Fleet development and corporate values

NORDEN expanded its active fleet from 153 to 216 vessels in 2007. In addition, the Company had 94 vessels on order, which meant that the gross fleet of active vessels and vessels for delivery totalled 310 at the end of the year. This is an increase of 41%. The increase was mainly due to a steep increase in the number of bulkcarriers on short-term charter as well as a significant increase in the number of owned newbuildings.

 

The fleet consists of a core fleet of owned vessels and vessels on long-term charters with or without purchase or extension options, supplemented by a flexible portfolio of vessels on shortterm charters. With this mix, NORDEN enjoys the benefit of the economies of scale associated with operating a large fleet without having to tie up the amount of capital necessary if the Company owned the vessels. Moreover, NORDEN can effectively adapt to changed market conditions and economic trends. In periods when rates are rising, NORDEN is able to charter in vessels in the short term to increase earnings. The Company took great advantage of this opportunity in 2007, particularly increasing short-term charter capacity in the highly liquid Panamax segment. Conversely, in declining markets NORDEN can refrain from chartering in vessels in the short term as well as from exercising options to buy vessels or extend their charter periods.

 

The expansion of the core fleet continued in line with the strategy of improving control of the tonnage and building a costeffective core fleet. The active core fleet grew by 21% to 76 vessels, and the number of vessels for delivery to the core fleet rose by 40% to a total of 94 vessels. The expansion of the active core fleet will continue in 2008 with the delivery of four newbuildings and 12 vessels on long-term charters with purchase options. In addition, NORDEN will take over five vessels, having exercised purchase options on the vessels for delivery in 2008. The average costs of operating a bulkcarrier in the core fleet will from 2011 onwards be less than USD 13,000 per day, which makes the core fleet competitive in the longer term.

 

The Company’s business model focuses on the long as well as the short term. By increasing capacity, the Company was able to benefit from the strong dry cargo freight rates. Moreover, NORDEN profited from the favourable second-hand tonnage markets to obtain sizeable profits from the sale of vessels. The purchase and sale of vessels is an integral part of the business model, helping to secure earnings and cash flows. During the year, the Company entered into agreements to sell a total of 16 vessels, of which eight were delivered in 2007.

 

The continued expansion of the core fleet and the systematic use of options create significant values. The total theoretical Net Asset Value including purchase options at the end of 2007 was estimated at DKK 614 per share. Of this, the value of the Company’s 75 purchase options amounted to DKK 323 per share and the value added to owned vessels and newbuildings was DKK 132 per share.

 

According to an updated estimate, the value of the charter parties with purchase option amounted to DKK 365 per share by mid-February.

 

At the end of the year, the value of the Company’s 14 owned vessels and 35 newbuildings as well as one vessel sold but held on finance lease was estimated at USD 2,638 million (USD 1,164 million). The valuation is based on an average of three independent broker valuations. The added value over the carrying amount of owned vessels and the expected newbuilding prices was USD 1,090 million (USD 440 million).

 

At the end of the year, NORDEN held a total of 75 vessels on long-term charters over three years with options to purchase the vessel or to extend the charter period. The vessels held on long-term charters with purchase and extension option had an estimated value of USD 2,668 million before tax, corresponding to DKK 323 per share. This was an increase of 126% relative to the end of 2006. Of the estimated total value, USD 1,475 million related to the fixed charter period (the charter party), while the remaining USD 1,193 million was linked to purchase and extension options. 41% of these values related to vessels which NORDEN has options to buy within two years.

 

NORDEN’s valuation of purchase and extension options follows standard pricing of American options, which simulates future scenarios for freight rates (T/C rates) and vessel prices under assumptions of price volatility and correlation between the change in T/C rates and the change in vessel prices. The calculation model is unchanged compared with 2006.

 

In each segment, the volatility and the correlation are assumed to be constant over time and are estimated based on historical T/C rates and vessel prices. An important input to the model is the T/C rate curve for each segment. The curve consists of three elements: Market rates for the first five years, a linear, interpolated rate curve between year 5 and year 10 and a long-term constant rate level from year 10 onwards, based on the median of the historical T/C rates since 1989. In addition, market prices are used for interest rates, exchange rates and operating costs. On the basis of the future scenarios for T/C rates and vessel prices, the optimum value of the purchase and extension option for each vessel is determined.