So you want to buy your own ship?

by William V. Packard

Shipping Books

INTRODUCTION The series of short articles which follow were written by William Packard in 1980 and published in weekly instalments in the Fairplay International Shipping Magazine over a six week period. The articles were subsequently amalgamated into a pamphlet which has long been out of print. Nonetheless, and although the shipping market has moved on in the twenty five years since the articles first appeared, and we have witnessed the effects of soaring freight rates and a major depression in the intervening period, along with the emergence of techniques such as shipping pools and KG schemes, much of the underlying advice contained within the articles remains as relevant today as when it was first typed. A chance enquiry obliged us to track down the articles and we have pleasure in re-printing and making them available to a wider audience with our compliments. We hope that a future entrepreneur or two will be encouraged to dip their toes into this fascinating occupation. September 2005

So you want to be a shipowner William Packard begins a new series designed to feed the ambition

PART I - DREAMS AND REALITIES If the truth be told, it is the dream of many involved in the marine industry to one day own a ship - not only the aspiration of shipping people, but of not a few outsiders as well. Ships have always had this effect on people - particularly upon those not closely associated with the vessels concerned! But dreams, of course, are a highly individual affair. For some, the thought of a small coaster to while away the expected boredom of retirement is a comforting thought amidst the daily hustle of a sometimes over-active business life. For others, merely an eventual investment stake in a famous shipping line is all that is sought - a ring-side ticket to board-room battles where the size of one's share-holding encourages harassed directors to look occasionally in your direction. For yet others only the imaginary emulation of legendary modern-day fleet-builders such as Stravros Niarchos, C.Y. Tung, Daniel Ludwig or others will serve to keep the somnolent adrenalin flowing. It is, perhaps, the very success of these latter figures that they are apparently able to control the outward romanticism of their ships - failure to do so being, arguably, the start of the slippery slope into bankruptcy. To them - with a very few exceptions in which they can well afford to indulge - ships are nondescript elements of business, floating factories to be bought and sold as necessity dictates. There is little room for sentiment in the large companies, still less for dreams - the stock-in-trade of lesser mortals. After all, though, dreams are at least for free, and can be spontaneously afforded without the necessity of arranging long-term, complicated finance. No problems arise which cannot be easily overcome. Never does a ship's expenditure exceed its income, or bankers press for overdue loan instalment repayments in dreamland. No crew members strike over alleged grievances, or airlines lose vital spare parts in a South American port. And if, nevertheless, the dream turns into a nightmare and these problems raise themselves? Well, one can always wake up, return to square one as it were, and dream all over again!

Unfortunately, it is where one attempts to convert dreams into realities that all too many difficulties materialise. Thus, for the majority of us, ship-owning remains an unfulfilled aspiration, a tempting but unattainable goal. We may be active and, perhaps, quite expert in merchant-ship operations and management when employed by others, but find it impossible to work at the same tasks on our own behalf.

Then excuses aplenty are found to enable us to salve our conscience and return in peace to our dreams. Perhaps the first essential of a shipowner's protective armoury is recognised by many but accepted by few. A ship-owner should be single-minded. Many aspirants are not prepared to make sacrifices in order to be single minded. As a nation, perhaps the Greeks are the most successful individual shipowners and illustrative in this respect. The newly-recruited cabin-

The stuff that dreams are made of.

boy of a Greek freighter wants to end up owning it. He is prepared to work hard to earn extra money and, having earned it, to save it. He strives to gain promotion - to ordinary-seaman, then able-seaman, bosun and mate, even to captain. He will delay his marriage plans for five, ten, fifteen, even twenty years. All his energies will be devoted to making his dream come true. He is fortunate, though, in that during his sea-going career he regularly meets those who have preceded him and succeeded - the best encouragement of all. In Greece it is not unusual, moreover, for a man to marry when in his thirties or forties. But for those of us who are married and with family responsibilities - are we a hopeless case? Do we continue to give our families their due attention only to dream on about our first ship? Of course not. There are ways of becoming a ship-owner that do not require enormous finance or limitless time. Over the next few weeks, I will be examining some of these paths to achieving our dreams.

Coming soon

SALE & PURCHASE - 3rd Edition by William V Packard ISBN 0-9548218-2-3

Hardback - approx. 300 pages with black and white

photographs/illustrations.

Completely revised and enlarged, hardback publicationdue January 2006. Contains coverage on ship finance,Basel II, money laundering, checklists for S&P closings,clause by clause analysis of Norwegian Saleform,Nipponsale and Demolishcon, environmental demolitionissues, IMO Guidelines on Ship Recycling, greenpassports and a complete chapter on Ship Value Futures.

Price £75.00

So you want to own your own ship? William Packard continues his hints to the ambitious

PART II - FIND YOUR SHIP There are, of course, many vessel types available for purchase, and the aspiring ship-owner may be excused a certain amount of confusion in deciding on the sort of ship on which to concentrate his energies. Naturally, if you are involved in some allied industry - say solvents - you may be inclined towards chemical tankers. If, however, you have no particular connections with ships and no preferences, it would be best to obtain expert advice on investment potential.

“Many aspiring shipowners think small”

In some states of the freight market - the barometer which governs vessel income - there are both under-valued and over-priced ships. The knack is to identify those vessels which can be expected to prove a good investment. Obviously, this is not nearly so easy in practice as it is to describe, otherwise many of us would be millionaires! And you cannot be guided by what others are doing. Time and again in shipping, the good prospects of a certain vessel type are swamped by too many ship-owners copying one another. The best bargains remain those yet to be discovered by others, and there is no reason why a newcomer should be any less successful than a so-called experienced owner in identifying financially attractive investments. So what stakes are we talking about? Just what kind of profits can be made by shrewd or fortunate shipping investment? Well, as an example-admittedly not an everyday one - in this magazine in 1978, it was reported that a particular ship-owning group had moved in at what - in hindsight - proved to be a bottom of the freight market and purchased three, fairly modern 120,000 ton bulkcarriers for about US$5.5m each. Since then, as freight levels substantially improved, the same group has received purchase offers of up to US$25m for each unit. I leave you to calculate for yourself the percentage profits obtainable in a relatively short period.

Fears on funds I can hear you protest already. Where is a small newcomer to find US$5.5m? A very good point, but the shipping group concerned almost certainly borrowed a good slice of the necessary finance. For a good deal, finance is almost always available somewhere. It has to be found and the search may prove time-consuming, problematical and irksome but somebody, somewhere will be interested. The major problem is psychological. Many aspiring shipowners think small. This is no bad thing in many walks of life but in ship-owning it tends to mean small ships. In fact many aspiring shipowners take fright both at the thought and at the expense of large ships and concentrate instead on small, relatively inexpensive coastal vessels on the basis of "Small Ship equates to Small Investment which equates to Small Risk". Unfortunately, judging by recent years' results, one can add "equates to Small Income", which may, in turn, lead to "Large Risk".

Not only that, but the work engendered by a coastal vessel in comparison to that of a deep-sea ship has to be experienced to be understood. Take employment on the spot-freight market, for example. A deep sea ship may require, say, about six or seven "fixtures" a year to maintain full employment, whereas a coastal ship will need the same number each month. It may well be that a larger, more expensive shipping investment is the safest in the long term, since the profit level potential may be considerable and, furthermore, the workload involved in running the ship may be found to be somewhat easier than for a relatively-low investment coastal ship.

The bargain buy So, your next question is doubtless "What bargains exist today?" Well VLCCs (225,000 d.w.t. plus oil-tankers) are currently valued at little more than SD14s (15,000 d.w.t. general cargo-ships) - at around US $5-6m, a mere token of VLCC building costs and potential value should the tanker freight market ever lift from its present long-running, rock-bottom state. VLCCs are, in fact, ridiculously cheap, with their owners glad to sell in order to reduce finance liability and running expenses, even in lay-up. All round the world, in fact, VLCCs are either laid-up or awaiting too-few cargoes, with only a fortunate few ships gainfully employed. If ever a ship-type was ready to make somebody's fortune, this is it - but only if tanker market freight levels improve to justify an escalation in VLCC values. If this will ever happen, when do you buy? Interesting dilemma isn't it? Most shipowners, however, settle for more mundane increases in value in their ship where the profit lays in freight and hire income exceeding the running costs and loan repayments rather than in highly speculative sale and purchase deals. Thus must an aspiring shipowner study the shipping scene before reaching a carefully reasoned decision as to the most promising investment. This decision can, however, be aided by competent advice from an efficient sale and purchase broker.

A newcomer will, though, have to convince a broker of the seriousness of his enquiry so as to obtain equally serious assistance. S. & P. Brokers are busy people and uninclined to put effort in to what they sum up to be a lost cause where, at the end of much hard work, their client is unlikely to buy. But with help from an efficient broker who knows his way round his market and by proper interpretation of world events, to which shipping freights are always susceptible, you will be well on the way to finding the right ship.

CARGOES 2nd Edition

by William V Packard ISBN 0-9548218-0-7

Hardback 280 pages

with black and white photographs/illustrations.

Completely revised and considerably expanded. Providescarriage and contract advice for over 500 commoditiescarried at sea. Extensively indexed and including easyreference to stowage factors, specific gravities, angles ofrepose, as well as references to geographical origins anddestinations, production and end-use factors. Price £65.00 Available now from:-

So you want to own your own ship William Packard turns his attention to ship managers

PART III - YOU'VE FOUND YOUR SHIP - NOW RUN IT! A new owner must ask himself if he is capable of running his own ship, or if he must needs call in the assistance of experienced ship-managers. Much detail must be considered, such as the optimum flag under which the ship will sail, the nationality of her crew (and thus a large part of her running expenses), all related to the trade she is likely to be employed upon.

To operate a ship by oneself is a highly technical and time-consuming activity, if it is to be done properly. Quite apart from physical daily work involved in running a vessel, a small operator must have a good working knowledge of ship-broking and marine insurance, as well as

Crew motivation can be a problem

the technical ability to at least begin to understand the basics of ship construction and mechanics. He must know about storing, provisioning and bunkering and buy and supply these commodities shrewdly. Proper accounts will have to be kept if for no other reason than a mortgagee will probably insist that this is done, and close control of finance, incomes, expenditures and loan repayments - in other words cash-flow - will have to be kept. Then, of course, is the problem of crew employment and motivation. It is one thing finding crew and employing them, it is quite another dealing with the host of minor (and major) problems that develop in relation to individual crewmembers. And the crew will have to be shown that this is not just another job. They will have to be motivated, encouraged and given incentives to make the sea-going side of things a success. In short, you will need to exercise the rare talent of man-management. A good ship-operator can lop hundreds of dollars off a vessel's running costs - a poor one increases the costs accordingly. If you have no actual ship-operating experience - whether or not you have been employed at sea or in some allied but narrow and restricted shore position - it may be best - at least initially - to recognise your possible short-comings and to rely on ship-managers. But to select the right ship-manager for your vessel is not easy. Some managers deal only in specialised tonnage - others in a whole range of ship-types. Some will handle chartering and ship employment services in addition to operating, others only concentrate on `running' ships for 'sleeping' owners, leaving employment matters to specialised ship-brokers. An owner must carefully examine the alternatives and the costs associated with those alternatives before reaching a prudent decision. Nearly all ship-managers will do their best to convince you that they are the pick of the bunch. You will need to ignore the sales talk, and remain cool and objective. Large management concerns will have more staff and arguably more expertise to fall back on in time of emergency, but then your ship will to them be only one of many. A small company may make up for loss of personnel cover by giving the task in hand a

little more personal attention. There are many management companies to choose from. The choice is yours. But how does one arrive at a list of ship-managers from which to select a suitable candidate? Well, as in most communities, much can be discovered by word of mouth in the shipping world. Meanwhile, advertisements extolling the virtues of particular ship-management companies often appear in the shipping press, which also produces occasional feature articles on the subject. Additionally, directories listing various names are produced fairly frequently, giving a wide selection choice. It may not be easy to find the right management company. It will need time, effort and a generous dosage of luck - just the qualities you required in the first place to find your ship!

TRADING by William V Packard

Paperback 141 pages

with black and white pictures. This volume covers the trading of raw materials, the worldof liner conferences and tramp shipping. Also discussedin detail are the negotiation and format of charter partiesand bills of lading. Price £20.00

Shipowning So you want to own your own ship?

William Packard examines the problem of shipping shares PART IV - THAT'S MY SHIP OVER THERE

- AT LEAST I OWN THE FUNNEL!

Most of us admit to little hope of raising sufficient finance to ever own a ship. Greeks are the exception, where lorry drivers to back-street greengrocers remain convinced to their dying day that they will emulate Onassis in the natural course of events. But for the rest of us, if we are to at least partly realise our ambition of ship-owning, it must be by means of a joint-venture - in other words, a stake in a common enterprise.

The obvious common enterprise which comes to mind is to be found in the stock-market, shipping shares being quoted in various financial centres. However, your stockbroker will almost certainly warn you of the volatility of the shipping market, point to the extremes of the high

“I own the forward bulkhead of No.1 hold – and I’m saving up for a share in the engine room bilges.”

and low tidemarks of shipping share values of recent years, and gently suggest that only a few shipping shares acquired in conjunction with a wide-range of other investment possibilities would prove safer. This is not what you want at all. You want a sizeable stake in ships but, even if you invest your entire available capital into shipping shares, unless it is a considerable sum of money, you are unlikely to find you have much say in the running of the companies - and thus the ships involved. You will thus have to face it. The way to becoming a shipping magnate from humble beginnings is by the sweat of your own brow and unlikely to be via the stock-market. So to where do you turn your attention? Well, if you are fortunate enough to be employed in a ship-owning organisation, not only are you in at the ground-floor and thus given a golden opportunity to learn the lessons of ownership from the inside, but also you might benefit from largesse from above. Some owners - admittedly very few - provide their senior staff with a small stake in one or more ships by way of a bonus for past employment, and also as an inducement to continuing long and conscientious service. More likely, though, you must gather together with a few like-minded individuals who can be trusted in such an enterprise, and pool your finances, resources and talents. It is not simply a coincidence or mere tradition, that the ownership of British-flag vessels is even now divided into many small parts - sixty-four in fact. It was once quite common to divide joint-ownership of merchant vessels in just such a way as insurance profit and risks are shared today. Thus could trading ventures be launched and profit or loss spread among even very small stake-holders. Such ventures are not so common in these times of `big business' but, given proper thought and, of course, good fortune, there is no reason why they should not succeed even in today's multi-national orientated climate. Naturally, such a scheme would necessitate fair and concise decisions being taken at the inception, as to management of the ship(s), as well as the responsibilities of the persons involved. Participants may be

described as `active' (in that they not only invest in the venture but actively help to run it), or `sleeping' (where they look upon the idea purely as an investment and opt to employ ship-managers to operate the vessel(s) concerned). Alternatively, of course, there can be a situation combining both 'sleeping' and 'active' partners providing joint ownership. Decision-makers would need to be properly identified along with the extent of their individual and collective authority. Meetings of all the partners should be kept to a reasonable minimum, commensurate with each individual feeling satisfied that his best interests are considered, and 'board' gatherings should normally discuss only matters of major importance - not of trivial incidence. Given good-will on all sides and the firm intention to succeed, there is no reason why fortune should not favour the intrepid in shipping investments just as in other spheres of life and there is, perhaps, room for more shipping co-operatives in the years ahead than have hitherto been apparent.

VOYAGE ESTIMATING 2nd Edition

by William V Packard Paperback

80 pages with illustrations. How to accurately estimate voyage and time charterreturns for merchant ships – the principles and problemsexplained with graphic examples. Price £20.00

Shipowning So you want to own your own ship

William Packard offers an opportunity to the poor PART V - BAREBOATING

One tried and tested method of ship-investment which deserves special mention in this series is termed 'bareboating', a strange name but one which is simply explained. A typical bareboating situation would arise where an investor (let us call him an owner), with, perhaps, no previous shipping experience and/or no wish to operate his own ship, purchases a vessel and, in turn, bareboat charters it on to an operator (let us call him a charterer even though he acts as a disponent owner in the true sense of the word) who is interested and able to operate a merchant-ship, but who has insufficient capital to purchase a vessel on his own account.

What is apparently lacking in the deep-sea market is for someone to bring investors and operators together

Our charterer hires the vessel for a fixed period of time - normally for several years - and operates it as though the ship were his own, eventually returning it to the owner in `like good order' as on the ship's delivery, `fair wear and tear', of course, excepted. Upon redelivery, the owner may hope to find that the vessel's value has escalated in the meantime and, if he so wishes, he can take advantage of the market to sell at a profit, having also received regular hire payments during the bareboat-charter period. At first glance the scheme appears attractive to both parties and, indeed, on the coastal/short-sea market is not uncommon. So why is it not to be found more often where deep-sea ships are involved? For an attempt at an answer to this question, let us return to the investor - for after all, the scheme is only possible with his funds being made available. At the commencement of the project he has various investment opportunities. (Indeed, if he was considering alternatives at the time of writing this article, he would find US$ interest rates soaring and investment in US$ currency correspondingly attractive). In order for the investor to show serious interest in purchasing such a risk object as a ship, he must be confident that:-

a) The proposed vessel is in good condition. b) Its value can be expected to escalate during the

period of bareboat charter, so that she can be disposed of at a profit in due course.

c) A bareboat charterer can be found who is not only efficient, but who can be relied upon to regularly pay hire and maintain the ship in good condition.

Where a potential investor has little knowledge of shipping, is it little wonder he finds difficulty in assuring himself on all these points? On the other hand, where interest rates are low and there are consequently few alternative investments, the purchase of a ship may be a very prudent move. There may even be Government Grants available to alleviate the full purchase price of a new building vessel provided, perhaps, that she be operated under a particular flag and that

crew of a particular nationality are employed. Furthermore, an investor employing bareboating techniques has no operating worries or expenses such as ship-management fees, as such become the responsibility of the eventual charterer. Let us now turn to the operator/charterer. Like so many, he may feel confident in his ability to operate and employ a ship, but has restricted available funds and only limited access to financial assistance. Bareboat chartering may be just the means to launch his enterprise. Of course, he may be restricted to a certain trading flag operation by the investor's commitments and he must, of course, maintain the vessel to a good standard commensurate with her eventual redelivery to her owner in good order and condition, fair wear and tear excepted. Thus his financial liabilities are:-

a) Hire payments to be made to the owner and b) Running Costs.

The balance that - hopefully - remains becomes his profit, which may accumulate towards the down payment on his own vessel in the fullness of time. In the meantime he is illustrating to potential bankers and others in the best possible way that he is capable of operating ships efficiently - an ability of considerable value when eventually seeking loans from perhaps sceptical financiers. At such levels a charterer could afford to pay a bareboat hire somewhere around the US$1,500/2,000 per day mark, and still make a small profit, although he has to consider future freight market prospects, security of whatever employment upon which the vessel is engaged and, of course, escalating bunker and running costs. Consequently, since the majority of the risks commensurate with the success or failure of the venture are his, the probable agreed rate of bareboat hire would be somewhat lower. So why does not more bareboat chartering take place in the deep-sea arena? Possibly because deep-sea ships are expensive necessitating the interest of 'big-money' investors and these same 'big money' investors have such a wide range of investment opportunities

beckoning to them that shipping, with its chequered history of freight market slumps and high-spots appears from cursory examination too risky and complicated. It is, however, in just such a market that high-value returns can be achieved. All it requires is commonsense, patience and knowledge. The investors exist. The desire of capable operators to run ships exists. What is apparently lacking in the deep-sea market is for someone to bring the two together. Perhaps this is a neglected area where shipbroking houses could utilise more of their energies than in simply fixing charter business or sale and purchase work, by master-minding bareboat enterprises.

Coming during 2006

LAYTIME CALCULATING by William V Packard

A completely revised edition of the popular and practicalguide to calculating laytime, including how to deal withcommencement, interruptions, reversible and averagelaytime, custom of port, workable hatch, damages fordetention and other problems. The importance of laytime calculating is not alwaysappreciated but the professional calculator must combinethe talents of amateur lawyer, mathematician andnegotiator in order to succeed in his work. The stakesare often very high indeed. In the recent high freightmarket, the daily values of laytime for larger bulk carriersand tankers were in excess of US$50 for every minute –US$3,000 for every hour. In every market the diligentcalculator of laytime can save considerable sums ofmoney for his employers, be they shipowners orcharterers, commodity sellers or buyers.

Shipowning So you want to own your own ship?

William Packard looks for a sympathetic banker PART VI - TIMECHARTERING

In this final article of this series, we will examine a method of financing the purchase of a ship for persons with only limited available funds - in this case a loan secured against a timecharter. The security of stable timecharters has for long been recognised and utilised as a method of securing loans. Indeed timecharters are arguably the cornerstones of the mighty, entrepreneurial fleets of today. Even in today's shipping world, where period timecharters are hard to come by and when found are of a value relatively low when compared to the high cost of both new and second-hand ships, timecharters are still occasionally utilised as major loan security. In isolated cases it remains possible for certain, prominent owners to obtain the promise of a substantial loan against the eventual production of a suitable timecharter, followed by a new building contract against the promise of the loan and, finally, a timecharter fixture against the new building contract - all without money changing hands or, at least a relatively small sum only being involved. In such cases the parties concerned - the shipbuilder, charterer, financier and owner will all be confident that the deal will substantiate. How does it work in practice? Let us imagine a second-hand ship is for sale and, by knowledge of your freight market, you have identified a charterer who is seeking just such a ship for period employment of, say, five years duration. If you can but persuade a bank or some other source of finance to lend you funds against the security of the anticipated timecharter hire income, and the loan so raised in addition to your own capital is sufficient to purchase the ship, you are in business! Well, in simple terms that's it but, as with so many things, there are many problems to be settled first, any one of which can jeopardise your best-laid plans.

First and foremost, ship values reflect the freight market and, although it can occur, it is not common for the second-hand value of a ship in good condition to be covered by currently available timecharter income, given the running costs of the ship, as well as loan repayments of principal and interest. When ship values are low so are timecharter hire opportunities and, conversely, when hires increase as the result of a buoyant freight market, so do ship values.

A bank advancing funds must, however, not only be confident in the ability of the prospective owner to run his enterprise and in the good condition and resale value of the ship should this be necessary, they must also be satisfied with the security offered by the timecharter. Thus must the seeker of funds need to convince a bank to support him! When timechartering, an owner hires out his vessel to a charterer in return for regular hire moneys usually paid monthly or semi-monthly in advance. Unlike bareboat charters considered in last week's article, the timecharter owner continues to operate his vessel, to insure her, employ and pay crew, store and provision, etcetera, but the actual employment of the ship is left to the timecharterer who, as a result,

A potentially good ship may be under priced

becomes responsible for arranging cargoes and for dealing with all matters surrounding that activity, e.g.: appointing port agents, supplying bunkers, etcetera. The owner and his bankers must ensure that the timecharterer is to be trusted to properly perform his duties and to pay the hire, as the entire enterprise depends very much upon the security of the time-charter. Some such period charters are for five years or more. If the freight-market charter rates increase during this time, a timecharterer can expect to do quite nicely in comparison to the fixed, pre-arranged hire payments for which he is responsible. If, however, the reverse occurs and freight rates tumble, a timecharterer may be faced with paying monthly hires in excess of his current freight income. That is where trouble may build up for all concerned. Nevertheless, there are always some secure timecharters around and, equally, there are those few occasions when an inexpensive ship becomes available at the same time that a period timecharter can be found that will generate enough cash to make the whole enterprise viable.

Coming soon

SHIPS by William V Packard

Paperback approx. 140 pages

Reprint with new drawings/illustrations and photographs.

A practical guide to the construction and machinery ofships, their plans, classification, surveys, loadlines,tonnages, flag requirements and a review of different shiptypes. Price £28.00

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