"YOU CAN'T MAKE MONEY WITH NEW SHIPS IN THE TRAMP TRADES" - OLD BROKER'S ADAGE

A recent maritime publication contained the calculation, so claimed, of the break-even time charter rate over 15 years for a recently purchased 4 year old VLCC.  The project as outlined is a classic bank financing - $124 million price, 15 years at 7%, 35% equity,$9 million residual (scrap value).  Note that the price is about equal to newbuilding quotes.  The calculated rate for the 15 years was $31,500 per day.  This is the rate that would return zero to the investors and seemed uninteresting to us.

We tried something different and perhaps more meaningful.  First, we "fixed" the first five years at the rate of $40,000 per day, a rate and term reported in several recent fixtures.   Then we asked the question: For the remaining ten years of the vessel's life, what time charter rate would be needed such that the cumulative cash flow from the ship-owning project would be equal to the cumulative cash flow from simply investing the 35% equity at a modest 6%.  The answer to this question is that the needed time charter rate (for ten years!) is $63,700 per day.

If, instead of a 35% equity we assume 100% equity, as in using the proceeds from a stock offering, then the needed rate is even higher, $83,600 per day.

I believe there are two conclusions to be drawn from this scenario.  First, don't underestimate the power of compound interest, and second, when the old broker says, once again, "you can't make money in the tramp trades with a new ship", listen to him.