Values contested

An option for two suezmaxes from Sovcomflot at a large Korean yard earlier this decade deserved a discount rather than a premium on the price for firm orders, a London court heard today.

The contentious issue of ship values came under scrutiny as the Russian owner’s law suit against former directors and business associates resumed today following a lengthy Christmas and New Year break.

Graham Dunning QC, barrister for major defendant, Yuri Nikitin, pressed independent ship valuations consultant, Nick Willis, on the pricing of an option from the Russian owner for two suezmaxes at Hyundai Heavy Industries (HHI) in early 2003. Nikitin, through his company Standard Maritime, went on to buy the vessels at what Sovcomflot contends were unfairly low values.

Yuri Nikitin

Sovcomflot had pencilled the option for the 159,000-dwt pair – hull numbers 1564 and 1565 - at HHI in February 2003 with Willis’ valuation putting the per-ship price at $45m. The value was based on the original letter of intent (LOI) at the yard late the previous month.

Hulls 1564 and 1565, were subseqwuently resold by Nikitin and now trade as the 159,000-dwt Cape Bari and Cape Bastia (both built 2005).

Dunning put it to Willis that it was unrealistic for Sovcomflot to price the option based on the LOI and if it was right to dispose of an optional contract.

“I don’t see why not. People sell things all the time subject to certain conditions,” said the managing director of Ship Valuation Consultancy.

“There’s nothing stopping you from going to anybody to discuss these matters. There’s noting to stop Sovcomflot trying to exploit a market situation¿and going to a potential buyer and seeing if he might be interested in two more, which I think is what happened with Standard Maritime.”

Dunning contended that it was unrealistic for Sovcomflot to expect to make a profit offloading the optional contract given market conditions at the time, something with which Willis disagreed.

“It is still a realisable asset which can be realised in a market,” a market about which Willis contended there was considerable positivity from the beginning of 2003.

“The market was going up really pretty rapidly at that time and there was nothing to suggest there was a crash around the corner.”

Willis said his valuation of the optional vessels was based on prevailing market conditions, yards’ berth space availability and what he thought at the time were the ships’ specifications. He attached an “intrinsic value” or premium to the option of $1.5m for each ship.

(Click here to read earlier exclusive reports from the Sovcomflot corruption trial as well as the interlocutory judgments in full.)

Dunning pressed the consultant on why he has not since reduced his value estimate on the ships despite finding out that they were not epoxy coated as he had originally thought. Willis replied that, on revaluating the contract, he had not given enough attention to the delivery date and, thus, this counterbalanced the fact that the ships were only top and bottom coated to leave his original value unchanged.

Nikitin’s barrister pressed Willis that Sovcomflot was, in fact, unlikely to be able to find a buyer who would pay such a premium on these vessels at the time, something the consultant rebutted, contending that they would have been “very attractive in the market”, even to some big players who were at the time hunting for suezmax tonnage.

Dunning asked why Willis had failed to mention in his reports a contemporaneous order from one order for a suezmax - which went on to be named Nordic Freedom - at $44.5m and another from Navigacione Montanari, both at Daewoo Shipbuilding & Marine Engineering (DSME), at $45m. The consultant said he had simply mistakenly omitted these deals from his reports at the time but reiterated that reports at any time on newbuilding deals, as opposed to second-hand deals, are always “more flaky” meaning his valuation reports are merely to be taken as a “rough guide”.

Willis continues to give evidence in the afternoon on day 56 of the $800m alleged corruption, fraud and bribery case.

The trial continues.

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