Market seeks solutions for meaningful asset valuation

For shipping, the financial crisis that exploded in the third quarter of 2008 (3Q08) had the impact of choking off the supply of bank credit that would normally support purchases of second-hand vessels or resales of new ships about to be delivered from shipyards. Up until the market disruption, a steady flow of transactions provided the grist for asset appraisers – usually shipbrokers specialising in "vessel sale and purchase" – to steadily chronicle the ebb and flow of vessel prices. These values, in turn, would serve as the basis for periodic asset valuations used in measuring requisite coverage ratios for shipping loans, with the loan-to-value (LTV) ratio being the best known.

Although new lending activity contracted in late 2008, bankers were still faced with the task of monitoring borrower compliance with covenants in existing credit facilities. A number of brokers who had provided guidance on values of standard vessel types through market reports and client circulars ceased doing so around this time, although some were still providing values to their bank clients on a bespoke basis. On www.shipvalue.net, the online service of major broker Clarkson Valuations Ltd, a disclaimer reads: "Because of current market conditions we are having difficulty in monitoring values. The values in the system were last updated on 3 October 2008 and have not been updated since. Until we have been able to update our values as a guide to present values, please do not use the system."

The dislocations in vessel asset markets – or lack thereof – have figured prominently in companies' negotiations with banks. At the end of April, Global Ship Lease (GSL), a share-listed owner of containerships (with CMA CGM owning 45 per cent and investor George Soros holding 11 per cent) announced a two-month waiver with a lender group led by agent Fortis (Nederland) and with participation by five other banks, to submit valuations on its fleet of 16 containerships. GSL had been required to obtain valuations at the end of April to perform LTV tests on amounts outstanding under the company's USD800 million facility, which is in the process of being amended. As described by GSL in regulatory documents: "The charter-free market value of a vessel will be calculated semi-annually as the arithmetic average of valuations determined by two independent sale and purchase brokers acceptable to the agent."