E236 E SUM23

Group 4: Andrea Zhang, Arush Sinhal, Punit Malik, Shalmoli Halder, Usama Qamar, Yuxin Chen

1. When valuing a ship using the market approach, several main factors come into play, such as

the ship's type, size (measured in deadweight tonnage or DWT), age, and condition. Minor

factors, including the type of main engine, loading equipment, and location, also contribute

to the ship's valuation. For instance, to determine the price of the Bet Performer, a 172K

DWT capesize bulk carrier built in 1997, we can examine the most recently completed

transactions of comparable ships. By referring to Exhibit 3, we can see that the Cape Sun,

another Capesize ship built in 1999 with 171.7K DWT, was sold for $135 million on March

8th. Based on this information, we can conclude that the $133 million purchase price of the

Bet Performer is reasonable.

2. When using the comparable transaction method, the Golden Wing appears to be a suitable

comparison for the Bet Performer. These two ships are similar in size, type, age, and main

engine type, indicating that they should be worth around the same value. Specifically, the Bet

Performer was purchased for $133 million, so the Golden Wing's estimated value would also

be around this price range.

However, when using the Discounted Cash Flow (DCF) model (as shown in Exhibit 8), the

estimated long-term asset value of the Golden Wing is around $52.2 million. This figure

differs significantly from the comparable transaction method. As such, we can conclude that

the Golden Wing's value should be between $52.2 million and $133 million. Nevertheless,

even if we take the lower estimate of $52.2 million, the Golden Wing's value is still

significantly more than its purchase price of $27 million.

3. In normal market conditions, where ships are frequently sold, there are a large number of

market participants who are rational and have access to all available information. This leads

to market prices that closely reflect the fundamental values of ships. However, in slower

markets, prices are more likely to deviate from these values. Abnormal market conditions can

be indicated by low sales volume, transactions where either party urgently needs to conclude

a deal, divergences between current transaction prices and the long-term asset value (LTAV),

a low number of market participants, or the absence of essential market conditions. These

factors can contribute to a divergence between market prices and the fundamental values of

ships.

4. As a ship owner or a ship lender, I would absolutely adopt the Hamburg Ship Evaluation

Standard. Obviously, the financial crisis significantly deteriorates the market condition, thus

making the traditional market approach inaccurate. The transaction value is no longer

representing the value of underlying asset nor its ability to generate future cash flows. In

addition, the illiquid market plus the forcing nature of the transactions produced too few of

the transaction data that could be used as a reasonable reference to predict the asset value

even under such special circumstance.

However, the counter argument against adoption is centered around the difference between

value and price. Ultimately, the value does not mean much unless someone is willing to

transact. In addition, the assumptions used under the proposed approach are very subject.

Especially, it is questionable on to what extent post-crisis market condition could be back to

the previous level, when using past ten years average charter rate including the best period

from 2004-2008.
 The alternatives could be using a combined approach of both and producing a reasonable

range for price reference. Another way is to using intelligence from market approach to make

or adjust the assumptions used in the income approach.

5. Yes, I would approve the use of the HSES. As a bank regulator, it is very important to use a

consistent methodology to evaluate the asset across different times. As mentioned in the case,

a typical ship usually lasts for 2 to 3 economic cycles. Under the current dominated market

approach, the vast volatility on prices during extreme market conditions made them less

useful in normal periods and created additional difficulties for regulatory monitoring such as

covenant. Therefore, using the income approach, which is less dependent on the market

condition rather than the underlying value of the asset, is considered more favorable to

implement a consistent measurement across different times and metrics.

6. To demonstrate the advantage of the income approach but more importantly to ensure a

cohesive view with the market approach, it is critical for VHSS to look at the bigger picture

and promote a liquid and healthy market for ship transactions. More specifically, VHSS

could set up a industry standard or guidance on the charter price to set a floor price in order

to support the value of the ships. By doing such, it could also help stop vicious circle of the

industry and alleviate the damage caused from the financial crisis,

Another way to provide liquidity to the market is to increase access to capital market. A

sufficient supply of credit is fundamental to transactions in any markets. Besides large banks

and major financial institutions, VHSS could also set up a separate emergency fund to

support market in extreme situations like this.