Vessel Valuation & Asset Risk
How Banks Value Ships
Summary
Banks value ships to underwrite loans, to test covenants and to estimate recovery in downside scenarios. The valuation is a contractual construct as much as a market observation: it is set by defined methodology, agreed sources and specified frequency, and its role changes across the life of a loan.
Why this matters in ship finance
The value used in a covenant test is rarely a single objective figure. Different methodologies, sources and dates can produce materially different numbers, and each has implications for the borrower’s position.
The concept
Bank valuations of vessels rely on one or more of three approaches: broker appraisals, based on recent comparable sales; desktop valuations, using standardised inputs and reference data; and income-based approaches, discounting expected earnings over the useful life. Facility agreements usually specify which sources are acceptable, how they are averaged and how disputes are resolved.
How it is used in practice
At drawdown, valuation supports the loan-to-value calculation. During the loan, periodic valuations test the loan-to-value covenant. In distress or workout, valuation supports decisions on cure, restructuring and enforcement. In each case the same underlying vessel may attract materially different values depending on assumptions.
Practical issues
Charter-attached vessels may be valued with or without the charter, producing very different figures. Specialised vessels have thinner comparable-sales data and wider uncertainty. Timing matters — a valuation dated in a strong market can lag a subsequent downturn.
How ShipFinance.ai uses this concept
The platform can store multiple valuations with source, date and methodology, present them alongside the contractual definition and show sensitivity to the choice of approach.
Key takeaways
Vessel valuation is methodological, not mechanical. The reader of a valuation should always ask which approach was used, when, on which assumptions and by whom.