Can Residual Values Be Assured?

by David Howard, L.P.H. Pitman Limited

Since the insurance market’s appetite for underwriting marine residual value has been mixed, I will briefly outline the current position of residual value insurance. I have come to the conclusion that only by pooling insurers, financiers and shipowners positions can we originate a market product.

Bankers prefer to be involved in projects which have the “Morpheus quality” i.e. the risks are so reduced they can sleep at night! They are concerned about risk and price volatility, and there has been considerable price movement in the shipping market. Bankers have traditionally sought three ways out for a loan. These are: i) cash flow from project; ii) cash flow from borrowing company; iii) asset value of project and/or borrowing company.

If all three can be in place and have a value assigned to them by a third party, then the bankers will normally be much more flexible in allocating funds to projects. As we know, the problem with ship financing is that there is no objective third party that can provide information, data or even statistics to cover all of these exit routes. If we could give residual value to ships, then the balance sheets of shipping firms would be enhanced and their ability to finance similarly increased.

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