Wasting Assets: Deteriorating VesselCondition in Shipping Finance

One of the major factors in the success or failure of a shipowning enterprise is the physical condition of the vessel. But with the utilization of contract management in modern shipping, shipowners increasingly find themselves removed from their vessels. Even further removed are mortgagees, bondholders, or shareholders who have an interest in the vessel, but no ability actively to monitor—much less control—the ship’s day- to-day operations. Often, their grasp of the vessel’s condition, her trading market, and her asset value recede to the background as financial, corporate, and legal considerations take the foreground.

Consequences of Ignorance

The lack of current and accurate information on a ship’s condition and status often results in disastrous consequences for interest- holders. In one illustrative situation, the owner apparently plotted for about six months to abandon his ship, during which period the ship’s debts went unpaid. After the owner received US$500,000 in freight, he had the crew fake an engine room fire during the vessel’s departure from her load port. He then replaced the crew—who were necessary conspirators—with another crew of innocent Russians who knew nothing of the situation. The owner then disappeared with the freight money and the vessel’s profits from the previous six months. He left behind a ship at the end of her certificates, devoid of spares, in wretched condition, and with a trail of debts. The mortgagee was left holding a mortgage secured by a vessel without value. In fact, the vessel’s subsequent auction failed to generate enough money even to cover the court and custodial costs.

The sad truth is that such incidents are not uncommon. An interest-holder usually expresses disbelief after a loss due to vessel condition or mismanagement. He is often astounded to learn that a ship with full certificates and which has been recently trading can become worthless with such amazing speed. However, the warning signs were probably right before their eyes for months, had they known what to look for.

This is only an excerpt of Wasting Assets: Deteriorating VesselCondition in Shipping Finance

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