'Mark to Model' Redux

One would have thought that, given the debacle in last fall's markets, it would be QUITE some time before that method of valuing assets would be used by banks, or other lenders. It seems that one would be mistaken, however, according to an article in Monday's (Oct. 26) FT.

Two of the largest banks involved in ship financing, HSH Nordbank, the world's largest shipping bank, and Deutsche Schiffsbank, Germany's second largest, are set to use the Hamburg Shipbrokers' Association's "Hamburg Ship Evaluation Standard" in computing the value of the ships that form the collateral for loans, rather than using "market value".

Given the glut of shipping tonnage, both in bulk dry carriers, as well as tankers, it's no surprise that the value of these vessels has plummeted, meaning that the banks that provided the financing are facing a very real possibility of having to take very sharp write-downs on the loans they made against the purchase of these vessels. Is this sounding a trifle familiar?

The method that the Hamburg Shipbrokers' Association came up with values ships by their potential future earnings, rather than by what the "market" says is the going value for a comparable vessel. As in the real estate meltdown, the argument is made that "distressed" prices do not provide a "realistic" measure of value.

At this point, it's not entirely clear whether the proposed valuation methodology would be used for all accounting purposes, including financial reporting, or only to decide if a shipowner is in compliance with loan covenants, regarding LTV. Both banks mentioned above in a press conference last month, suggested the valuation method would have "wide-ranging applications".

The one bright note is that there seems to be some sharp dissension from other bankers and ship brokers, so perhaps fiscal reason will prevail.

Source: Financial Times

Full Disclosure: Long DHT