“It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it for “keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence.”
— John Maynard Keynes
“If something cannot go on forever, it will stop.” (Stein’s Law)
— Herbert Stein
The greater fool investment theory is acribed to the Great Man, who in a famous passage noted that the stock market worked like a beauty parade and that picking a winner was not about backing one’s own judgement:
“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”
(Keynes, General Theory of Employment, Interest and Money, 1936)
This led to the ‘greater fool’ theory as it has been observed that assets trade not on an intrinsic value (i.e. the cash they can be assumed to generate) but on the basis of what people believe others will pay for them at some point in the future. The boom in DSV building is running into the wall of cash requirements and a shortage of fools willing to invest in them.
If the market scuttlebut is true, and I believe it is, somewhere in 31 Shipyard Road, if it hasn’t happened already, a terrible realisation is taking place: New Orient Marine Pte Ltd, a subsidiary of Marine Construction Services Ltd (Luxembourg), has a financing issue with the new ICE Class DSV, and in reality isn’t going to take delivery as planned. SOR reported last week that they were seeking a charterer at rates of USD 80-100k a day, a number that if true is so absurd it is beyond satire. The vessel as you can see from the Keppel Q1 presentation is due to be delivered at some time this year.
You can write the script here I suspect: New Orient will be a thinly capitalised company that had sufficient funds to make the progress payments only. Unable to get work for the vessel they have now have no takeout financing, and will be unable to take delivery from Keppel. A frantic search is therefore underway to find someone, anyone, to try and take the vessel off their hands.
At the time the order was signed in 2015 (when the market was cooling significantly), Keppel issued this press release with the comment:
Mr Knut Reinertz, Director of Maritime Construction Services, said, “There is a demand for modern ice-class multi-purpose vessels in the market and we believe this new state-of-the art vessel we are building with Keppel Singmarine is ideally suited to meet this need.
The problem I have with this statement is that how much demand there was/is? And how you split the risk? And even more importantly what is the supply side looking like? MCS/MRTS have used the Toisa Paladin in the region and it has never been on a 365 basis, and they certainly never had the forward order book to justify going long on a vessel of this complexity and cost. So they were either completely mad, or wildly optimistic as to their prospects to resell or recharter the vessel prior to delivery (and they aren’t the only people doing this in the DSV space). Unfortunately the timing is spectacularly bad. I don’t know what the payment profile was for this asset but I can guess it was something like 5% down with 10% later, and if Keppel were lucky, another 10% further on. But apart from that I don’t see them getting any more for this.
I actually believe this vessel, with a reported build costs of USD 200m, or SGD 265m, is valueless. I say this not to be controversial but a cold examination of the market and the asset.
Firstly, and most importantly, the vessel is being classed by Bureau Veritas. That wasn’t a joke, I’m serious. You can read the BV press release and documentation here. Those who have worked for a saturation diving company will appreciate the significance of this, while others may wonder where I am going with it? Saturation diving isn’t rocket science, but not everyone can do it either, you need a certain number of systems, and processes, and high quality people to be there to create a certain institutional knowledge base to do it safely and efficiently (particularly North Sea/ ICE work). Small things can cost you a lot of money and this is a classic example where cutting corners, is I believe, going to render this hull worthless. For those still here, there is no other DSV in the world classed by BV, it is just not a classification society recognised to give a vessel SAT notation. The only reason you would use them, and not DNV or Lloyds (and maybe ABS at a push), is to save money, and anyone looking at buying this vessel at anything close to its construction cost would know the original purchaser did this to be cheap. Very cheap.
Secondly, the chambers and other equipment are not NORSOK compliant. I don’t even think a BV system could be NORSOK compliant without a vast amount of bridging documentation and ancillary work (I am happy to be proven wrong on this). The only market in the world where you can get day rates that would cover that build cost is Norway, and they already have two NORSOK DSVs for a total market of 550-600 DSV days on a good year.
Thirdly, the dive system is a Lexmar, and has had known installation problems throughout the build. No one spends USD 200m on a dive vessel with a Lexmar system. Again it was done to be cheap and it will in all likelihood render the vessel unsellable.
Although I am a paid consultant I have therefore done Keppel a favour and compiled a list of all the possible buyers for this asset (who says consultants ask for your watch and then tell you the time?):
Unfortunately, as you can see, it’s quite a small list. But the number of people needing a USD 200m DSV at the moment is 0. The largest owner of high class DSVs is rapidly beoming Yard Inc. Lichtenstein is still in Shenzhen, Vard has the Haldane, and now Keppel has the New Orient DSV. And that is without getting into idle tonnage and the DSVs still to be delivered. If you speak to people associated with these assets they all assure you that they are close to selling them, yet if these vessels are not used in the North Sea they are only worth the Asian/African DSV price, where you are competing with modular systems on a PSV, and all the North Sea contractors have too much tonnage, as the Nor vessels prove. Find me a CFO from one of the big 6 who could take one of these DSVs at anything like book value, and who is willing to go to the stockmarket, with backlog collapsing, and say he has paid anything less than a steal for one of these? No one outside of these companies could get the vessel into a region where they could hope to recover that sort of cost – and even then not in the current market.
New Orient Marine Pte Ltd , are in turn linked with MRTS, a Russian owned contractor focused on the Sakhalin region (although I think they have done other work in the Caspian). It’s worthwhile having a look at their fleet to see the sophistication of vessel they are normally used to dealing with here and the risk Keppel took in this contract given this. MCS have hired DSVs on a time charter basis, but have never owned a DSV; you therefore have to admire their… courage?… in striking out to build one of the most advanced DSVs in the world.
Clearly they were hoping to sell something well above it’s intrinsic value by being bold. The payoff was an asymetric one to MCS though, who stood to benefit enormously while Keppel are going to be stuck with this eccentric design for a long time prior to reality setting in I suspect. Keppel are a big company with a multi-billion market cap so this isn’t a “farmburner” for them, but they could realistically have to writeoff USD 150-200m here which is going to be very painful all the same. The Chinese yards have decided to play for time, the Tasik DSV was yard financed and UDS are the potential saviour for the Lichtenstein. Not everyone can be saved here because there is just insufficient demand until the DSVs return to construction work not maintenance, and that looks a long way off.