The KFU is one of the most exciting financial instruments to emerge from the post-Lehman Brothers Credit Crisis. This new financial technique involves placing smelly financial assets in an airtight can known as a Kick Forward Unit (KFU). The can is placed in a dark cupboard where, in a couple of years, the smelly assets mature into fragrant investments, rich in returns. Technically, this is known as kicking the can down the road”.
A Handy Pain Killer
Today’s shipping market is looking pretty grim. The Clarksea Index has fallen to $8,600/day which, allowing for waiting time, is close to OPEX. Sentiment has slumped and the 5 year TC rate for a Capesize bulker is now $14,750/day (see page 9). This combination of low earnings and lower expectations ought to be producing some pretty low secondhand prices. But so far that is not the case. Despite the pain, the evolution of KFUs seems to have allowed asset prices to be more stable than the freight rates which they normally track.
What Can it be Worth?
For example, today a 5-year-old Panamax bulker sells for $21m, compared with a new price of $26.5m. So the 5-year-old ship is worth 79% of the new price. Bulkers have an economic life of about 20-25 years, suggesting that on average a 5-year-old Panamax should cost about 75-80% of the new price. That would make today's Panamax price normal, which is strange because the current $3,000/day spot earnings are well below normal and the orderbook is still 32% of the fleet. Deduct a (hard to define) discount for being old generation technology and the 79% market price ratio looks surprisingly firm.
The Long-term Price of Cans
A reality check is provided by the graph, which tracks the old/new price ratio for a 5-year-old Panamax since 1976. Over the last 36 years the index averaged 76%, but it varied enormously. During the deep recession of the 1980s it slumped below 40% in 1983 and again in 1986. Then in the 1990s, a more normal decade, it was mostly in the 75-80% band, falling briefly to 60% in 1990. In the booming 2000s it peaked at 163% in 2008.
All of which suggests that today’s secondhand prices are a long way from the distressed prices experienced in the past. Of course this ratio could be influenced by low newbuilding prices, but today’s new Panamax price of $26.5m is still 26% more than the newbuilding price was a decade ago, which suggests the shipyards are also doing a fair bit of can kicking too.
Don't Open the Can, Captain
So there you have it. Ship and shipbuilding prices look out of line with freight rates. If the graph is to be believed, they are also out of line with past recessions. So why is it happening? The answer is obvious. For the banks the big problem with a KFU is that when they open it up, they can't be sure that instead of fragrant financial investments they find a can of worms. Much better to keep on kicking.