The European Union is imposing stricter requirements on ship valuations, putting more pressure on brokers to be transparent and independent.
The European Banking Authority (EBA), an EU regulatory agency, introduced new guidelines at the end of June that involve significant changes to how loans are granted in a bid to address non-performing portfolios.
After this date, new and renegotiated loans will have to conform to fresh rules on a clear methodology for vessel assessments.
The European Central Bank will also now require independently verified valuation certificates for all movable assets.
VesselsValue reported that valuers will have to provide more information about the markets a particular vessel or company is trading in, its position in the global fleet and its ability to earn.
"This places an emphasis on the valuation provider to supply more than just a valuation figure on a certificate, as evidence must be given of both the process under which the valuation has been achieved and the factors taken into account to arrive at this value," the London-based group said.
Future shock-proof?
"These guidelines will not only force better regulatory compliance but will also ensure clients and institution’s lending portfolios are more robust to combat future shocks."
VesselsValue said it can provide certificates, based on its transparent automated algorithms.
The EBA's move has come as a response to the financial crash that began in 2007, at the request of EU member governments.
The guidelines come on top of the EU's 2013's Capital Requirements Directive and are designed to ensure banks are better able to weather another financial crisis.
VesselsValue has argued that valuations were traditionally carried out by a shipbroker using a combination of individual brokers' experience, market opinion and reference to recent sale-and-purchase activity.
The company said automation eliminates any subjectivity.
Evidence needed
VesselsValue said evidence must be given of both the process under which the valuation has been achieved and the factors taken into account to arrive at this value.
The EBA guidelines also state: "Lenders should incorporate environmental, social and governance factors in their credit risk appetite and risk-management policies and procedures."
Four keys area are identified for focus:
- A vessel's earning to cost ratio;
- The ratio of age to expected useful life;
- The size of the borrowers' fleet in relation to the global fleet;
- Valuations with or without debt "haircuts", reflecting selling costs and uncertainties regarding liquidity and marketability of the asset.
Consideration must be taken of supply and demand, present and future trade patterns, long-term charters and a shipowner’s ability to provide other securities.
Banks should ensure that the fee or salary of the valuer and the result of the valuation are not linked in a way that creates a conflict of interest.
Lenders are being asked to assess the performance of valuers by "back-testing" the value of vessels through advanced statistical models.
"Institutions should take reasonable steps [to establish] that valuers are not involved in the loan application, assessment, decision or administration, [and] are not guided or influenced by the borrower's creditworthiness," VesselsValue said.
"The latest EBA guidelines reflect the next evolution in the standard of asset valuation required to meet the ever more dynamic, interconnected and fast-changing nature of shipping assets."
