Hamburg Ship Evaluation Standard : a mark-to-model shipping evaluation

Saw this interesting article on Financial Times, titled:
Ship valuation method sparks inflation fears.

It was said that "German shipping banks are expected to follow the lead of HSH Nordbank, the world’s largest shipping bank, and Deutsche Schiffsbank, Germany’s second-largest, which have praised the Hamburg Ship Evaluation Standard and look set to start using it".

It was said that there is a report by PwC, the accountants, endorsing this new standard.
Let’s take a look at what the new evaluation standard is.

Hamburg Ship Evaluation Standard, is devised by Hamburg Shipbrokers’ Association (Vereinigung Hamburger Schiffsmakler und Schiffsagenten, VHSS).

From VHSS’s website, I found this insightful PDF file.

It claims that due to illiquidity in ship sale-and-purchase market, forced sales, charter rate at level of required operating expenses makes traditional method unusable as ship evaluation standard. Therefore, this new Hamburg Ship Evaluation Standard appears, as a tool for "value assessment (Long Term Asset Value, LTAV), beyond short term market fluctuations".

The LTAV is "determined on grounds of vessels long term earnings potential, using present value…. DCF method… incorporate volatility of shipping cycle… conservative, statistically proven… transparent…".

It defines when it is a dysfunctional/irregular market, when 2 of 5 scenarios apply (Refer to PDF for details). The formula to calculate LTAV is also given, basically it is using discounted cashflow, residual value analysis with inputs of charter incomes, operating costs, discount rate, residual value, 20-25 years.

Will other banks that loan to shipping companies, other shipping companies in the world going to change to this mark-to-model method to evaluate fair value of their shipping assets ?

Some more "philosophical" questions:

  • We see that a switch from mark-to-market to mark-to-model method has happened on "financial toxic assets" and now on shipping assets, will this trend spreads to other assets ? Where to draw a line ?
  • How should investment analysts or investors adjust their investment analysis ?
Related Posts with Thumbnails


The opinion post on this blog is personal and is not an inducement to buy or sell any investment products. The author of this blog will NOT be held responsible for any losses incurred due to the reliance on any content of this blog for investment decisions.