Customers & Industries: CONTI

CONTI Uses @RISK for Shipping Success

  • Industry: Shipping, Banking/Finance
  • Product(s): @RISK
  • Application: Financial Planning for Shipping Investment Funds

Summary

After the EU introduced regulatory requirements for better visibility into capital market investments, CONTI began using @RISK to construct financial models that capture and assess potential risks in the fluctuating shipping market. This enabled the company to offer higher levels of transparency for investors, successfully steer its shipping fleet, and generate above-average results on investments.

Shipping is a future-oriented market that offers lucrative investment opportunities. However, there are also many unknowns. Palisade's @RISK software helps us identify challenges over the lifetime of a project, then evaluate the decisions we’ll need to make and future actions we’ll need to take for the good of the company and our shareholders.
Martin Stobinski, Managing Director for Risk Management, Compliance and Asset Valuation, CONTI KVG

CONTI-Group has been a leader in the shipping industry since 1970. In addition to operating a large, deep-sea fleet in Germany, the company is an established global provider of ship investment funds. After the European Union introduced regulatory requirements for better visibility into capital market investments, CONTI began using Palisade’s @RISK to construct financial models that capture and assess potential risks in the fluctuating shipping market. This has enabled the company to provide higher levels of transparency to its investors, successfully steer its shipping fleet, and subsequently generate above-average results on its investments.

Background

Commercial shipping is one of the most efficient modes of transport for cargo, both economically and ecologically. Tangible shipping assets, including tankers and carrier vessels, represent an important form of financial investment. However, after the financial crisis of 2007-2008, the European Union introduced new requirements for better regulation and supervision of the financial sector. The objective of these regulations was to introduce a new level of protection for investors by appropriately regulating and supervising all markets, and included the provision of quality and transparency in all capital market investments.

In the past, CONTI would construct models manually in Excel, which took significantly more time and effort. With the @RISK software, they are able to easily build the models, then provide high-level visualizations of the Monte Carlo simulations in a format that is easily understood. The resulting output provides CONTI with the probability of the expected value for a new investment fund. The company typically uses PERT distributions to determine the minimum, mean and maximum probability of each return rate, from 0% (or bankruptcy) to 100% return on investment (ROI). CONTI has been commended by leading investment analyst firms, receiving multiple awards for its transparency and performance. In addition, the company has returned strong dividends for more than 50 funds. "Shipping is a future-oriented market that offers lucrative investment opportunities. However, there are also many unknowns," said Stobinski. "Palisade's @RISK software helps us identify challenges over the lifetime of a project, then evaluate the decisions we’ll need to make and future actions we’ll need to take for the good of the company and our shareholders."

With @RISK, CONTI provides industry-leading levels of transparency for its investors, as well as for BaFin. At the same time, the Palisade software provides the company with a risk management solution that enables it to quickly identify any potential changes in the markets, including the possible effects, and better monitor and manage its investment funds.

Building the Model

Building a model for a new investment fund comprises a wide range of factors. CONTI takes into consideration the full range of costs associated with building or buying and then insuring a vessel. They then consider the potential costs and revenues generated with the charter of that vessel, which is impacted by the type of ship, the duration of the potential charter, and the freight rate. “The type of vessel is very important. At the moment, a ‘bulker’ is typically used for a short-term, single journey, while a container vessel is typically a longer-term charter, sometimes for up to 10 years. This provides a higher hire rate and higher income,” said Stobinski.

CONTI also analyzes the operating expenses associated with running the vessel, including marine insurance and labor and fuel costs. Currency exchange rates, interest rates and amortization rates are also included in the model, as fluctuations in these rates can have a significant impact on the potential return on investment. “We need to consider all the factors that influence the profit or loss associated with each project. While the vessel hire rate is important, we also need to consider how much it will cost us to man the crew of the vessel and how much it will cost to insure the vessel, as well as how much interest we will have to pay the bank for any loans,” added Stobinski. For a typical model, CONTI inputs data for more than 30 different variables.

Limiting the Risks

Palisade's @RISK software enables CONTI to quickly and efficiently construct the models they need to capture and manage the risks for each investment. For a recent project, CONTI used @RISK to calculate two equity options: a preferred equity, which would generate a lower internal rate of return (IRR), and a high-risk equity, with higher IRR. They needed to run these options over a 5-year amortization period, as well as a 9-year amortization period:

9 Year Amortization

(E = expected value, STD = standard deviation, "Prozent IRR < 0" = probability of default)

5-Year Amortization

(E = expected value, STD = standard deviation, "Prozent IRR < 0" = probability of default)

In the past, CONTI would construct models manually in Excel, which took significantly more time and effort. With the @RISK software, they are able to easily build the models, then provide high-level visualizations of the Monte Carlo simulations in a format that is easily understood.

The resulting output provides CONTI with the probability of the expected value for a new investment fund. The company typically uses PERT distributions to determine the minimum, mean and maximum probability of each return rate, from 0% (or bankruptcy) to 100% return on investment (ROI).

CONTI has been commended by leading investment analyst firms, receiving multiple awards for its transparency and performance. In addition, the company has returned strong dividends for more than 50 funds.

"Shipping is a future-oriented market that offers lucrative investment opportunities. However, there are also many unknowns," said Stobinski. "Palisade's @RISK software helps us identify challenges over the lifetime of a project, then evaluate the decisions we’ll need to make and future actions we’ll need to take for the good of the company and our shareholders."

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