NET ASSET VALUE NOT A RELIABLE SAFETY NET.

We have received a number of inquiries lately from the securities community about ship valuations - how are they done, what do they "mean", what is their "shelf life", etc.?  Why all this interest in what has historically been a peripheral part of the shipping business?  We think these questions are motivated by the following reasoning:

1.) We (the securities community) are interested in the newly emerging group of public shipping companies.

2.) But we don't have a deep understanding of the marine business and we could get hurt if we choose poorly.

3.) However, these companies are all rich in physical assets - their fleets - and if the company we choose goes bankrupt, the underlying value of the ships will indemnify us.

Logical, but wrong, as follows:

1.) Shipping companies don't often go bust when freight rates are high.  Since ship values correlate strongly with freight rates, ships will have lost considerable value simply as a reaction to depressed freight rates - even before bankruptcy is declared.

2.) Bankruptcy will amplify the situation.  Every possible buyer will assume that that the ship owner has been deferring maintenance for some time and so the ships will be assumed to be in poor condition and therefore less valuable.

3.) If several ships are being offered for sale simultaneously, the market may have trouble absorbing those ships at the best prices.

4.) All in all, the ships will probably not sell for what the owner (or banker) wants but probably at a steep discount.

So the financial security that the physical assets of a shipping company seem to offer may be illusory.