Part 2 of a two-part series
by Geoff. Uttmark
Risk that is measurable is manageable because it can be priced. Risk is necessary and in fact essential, if investment returns above the risk-free 30-year U.S. T-bond rate are to be achieved. Confronting uncertainty has rarely discouraged ship owners who throughout history have been definers of the relationship between risk and reward. This is why sailing directions to prized destinations like the Spice Islands were closely guarded secrets. The business of operating ships is still chancy even today. So compared to personal physical risk taking, little wonder that financial risk taking using other peoples’ money is occasionally treated somewhat nonchalantly. The tsunami of high-yield offerings by companies that never produced returns on debt even close to the coupon rate of their newly issued bonds is a case in point. Subsequent revelations like “Based on current levels of freight revenues and anticipated market conditions, the company expects that its liquidity requirements for the next 12 months will not be met by cash flow from earnings of the vessels” (Pacific & Atlantic 20-F) become inevitable when supporting assumptions and projections on which the deal is based are highly problematic in the first place. There are many such deals.
This is only an excerpt of Measuring the Risk in a Shipping Investment
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