was accompanied by the suggestion that if they did not do so and the owner did not like the values then litigation would follow.

Some broking houses have long term contracts to provide valuations to financial institutions. Stopping providing this service is not a realistic option. In addition, a bank commissioning a valuation may feel that the independence of the valuer (and the worth of the valuation) would be compromised if the value had been discussed with the owner prior to submission to the bank. The broker will feel that, if the owner is a client, all the fees they receive for valuations will not amount to the commission on one sale. They cannot, therefore, afford to alienate their client. The broker’s financial interest is not an answer to a duty of confidentiality. The problem is removed, however, if the broker has made it clear to the bank that they may contact the owner.

The majority of ship valuations are given on the basis that the sale is assessed as between a willing buyer and willing seller. With such low volumes, could there really be said to be willing buyers and willing sellers? At the beginning of the year ITIC was assisting its members in redrafting their certificates to reflect the drop in sales. The wordings stressed that in view of economic conditions and the lack of recent sales the assessment of values was unusually uncertain. These wordings will need to be removed when markets return to higher levels of activity.

There have been a number of attempts to find alternative ways of looking at ships’ values. There is nothing new in this. In the aftermath of the collapse of Adriatic Tankers in the mid 1990’s, one of the large accountancy firms offered to provide a service assessing values. In recent times, the Hamburg Shipbroker’s Association has widely published details of its "Hamburg ship evaluation standard." It makes it clear that it does not regard its approach as replacing conventional established evaluation methods but is complimentary to them.

ITIC has recently assisted a number of its members who have been asked to provide alternatives to the traditional valuation. One principal requested a report on the mean average annual value of a type of ship. The vessel in question was newly completed. The report set out the vessel’s specifications and stressed that what was being provided was the mean average annual value of a newly built ship of similar description over the previous ten years. The certificate made it clear that it was not an assessment of the current valuation of the ship. Another series of requests has been that the broker provides the replacement cost of the vessel.

The desktop valuation has always sought to fulfil the function of providing an answer to the question "what will the vessel sell for?" Time will tell how much long term demand there will be for these alternative assessments. Brokers could find they are offering an expanded range of assessments in response to client requirements. The valuer must, however, make sure that the nature of the valuation or assessment is clear from the certificate. That is likely to require more than simply amending a few words on existing forms. ITIC is of course happy to discuss suitable wordings.