[Federal Register Volume 61, Number 91 (Thursday, May 9, 1996)]
[Rules and Regulations]
[Pages 21302-21335]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-11289]




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Part IV





Department of Transportation





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Maritime Administration



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46 CFR Part 298



Obligation Guarantees--Program Administration; Final Rule

  Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules 
and Regulations  

[[Page 21302]]



DEPARTMENT OF TRANSPORTATION

Maritime Administration

46 CFR Part 298

[Docket No. R-154]
RIN 2133-AB14


Obligation Guarantees--Program Administration

AGENCY: Maritime Administration, Department of Transportation.

ACTION: Final rule.

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SUMMARY: The Maritime Administration (``MARAD'') is issuing this final 
rule which amends certain provisions of the existing regulations 
implementing Title XI of the Merchant Marine Act, 1936, as amended 
(``Act''). This rule is intended to improve administration of the Title 
XI program. MARAD administers financial assistance under Title XI of 
the Act in the form of obligation guarantees for all types of vessel 
construction and shipyard modernization and improvement, except for 
fishing vessels. The part of the Title XI program related to fishing 
vessels is administered by the National Oceanic and Atmospheric 
Administration of the U.S. Department of Commerce, (``NOAA''), pursuant 
to NOAA regulations, which appear at 50 CFR part 253.

EFFECTIVE DATE: This final rule is effective on May 9, 1996.

FOR FURTHER INFORMATION CONTACT: David A. Lippold, Senior Financial 
Analyst, Division of Capital Assets Management, Office of Ship 
Financing, Maritime Administration, Room 8122, 400 Seventh Street SW., 
Washington, DC 20590. Telephone 202-366-1907.

SUPPLEMENTARY INFORMATION: Title XI of the Act, 46 App. U.S.C. 1271 et 
seq., authorizes the Secretary of Transportation (``Secretary'') to 
provide guarantees of debt (``obligation guarantees'') issued for the 
purpose of financing or refinancing the construction, reconstruction or 
reconditioning of vessels in United States shipyards for U.S. citizen 
owners. Applications for obligation guarantees are made to MARAD acting 
under authority delegated by the Secretary to the Maritime 
Administrator (``Administrator''). Prior to execution of a guarantee, 
MARAD must, among other things, make a determination of economic 
soundness of the project, and the financial and operating capability of 
the applicant. Prior to amendment by Public Law 103-160, guarantees 
could be issued only for debt issued by United States citizens. The 
Title XI program enables applicants to obtain long-term financing on 
terms and conditions and at interest rates comparable to those 
available to large financially sound corporations. Funds secured by the 
obligation guarantees are borrowed in the private sector.

Background

    On November 30, 1993, the ``National Defense Authorization Act for 
Fiscal Year 1994'' (``Authorization Act''), Pub. L. 103-160, was 
enacted. Subtitle D of Title XIII of the Authorization Act, cited as 
the ``National Shipbuilding and Shipyard Conversion Act of 1993'' 
(``Shipbuilding Act''), expanded the Title XI program by authorizing 
the Secretary to guarantee obligations issued to finance the 
construction, reconstruction, or reconditioning of eligible export 
vessels and for shipyard modernization and improvement. The 
Shipbuilding Act establishes ``a National Shipbuilding Initiative (NSI) 
program to be carried out to support the industrial base for national 
security objectives by assisting in the reestablishment of the United 
States shipbuilding industry as a self-sufficient internationally 
competitive industry.''
    On March 31, 1994, MARAD published in the Federal Register an 
interim final rule, effective on publication, which amended its 
regulations implementing Title XI in order to carry out the provisions 
of Subtitle D of Public Law 103-160, expanding the authorization for 
obligation guarantees to finance the construction, reconstruction, and 
reconditioning of eligible export vessels and shipyard modernization 
and improvement. A final rule was published on September 16, 1994. The 
final rule stated that MARAD would publish at a later date a separate 
notice of proposed rulemaking to improve administration of the entire 
Title XI program.
    MARAD initiated a review of the administration of its Title XI 
program regulations with the objective of implementing President 
Clinton's ongoing Regulatory Reform Initiative and to reaffirm and 
implement the principles of Executive Order 12866--Regulatory Planning 
and Review (September 30, 1993). This rulemaking significantly shortens 
the time for processing applications for guarantees and reduces the 
economic burden on applicants in complying with MARAD requirements for 
the submission of information. Accordingly, it is expected to encourage 
the construction, reconstruction and/or reconditioning of vessels in 
United States shipyards and the modernization and improvement of 
general shipyard facilities located in the United States.

NPRM

    MARAD published a notice of proposed rulemaking (NPRM) on April 26, 
1995, in the Federal Register (60 FR 20592) and is now issuing this 
final rule concerning program administration. This rule reflects 
consideration of all comments received in response to the NPRM and the 
interim final rule. Consideration has been given in the final rule to 
all concerns addressed relative to the Title XI program.
    In the interim final rule issued to implement the expanded 
authorization in Public Law 103-160 for issuing Obligation Guarantees, 
MARAD requested and received public comments on two additional issues, 
applicable to the entire Title XI program, namely: (1) The issuance by 
the Secretary of a Letter of Interest prior to an applicant's 
submission of a complete application and the subsequent issuance, if 
any, of a Letter Commitment, and (2) the establishment of a deadline, 
such as 60 days, by which the Secretary would act on a Title XI 
application considered complete by the Secretary. In the final rule of 
September 16, 1994, MARAD determined that these two issues would be 
addressed in the subsequent NPRM concerning program administration 
because they apply to both the export and domestic programs. The reason 
is that this would allow MARAD to consider the issues for both the 
domestic and export programs at the same time. MARAD advised that 
commenters need not resubmit their views on Letters of Interest and the 
60 day processing period in response to the new NPRM. The discussion of 
the rulemaking text below differentiates between comments received in 
response to the interim final rule and the NPRM on these two specific 
areas.
    These regulations do not require more extensive paperwork or 
reporting requirements than exist under the present Title XI 
regulations. Exemptions provided herein should substantially lessen the 
aggregate reporting burden.
    In order to alleviate a potential source of confusion in the 
discussion of the regulations by section, when one particular section 
pertains to more than one issue, the discussion and MARAD's subsequent 
response is divided into individual issues related to the content of 
that section.

Discussion of Rulemaking Text

    The discussion that follows summarizes the comments submitted to 
MARAD by 23 commenters on the NPRM and the commenters on the

[[Page 21303]]

interim final rule, notes where changes have been made to the Title XI 
regulations and the rationale therefor, and, where relevant, states why 
particular recommendations/suggestions have not been adopted. It is 
noted that where the first letter of one or more words is capitalized, 
that term is defined in Sec. 298.2. In addition to soliciting comments 
on specific amendments to the Title XI regulations proposed in the 
NPRM, MARAD solicited industry and other public comments on three 
additional issues in general. The first issue is the retention in 
Sec. 298.13 of the waiver requirement for foreign components and 
services to be included in Actual Cost. MARAD expressed concern about 
the potential adverse effect of eliminating the waiver requirement on 
the U.S. supplier base, which MARAD recognizes as critical to the 
national defense and economy. MARAD stated that it is attempting to 
create an environment where both the shipbuilding and ship supply 
industries have the opportunity to be competitive based on fair 
pricing, quality, and timeliness. All comments received in this area 
are in the discussion of Sec. 298.13.
    The second issue on which MARAD solicited public comments is 
construction period financing. As the Secretary may approve Guarantees 
with respect to obligations to be issued for the applicable period of 
construction, reconstruction, or reconditioning, MARAD invited comments 
on available forms of security, in addition to surety bonds, that could 
protect MARAD's interests as a lender, how progress should be 
monitored, what new procedures/methodologies should be developed to 
improve the previously utilized progress payment system, and if payment 
of interest on the obligations should be made on a more frequent basis 
(i.e., weekly, monthly or quarterly) than that outlined in Sec. 298.22, 
Amortization of Obligations. In addition, comments were solicited as to 
how the Title XI applicant will verify/certify to MARAD that certain 
costs have been paid prior to disbursement of Title XI funds from the 
escrow account, for example, the use of an agent on MARAD's behalf to 
verify that certain costs have been paid. All comments received in this 
area are discussed in Sec. 298.21 below.
    Finally, MARAD also requested comments concerning the standard 
application Form MA-163 referenced in Sec. 298.3, Applications, and the 
required documentation outlined in subpart D of this part 298. All 
comments received in these areas are discussed under Sec. 298.3 or 
subpart D of this part.

Discussion of Regulations by Section.

    Note: Paragraph references are as designated or redesignated in 
the notice of proposed rulemaking.

Section 298.2  Definitions

    (b), Actual Cost. One commenter suggested the inclusion of 
Guarantee Fees as an item in the definition of Actual Cost.
    MARAD Response: The present definition of ``Actual Cost'' refers to 
Sec. 298.21(b) which is being amended in the final rule to clearly 
state that ``Guarantee Fees determined in accordance with the 
provisions of section 1104(e) of the Act shall be included in the items 
of Actual Cost.'' Hence, adoption of the NPRM as a final rule will 
effectively accomplish the commenter's suggestion without the necessity 
to change the definition of Actual Cost.
    (f), Depreciated Actual Cost. One commenter suggested the inclusion 
of Guarantee Fees as an item in the definition of Depreciated Actual 
Cost.
    MARAD Response: The same response as to the preceding comment 
applies.
    (l) Guarantee Fee. One commenter suggested deletion of the 
reference to interest accrual on the Guarantee Fee.
    MARAD Response: The definition of ``Guarantee Fee'' does not 
include a reference to interest accrual and, therefore, is not being 
amended.
    (o) Letter of Interest. While no commenter suggested a change to 
the proposed definition of a Letter of Interest, comments were received 
regarding the Letter of Interest concept and content.
    MARAD Response: MARAD's response to the comments are outlined below 
in the discussion regarding Sec. 298.3(f). In view of the fact that 
MARAD is deleting Sec. 298.3(f) in its entirety, this definition will 
not be included in the Title XI regulations.
    (y) Related Party. One commenter suggested that the definition of 
Related Party should be revised to be consistent with the existing 
definition in generally accepted accounting principles (GAAP).
    MARAD Response: The intent behind replacing the terms ``Affiliate'' 
and ``Affiliated'' with the term ``Related Party'' was to be consistent 
with a terminology change in GAAP as promulgated by the Financial 
Accounting Standards Board of the American Institute of Certified 
Public Accountants. Although the commenter has provided the present 
GAAP definition for Related Party, MARAD has determined that it would 
be inappropriate to incorporate the precise GAAP definition as it 
exists today in the Title XI regulations due to the frequent 
modifications to GAAP definitions. It should be noted, however, that 
MARAD's regulations are to be construed in a manner consistent with 
GAAP, unless the regulations expressly deviate from GAAP.
    (cc) Vessel. The definition of Vessel was not modified in the NPRM. 
However, three of the four commenters supported MARAD's announcement of 
a change in policy to expressly include passenger vessels engaged in 
commercial common carriage, in particular ferries, as eligible for the 
Title XI program. One commenter also was in favor of an expansion of 
Title XI financing to the ``cruise to nowhere'' segment and gaming 
vessels, as the commenter believes that the passenger vessel segment of 
the U.S. flag merchant marine will make the most gains in the next 
decade. One commenter does not believe that the change in policy on 
passenger vessels should include ferries and/or gambling vessels on 
U.S. rivers because use of scarce Title XI resources for these vessels 
would not promote the Act's objective of ocean-going vessels or vessels 
capable of serving as a military auxiliary.
    MARAD Response: MARAD does not believe that a regulatory change to 
this definition is necessary. It is MARAD's position that the expansion 
of Title XI financing in the passenger vessel market generally will aid 
in the development and maintenance of an adequate and well-balanced 
U.S. merchant marine and will promote U.S. commerce. As to the concern 
expressed about MARAD's scarce Title XI resources, MARAD retains 
informal discretion under the Act and formal discretion under 
Sec. 298.3(e) (priorities), in appropriate circumstances, to limit 
allocation of its Title XI resources to ensure optimal use of MARAD's 
appropriated funds in terms of promoting the objectives of the Act.

Section 298.3  Applications

    Section 298.3 (a). This section specifies the format for submitting 
and amending applications for Title XI financing. As mentioned above, 
MARAD specifically solicited comments on the current standard 
application Form MA 163 and any proposed amendments to the form and 
standard documentation, particularly with regard to export vessels and 
shipyard modernization.
    One commenter stated that inadequate time was given to review and 
comment on the application form; however, as a general comment, the 
form needs to be revised to be consistent with the recent changes in 
law for

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shipyard modernization and Eligible Export Vessels. Another commenter 
stated that the application form is overly complicated and greatly 
increases transaction costs and discourages applicants. The commenter 
suggested the establishment of an advisory committee composed of 
representatives from MARAD, the maritime bar, investment and commercial 
banking industry, shipbuilding industry and the shipowning and 
operating industry to review and assist in revisions.
    A final commenter believes that the administration of the program 
will be improved by including a list of all documents required to be 
submitted with an application, i.e., any demise charters, time charters 
in excess of six months, contracts of affreightment, drilling contracts 
or other contractual arrangements (Sec. 298.3) and legal opinions 
ensuring the enforceability of the mortgage or security interest for 
Eligible Export Vessels (Sec. 298.31(a) (2) and (3)).
    MARAD Response: In view of the time required to determine 
appropriate changes and to obtain approval from the Office of 
Management and Budget for a revised form, MARAD has decided to defer 
consideration of this matter in order to avoid delay in promulgating 
this rule. MARAD supports the suggestion that a non-Governmental 
authority establish a working group composed of representatives from 
MARAD, the maritime bar, investment and commercial banking industry, 
shipbuilding industry and the shipowning and operating industry to 
review and assist in revisions to the form.
    MARAD agrees with the comment that the administration of the Title 
XI program will be improved by including with the application form a 
list of all documents required to be submitted with the application. 
MARAD will prepare such a list of documents, which list shall be 
provided with the standard application form.
    In addition, MARAD has determined that the document required to be 
filed with the Secretary of the Senate and the Clerk of the House of 
Representatives by the Lobbying Disclosure Act of 1995, Pub. L. 104-65, 
must be filed as part of a formal Title XI application, together with 
the declaration required to be filed by 31 U.S.C. 1352. MARAD will 
still require similar forms at Closing. Finally, as part of the 
application process MARAD may request that the applicant submit 
information to assist MARAD in the preparation of a National 
Environmental Policy Act analysis.
    The instructions regarding the filing of a Title XI application on 
Form MA-163 require that 12 complete sets (of which three must be duly 
executed and certified by the applicant), including schedules and 
exhibits as required, must be filed with MARAD. MARAD has reviewed its 
internal requirements for processing applications and has reduced the 
required number of application sets to ten. Only two of the sets must 
be duly executed and certified by the applicant. In addition, MARAD has 
examined the possibility of allowing Title XI applicants to submit 
their Title XI applications on computer disk to be accompanied by two 
hard sets of the application duly executed and certified by the 
applicant. Upon request a list of the computer software which can be 
utilized for disk submission of the application will be made available 
by the Office of Ship Financing.
    Section 298.3(b)(1). In response to the 1994 interim final rule, 
most commenters thought that the 60-day processing period for completed 
applications was reasonable, appropriate, and adequate. Some commenters 
suggested a shorter period of 30 days as conforming more closely to 
purported international commercial norms. Some shipyards were concerned 
that the 60-day turnaround is noncompetitive in the international 
market because a ``complete'' application may in itself take more than 
60 days to draft. They suggested that guidelines would be necessary to 
define the procedures for submitting a complete application. Some 
suggested that, for a pre-approved ship design, MARAD should be able to 
issue Letter Commitments within 30 days, and further suggested that 
MARAD review its application requirements to ensure that it is not 
requiring burdensome information. One commenter suggested that a 
deadline for processing completed applications is an unnecessary 
requirement.
    The April 1995 NPRM reiterated the 60 day guideline and also 
proposed a 15-day deadline, after notification by MARAD, by which an 
applicant must correct deficiencies in the application or face possible 
termination of the application. In response to the NPRM, most 
commenters supported MARAD's efforts to shorten the time for processing 
guarantee applications. Several commenters suggested that to be world 
competitive, a 60-day turnaround, from when the application is 
submitted to the Closing, is necessary. Some commenters were concerned 
about the proposed reduced amount of time the applicant has to correct 
deficiencies in the application. One stated that placing a 15-day limit 
on correcting deficiencies would place an undue hardship on the 
applicant as well as make it impossible to meet the deadline where 
deficiencies involve engineering or architectural items and, therefore, 
suggested a minimum of 60 days to correct deficiencies. One commenter 
noted that the requirement makes no distinction as to the nature, 
complexity, or availability of the requested information.
    Several commenters suggested that termination of an application 
should occur only when it is the applicant's failure to complete the 
application that results in inaction and that failure to supply the 
deficient information should result in suspension of the application 
process, rather than termination. Several commenters stated that if an 
application is resubmitted, no new filing fee should be assessed unless 
the application is for a substantially different project. Finally, one 
commenter indicated that having to start over will actually result in 
prejudice to MARAD's consideration of a subsequent application.
    MARAD Response: Prior to the issuance of the NPRM, this section 
indicated that the period between the filing of the application and the 
anticipated date by which a Letter Commitment is issued was six months 
and that the period for completing an application and the Secretary 
taking action on a completed application is within one year. The NPRM 
proposed significant modifications to the Title XI regulations in this 
section in order to provide for expeditious processing of each Title XI 
application, resulting in lower administrative costs and a more timely 
response to the applicant.
    The 60-day processing period for completed applications is a 
general guideline for processing Title XI applications. If possible, 
MARAD will process completed Title XI applications on a more expedited 
basis than 60 days in order to enable applicants to more quickly 
respond to market opportunities.
    As to some shipyard concerns regarding the drafting of a 
``complete'' application, the time that it takes to draft a Title XI 
application is not factored into the 60-day processing period. MARAD is 
on public record as encouraging Title XI applicants to have at least 
one pre-application meeting with MARAD personnel to, among other 
things, determine what essential pieces of information about the 
applicant and its proposal must be included in the application. As each 
application is project specific, the information necessary for 
submitting a complete application for a given project will be discussed 
at the pre-application meeting(s). If applicants follow MARAD's 
suggestion to have pre-

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application meetings, the application drafting time should be 
significantly reduced.
    The suggestion that MARAD issue a Letter Commitment in the case of 
pre-approved ship designs within 30 days is rejected because MARAD 
still has to review the application for economic soundness and review 
of a company's financial position. In most cases, this could not be 
completed in the proposed 30-day period. With regard to the suggestion 
that MARAD review its application requirements to ensure that it is not 
requiring burdensome information, MARAD is undertaking this review.
    Finally, one commenter's suggestion that a deadline for processing 
completed applications is an unnecessary requirement is rejected 
because MARAD believes that it is critical to an orderly and 
expeditious process to have a specific indication as to the period for 
such process.
    Several commenters expressed concerns about the reduced amount of 
time (from the previous period of nine months) the applicant has to 
correct deficiencies in the application. In response, MARAD notes that 
failure by the applicant to correct deficiencies within 15 days does 
not result in automatic termination of the application. The regulation 
provides that the Secretary may terminate processing of the application 
without prejudice. MARAD thus has the flexibility to extend the 
deadline, if appropriate, taking into consideration the nature, 
complexity, or availability of the requested information.
    MARAD does not believe it necessary to amend the language in this 
paragraph to provide that, in lieu of terminating an application 
without prejudice, MARAD may elect to suspend processing of an 
application for any number of contingencies. MARAD may use its 
discretion to do whatever is appropriate in processing applications.
    The position of several commenters that, if an application is 
terminated, no new filing fee should be assessed unless a subsequent 
application is for a substantially different project, is justifiable 
and is being adopted.
    In view of the foregoing, MARAD sees no reason to change the 
present wording of Sec. 298.3(b)(1), with the exception of one item. 
The paragraph is being amended to clarify that if an application is 
terminated by MARAD without prejudice, no new filing fee will be 
assessed for a subsequent application for a similar project that is 
filed within one year of the termination date. If a subsequent 
application is for a substantially different project as determined by 
MARAD on a case-by-case basis a new filing fee will be assessed.
    Section 298.3(c). The NPRM proposed requiring each Title XI 
application to be accompanied by a filing fee in the amount of one 
quarter of the investigation fee amount, calculated pursuant to the 
formula outlined in Sec. 298.15, but in no event less than $1,000.
    Several commenters do not support raising the $1,000 filing fee, 
arguing that preparing a Title XI application shows seriousness. Other 
commenters object to raising the filing fee to the amount proposed in 
the NPRM, but believe a modest fee increase is appropriate. One 
commenter believes that a multiple vessel application should not result 
in a substantially greater fee than a single vessel application of the 
same type because the amount of analysis involved is not significantly 
more. Therefore, the commenter believes that the filing fee should be 
capped at $25,000 to discourage frivolous applications. Another 
commenter supports capping the filing fee at a maximum of $10,000. A 
$10,000 non-refundable maximum filing fee will ensure the seriousness 
of the applicant and provides the government with a substantial and 
immediate contribution toward the cost of processing the application. 
At the same time, the commenter states that a $10,000 cap will not 
result in applicants undertaking substantial economic risk simply to 
file an application.
    One commenter states that the proposed filing fee increase would 
act as a major disincentive to program participation by portions of the 
maritime community the program is designed to serve, bearing most 
heavily on those least able to afford its terms. The increased fee 
would create a severe disincentive and is not only onerous in the 
extreme for any large project but also discriminatory against larger 
projects which tend to bring greater benefits to the country. Such a 
fee level, in the case of large projects, bears no relationship to a 
greater cost to MARAD of processing a given application up to the point 
of approval and receipt of the investigation fee.
    Another commenter believes that if the proposed NPRM modifications 
are adopted, either the Letter of Interest procedure will in effect 
become the application procedure, with prospective applicants 
submitting applications complete in all respects (except for signatures 
and payment of the application fee) or the number of Title XI 
applications will decline dramatically. The commenter states that MARAD 
cannot adequately review a Title XI application in a ten-day time frame 
set out for Letters of Interest, and many applicants, particularly for 
Eligible Export Vessels, will not pay thousands of dollars to find out 
if MARAD might approve their application.
    MARAD Response: MARAD has reconsidered its proposed amendment and 
has decided to further amend this paragraph by requiring each Title XI 
application to be accompanied by a filing fee in the amount of $5,000. 
Since the filing fee is deducted from the investigation fee, which is 
paid at the end of the application process, there will be no net 
increase in cost to the applicant. However, the increase in the initial 
filing fee will enable the Government to recover more of its 
administrative costs for application processing at the beginning of the 
application period. The instructions for filing Form MA-163 will be 
modified to reflect the increased fee.
    Section 298.3(f). In response to the 1994 interim final rule, 
almost all of the 28 commenters responded favorably to the proposal 
that the Secretary exercise discretion to issue a Letter of Interest 
prior to the applicant's submission of a complete application. 
Commenters noted that the procedure could be particularly useful if the 
shipbuilder could use the document as a marketing document to compete 
effectively against foreign yards. Some suggested that if MARAD were 
also to preapprove ship designs, Letters of Interest would be very 
effective indicators of MARAD's interest in a proposed financing. One 
commenter suggested that Letters of Interest could be used by 
applicants to forecast the cost of a transaction and the expertise that 
will be needed to complete a proposed transaction.
    Commenters proposed that requests for Letters of Interest should 
contain information about (1) the type and design of the Vessel to be 
financed and its intended trade, (2) the approximate cost of the Vessel 
and its proposed builder, (3) the amount of the requested Guarantee, 
(4) recent financial information on the prospective shipowner or 
bareboat charterer, (5) a description of the collateral to secure the 
Secretary's Guarantee, and (6) identification of the country in which 
the Vessel would be owned and documented. A commenter recommended that 
there be no charge or fee for the issuance of a Letter of Interest, 
that the letter be issued prior to the filing of an application, and 
that the letter be issued within ten days of the request.
    Several commenters raised two concerns about Letters of Interest. 
First,

[[Page 21306]]

they argued that requests for such letters must be treated 
confidentially because a request for a letter may come during the 
negotiating process and the subject shipyard would not want its 
competitors to be aware of the negotiations or potential prices. A 
second concern raised was that the formalization of a Letter of 
Interest procedure could slow down the expeditious approval by MARAD of 
loan guarantee applications by effectively duplicating the formal 
application process. It was suggested by one commenter that MARAD could 
substitute preapplication meetings for the Letter of Interest. 
Additional concern was expressed that the conditions contained in the 
Letter of Interest should not be deemed by the agency to be binding if 
the applicant later demonstrates that it can meet alternative, but 
equivalent conditions.
    MARAD Response: MARAD noted in its comments above to Sec. 298.2(o) 
its deletion of the Letter of Interest definition. Initially, MARAD 
intended its Letters of Interest to parallel those of the Export-Import 
Bank of the United States. However, MARAD has, with the passage of 
time, significantly diluted the content of its Letter of Interest to 
the point where the letter is in the nature of a letter of eligibility. 
MARAD found it necessary to amend the letters because, in certain 
instances, they had been held forth to outside institutions as 
representing some sort of commitment to a project by MARAD. Currently, 
the letters describe only the general eligibility of a project and 
advise that, as such, they do not and should not be construed as 
approval of the project by MARAD or the terms that would be applicable 
to the project. The letters state that approval of any project would be 
based on MARAD's determination that the project meets all statutory, 
regulatory and financial requirements. The letters further state that, 
although a project may be deemed eligible for Title XI financing, 
issuance of the letter does not give any assurances that MARAD would be 
interested in proceeding with, or that funds would be available for, 
the type of project should an application be filed. Therefore, MARAD 
believes that to continue to call these letters ``Letters of Interest'' 
is inaccurate. MARAD will continue to issue letters of eligibility to 
indicate the general eligibility of a project for Title XI financing. 
However, it will no longer issue any document referred to as a Letter 
of Interest. MARAD believes that the letter of eligibility concept does 
not have to be formalized in the Title XI regulations and, therefore, 
paragraph (f) is being deleted in its entirety.
    MARAD does not agree with the commenters' concern that letters of 
eligibility be treated on a confidential basis. As a general matter, 
all letters of eligibility including all formal actions taken by MARAD, 
including the issuance of a letter of eligibility, must be disclosed to 
the public. However, if the request for a letter of eligibility, 
including attachments thereto, contains information which the submitter 
considers to be trade secrets or commercial or financial information 
and privileged or confidential, or otherwise exempt from disclosure 
under the Freedom of Information Act (FOIA) (5 U.S.C. 552), the 
submitter shall assert a claim of exemption at the time of filing a 
letter of eligibility request. The same requirement shall apply to any 
amendment to the request. The procedures outlined in paragraph (d) of 
this section shall apply with respect to the assertion and review of 
FOIA exemption claims. Due to the nature of a request for a letter of 
eligibility, MARAD does not agree with the comment that the letter of 
eligibility procedure would slow down the expeditious approval by MARAD 
of Title XI applications. Finally, MARAD believes to be unfounded the 
comment that MARAD could substitute pre-application meetings for the 
letter of eligibility as the two concepts are unrelated. The purpose of 
a pre-application meeting is to exchange information and the purpose of 
a letter of eligibility is to identify the general eligibility of a 
project.

Section 298.10  Citizenship.

    This section sets forth the citizenship requirements for Title XI 
applicants and certain other parties that must establish U.S. 
citizenship prior to acquiring a legal or beneficial interest in a 
Vessel financed under Title XI of the Act. The exceptions to this 
requirement are Eligible Export Vessels and General Shipyard 
Facilities.
    Section 298.10(a). MARAD received four comments on this issue. One 
commenter merely pointed out a typographical mistake. The other three 
commenters supported the elimination of the citizenship requirement for 
all Title XI financed U.S.-flag vessels and stated that the only 
requirement should be the vessel documentation requirements 
administered by the U.S. Coast Guard. One of the three commenters, with 
known foreign involvement, is interested in converting semi-submersible 
drilling rigs into floating production systems (FPS) for use in the oil 
and gas industry in the Gulf of Mexico area. Therefore, their view is 
that Title XI financing should be available to ``transnational ship-
owning corporations.'' Another commenter supported the elimination of 
the citizenship requirement because their desire is ``to see that the 
potential beneficiaries of the Title XI program are as broad as 
possible * * *'' A comment from a law firm stated that sections 1103(a) 
and 1104(a)(1) were amended by the Shipbuilding Act to eliminate 
Section 2 citizenship requirements for Title XI financed U.S.-flag 
vessels and that MARAD is misreading the U.S. citizenship requirements 
set forth in the defined term ``vessel'' at section 1101(b). Their view 
is that the U.S. citizenship requirement in this section is not all 
inclusive and applies only to certain types of vessels. One of the four 
commenters also stated that the citizenship of a preferred mortgagee is 
``immaterial'' and MARAD should not be concerned with the citizenship 
of third party mortgagees.
    MARAD Response: The U.S. ownership requirement for U.S.-flag 
vessels financed with Title XI has been consistently required 
throughout the life of the Title XI program. It was required for the 
predecessor federal ship mortgage insurance program, 52 Stat. 969 (See 
H.R. Rep. No. 2168, 75th. Cong., 3d Sess. 29), retained in the Federal 
Ship Loan Guarantee Program, enacted in 1972, 60 Stat. 909, and left 
unchanged by enactment of the Shipbuilding Act in which Title XI loan 
Guarantees were extended to Eligible Export Vessels, which could be 
owned by either U.S. citizens or non-U.S. citizens, but retained the 
limiting definition of vessels for non-export purposes. Therefore, by 
law, U.S.-flag Vessels receiving Title XI financing must be owned by 
U.S. citizens.
    With respect to the comment regarding citizenship of mortgagees, 
MARAD does not require, under the Title XI financing program, evidence 
of the mortgagee's U.S. citizenship. MARAD only requires confirmation 
that the mortgagee complies with the statutory requirements established 
for mortgagees. Accordingly, MARAD will not amend the regulation.

Section 298.11  Vessel requirements

    Section 298.11(a). Concerning paragraph (a), United States 
Construction, one commenter suggested that the structure of creating 
three separate classes of Vessels is confusing and unnecessary. To the 
extent a higher standard is required for operation in the coastwise 
trade, it should be sufficient simply to say that the Vessel shall be 
built to whatever standard is necessary

[[Page 21307]]

to entitle it to be eligible for such trade. There should be no 
distinction between U.S.-flag and Eligible Export Vessels. The standard 
for U.S. shipyard involvement for Eligible Export Vessels is the 
standard which should apply to all Vessels subject to specific trade 
requirements. The commenter therefore recommends that for all Vessels 
MARAD adopt the definition in Sec. 298.11(a)(3), which provides that 
the Vessel is considered to be of U.S. construction if assembled in a 
United States shipyard. A second commenter states that since the 
Organization for Economic Cooperation and Development Shipbuilding 
Agreement recognizes the U.S. right to maintain the Jones Act, it is 
appropriate for the rule to make a distinction between Jones Act and 
non-Jones Act Vessels so that any prospective change to the guarantee 
period will not apply to Jones Act Vessels.
    MARAD Response: Upon further review, MARAD agrees with one of the 
commenters that the creation of three separate categories of Vessels is 
unnecessary. As the proposed categories were squarely in line with the 
standards enunciated by the United States Coast Guard, MARAD believes 
it is appropriate instead to amend paragraph (a) of the regulation to 
simply state that for U.S.-flag Vessels, the Vessels shall be built to 
whatever standard is necessary to enable them to be eligible for their 
specific trade requirement. Accordingly, the regulation is being 
amended to provide that a Vessel, including an Eligible Export Vessel, 
financed by an Obligation Guarantee is considered to be of United 
States construction if the Vessel is assembled in a shipyard 
geographically located in the United States. In addition, 
Sec. 298.32(a)(6) is being amended to reflect the above.
    Section 298.11(c). Concerning paragraph (c), Class, condition and 
operation, two commenters supported MARAD's proposed amendment 
regarding Quality Systems Certificate Scheme (QSCS) issued by qualified 
International Association of Classification
    Societies (IACS) members as meeting acceptable standards for such a 
society to participate in the Eligible Export Vessel program.
    MARAD Response: By requiring solely ISO-9000 registration, the 
current Title XI regulations do not allow members of IACS who are QSCS 
qualified members that are not ISO-9000 registered to participate in 
the Title XI Eligible Export Vessel program. Initially, there was a 
thought that merely agreeing to a QSCS standard would screen out 
marginally qualified classification societies. However, requiring the 
ISO-9000 standard would currently screen out the American Bureau of 
Shipping and other highly qualified classification societies whose 
inspection and classification activities are recognized worldwide. 
Paragraph (c) has been amended to permit QSCS qualified IACS members 
who have been recognized by the United States Coast Guard as meeting 
acceptable standards for such a society to participate in the Eligible 
Export Vessel program. That recognition shall include, at a minimum, 
recognition that the society meets the requirements of IMO Resolution 
A.739(18).
    Section 298.11(e). Concerning paragraph (e), Metric Usage, one 
commenter states that it is not clear what is meant in the regulation 
by the statement that the ``preferred system'' is the metric system. If 
some preference is to be given to application of the metric system, the 
consequences of such preference should be spelled out.
    MARAD Response: DOT Order 1020.1D ``Department of Transportation 
Transition to the Metric System'' established Departmental policy for 
transition to the metric system in accordance with the Metric 
Conversion Act of 1975, as amended by Section 5164 of the Omnibus Trade 
and Competitiveness Act of 1988, Pub. L. 100-418 (Omnibus Act). Section 
5164 of the Omnibus Act declares that it is the policy of the United 
States to designate the metric system of measurement as the preferred 
system of weights and measures for U.S. trade and commerce. Section 
5164(b)(2) requires each Federal agency to use the metric system of 
measurement in its procurement, grants, or other business-related 
activities. Therefore, the Title XI regulations have been amended to 
indicate that the preferred system of measurement and weights for 
vessels and advanced and modern shipbuilding technology is the metric 
system as a matter of policy. However, no preference/priority is given 
to processing applications where the metric system of weights and 
measures is utilized. The priorities given to Title XI applications are 
outlined in Sec. 298.3(e) and select criteria for evaluating Title XI 
applications is set forth in Sec. 298.17.

Section 298.12  Applicant and Operator's Qualifications

    Section 298.12(b)(2). This section outlines identifying information 
required to be submitted if the applicant is a partnership, joint 
venture, association, or unincorporated company.
    MARAD Response: Although no comments were received regarding the 
change to this paragraph as outlined in the NPRM, MARAD has decided to 
add a new paragraph (b)(2)(vi) requiring the submission of information 
regarding financial, management and/or equity transactions which could 
have a significant impact on the ability of the applicant to meet the 
Title XI requirements.
    Section 298.12(f)(1). One commenter stated it is unclear which 
individuals need to be named in this section which requires that the 
background of ``all senior supervisory personnel'' be submitted. To the 
extent that advanced shipbuilding technology is the subject of the 
application, it should be sufficient to submit the background of the 
people who will be directly responsible for the installation or 
operation of the facility or method. Additionally, one commenter 
suggested that the word ``personnel'' should be stricken from the 
proposed insert--''by all senior supervisory''--because the word 
``personnel'' already follows each place that the phrase is inserted.
    MARAD Response: MARAD agrees that the word ``personnel'' should be 
stricken from the proposed amendment to that paragraph. MARAD sees no 
reason to change the present wording of paragraph (f)(1) regarding the 
background of all senior supervisory personnel for Advanced 
Shipbuilding Technology. It is a sufficiently clear standard to apply 
to particular circumstances.

Section 298.13  Financial Requirements

    Section 298.13(a)(2)(i). One issue on which MARAD solicited public 
comments in the NPRM is the retention in section 298.13 of the waiver 
requirement for foreign components and services to be included in 
Actual Cost, which waiver shall not be granted for foreign components 
of the hull and superstructure. MARAD indicated its concern about the 
potential adverse effect on the U.S. supplier base, which MARAD 
recognizes as critical to the national defense and economy. In the 
NPRM, MARAD stated that it is attempting to create an environment where 
both the shipbuilding and ship supply industries have the opportunity 
to be competitive based on fair pricing, quality, and timeliness.
    A broad spectrum of comments were received on this issue. Some 
commenters supported the retention of the current waiver requirement 
for foreign components and services. One commenter submits that the 
retention of the waiver provision is the most

[[Page 21308]]

prudent path for applicants to follow and outweighs any speculative 
adverse impact that retention of the waiver might have on the U.S. 
supplier base. There are instances in which a foreign component or 
service is necessary for the construction, reconstruction, or 
conversion of a vessel, and the applicant should not be penalized in 
such instances. Additionally, the commenter states that removal of the 
waiver might place a U.S. supplier who competes with foreign suppliers 
in a position to demand what might amount to monopolistic prices; the 
supplier who normally competes in the world market would be given 
dominant market power if the applicant were required to purchase 
supplies from such a U.S. supplier in order to obtain financing for the 
cost of such supplies. The commenter states that removal of the waiver 
provision has the potential to hinder, rather than enhance, the 
creation of a competitive domestic ship supply industry based on fair 
pricing, quality and timeliness. In addition, the commenter submits 
that it should be made clear that, in addition to the hull and 
superstructure, each additional foreign component or service for which 
a waiver is not granted, and thus which is not included in Actual Cost, 
can be regarded as owner-furnished equipment that may be used in 
satisfying the applicant's equity requirements. Finally, that commenter 
proposes adding the following underscored language to 
Sec. 298.13(a)(2)(1): ``Although excluded from Actual Cost, foreign 
components of the hull and superstructure and other foreign components 
and foreign services for which a waiver has not been granted can be 
regarded as owner-furnished equipment that may be used in satisfying 
the applicant's equity requirements * * *.''
    Another commenter states that the term ``component'' should be 
defined in order to eliminate the possibility that raw materials, such 
as steel, might be considered to be a component and required to be of 
U.S. origin. It is important to retain the ability to waive the 
requirement for U.S. components, MARAD needs the flexibility and it is 
too hard to predict technological changes that may be beneficial to a 
vessel that may be obtained only through a foreign source or to 
compensate for shortages in the U.S. supply of components affecting 
delivery schedules. Another commenter notes that the regulations are 
not specific as to what items are to be considered as components of the 
``hull and superstructure.''
    Other commenters supported the introduction of a more restrictive 
waiver requirement by recommending that waivers ``ordinarily be granted 
only where the applicant has demonstrated that the item involved: (a) 
Is not manufactured by a U.S. domestic source, or if a service, is not 
available from such a source; (b) is not available from a U.S. domestic 
source in a timely fashion; or (c) is not available from a U.S. 
domestic source at a competitive price.'' Along the same line, another 
commenter states that the regulations need to be amended to provide for 
standards and procedures for granting waivers, such that applicants 
will be required to demonstrate in a clear and convincing way that no 
U.S. product is available and that sufficient and effective steps have 
been taken to search the U.S. industrial base.
    Finally, some commenters opposed the requirement for a foreign 
component waiver for non-hull and superstructure items. One commenter 
states that the requirement to seek a waiver for each of a myriad of 
items would be a crippling obstacle to achieving competitiveness and 
the NPRM gives no indication as to grounds for a waiver. The commenter 
states that protection of the U.S. supplier base will not promote 
competition. Where U.S. suppliers are capable and cost-competitive, the 
commenter expects U.S. suppliers to be used. However, the commenter 
supports the requirement that only hull and superstructure components 
fabricated in the U.S. should be included in Actual Cost and that no 
waiver should be granted. The commenter does not believe that inclusion 
of foreign hull and superstructure components should disqualify the 
entire vessel from Title XI financing and does not see any significant 
benefit to allowing foreign hull and superstructure components to be 
included as part of the equity contribution. Finally, the commenter 
states that it is unclear in the example given in the NPRM how foreign 
hull and superstructure components will be considered as part of the 
equity contribution. Nonetheless, the regulations should specifically 
state that large items of foreign hull and superstructure components 
excluded from actual cost may be financed externally, such as in a 
foreign jurisdiction that is willing to provide export financing.
    Another commenter opposing the requirement for a foreign component 
waiver for non-hull and superstructure items states that restrictions 
on the use and financing of foreign equipment will severely limit U.S. 
shipyards' ability to become globally competitive. The commenter adds 
that it is not reasonable to assume that these restrictions will result 
in the domestic manufacture of items. U.S. yards need to have the same 
access to the global supplier base as do other yards so that they can 
obtain the low prices and technologically advanced designs necessary to 
secure orders. Restricting U.S. shipyards from procuring foreign source 
machinery, equipment, or hull and superstructure material which has 
been manufactured in a foreign facility is not the way to make them 
competitive on the international market.
    Another commenter respects MARAD's good faith desire to try to 
protect U.S. suppliers, but opposes the actual cost disqualification 
for all foreign components and services. The commenter states that the 
NPRM's articulated policy goal is contrary to the spirit of GATT, to 
the policy of the President and the USTR, and to Congressional intent. 
In order to get export shipbuilding orders, there must be freedom to 
respond to the commercial dictates of international customers. The 
commenter adds that U.S. suppliers are done no favors by adopting 
protectionist principles which can prevent U.S. shipyards from 
obtaining export orders. The commenter states that a ``Buy America'' 
program should not be adopted until choice availability and price 
parity from within the domestic U.S. is fully equal to that 
internationally available. If the above arguments are rejected, the 
commenter argues that the hull and superstructure metals components are 
the only items for which no waiver should be granted.
    A final commenter adds that exclusion of foreign components of the 
hull and superstructure and a waiver for other foreign components or 
services is redundant in the case of coastwise-eligible U.S.-flag 
Vessels since other U.S. laws require that such Vessels be built in the 
United States (which term includes fabrication of all major components 
of the hull and superstructure in the U.S.). The commenter states that 
the regulations omit the word major thereby arguably setting up an even 
higher standard than that required to document Vessels under the U.S. 
flag for coastwise trade. The commenter recommends that MARAD limit its 
requirements under Title XI in the case of non-coastwise U.S.-flag 
Vessels and foreign-flag Vessels to assembly in a shipyard in the 
United States. The commenter states that MARAD should encourage U.S. 
shipyards to compete internationally and not limit its own program in a 
way that makes it less attractive than competing programs being offered 
by foreign countries. In addition, the commenter states that the waiver

[[Page 21309]]

requirement is totally unwarranted in light of earlier removal of the 
``Buy America'' requirements. Placing additional requirements of this 
type is the kind of unnecessary government regulation that the 
Administration promised to eliminate in its October 1993 shipbuilding 
initiative report.
    MARAD Response: MARAD reiterates its concern about the potential 
adverse effect on the U.S. supplier base of elimination of the waiver 
requirement for foreign components and services to be included in the 
Actual Cost determination. MARAD is attempting to create an environment 
where both the shipbuilding and ship supply industries have the 
opportunity to be competitive based on fair pricing, quality and 
timeliness. In view of the foregoing comments, MARAD has decided to 
retain the waiver requirement and to establish a standard for granting 
a waiver. The standard would be the certification by the applicant, to 
be reviewed by MARAD, that a foreign item or service is not available 
in the U.S. on a timely or price-competitive basis, or is not of 
sufficient quality. Paragraph (a)(2)(i) is being modified accordingly.
    In addition, MARAD agrees with one of the commenters that the 
omission of the word ``major'' from defining the components of the hull 
and superstructure which must be fabricated in the U.S. establishes a 
higher standard than that required to document vessels under the U.S. 
flag for coastwise trade. Accordingly, the appropriate clarification is 
being made to paragraph (a)(2)(i).
    Section 298.13(a)(4). One commenter states that provision should be 
made to accept financial information provided in the normal accounting 
system used by the applicant, provided that it is an accepted 
accounting system in the applicant's country of origin and further, 
provided that the applicant submits some reconciliation of the major 
differences between the accounting system employed and GAAP. The 
commenter adds that the Securities and Exchange Commission accepts this 
approach. One other commenter recommends that if U.S. GAAP is to be 
required of all applicants or other entities significantly involved 
with the financing, that requirement should be reflected in the 
regulations.
    MARAD Response: MARAD recognizes that a requirement to meet U.S. 
generally accepted accounting standards may be unduly burdensome in the 
case of Eligible Export Vessels. Accordingly, in the interim final rule 
published in the Federal Register on March 31, 1994, MARAD amended 
Sec. 298.42 of the Title XI regulations to provide that, in the case of 
such vessels, the company accounts shall be audited at least annually 
and the Secretary may require that the financial statements be in 
accordance with generally accepted accounting principles by 
accountants, as otherwise described in Sec. 298.42, or certified by 
independent public accountants licensed to practice by the regulatory 
authority or other political subdivision of a foreign country, provided 
such accountants are satisfactory to the Secretary. In order to be 
consistent with Sec. 298.42, MARAD agrees that provision should be made 
for MARAD to accept financial information from Eligible Export Vessel 
applicants provided in the normal accounting system used by the 
applicant, provided that it is an accepted accounting system in the 
applicant's country of origin and, further, provided that the applicant 
provides a reconciliation of the major differences between the 
accounting system employed and GAAP. This approach would parallel that 
accepted by the Securities and Exchange Commission. MARAD has added new 
language to this paragraph to accommodate the commenter's concerns and 
to make this paragraph consistent with Sec. 298.42.
    Section 298.13(b). This paragraph sets forth financial definitions 
for Secs. 298.13, 298.35 and 298.42 of the Title XI regulations. One 
commenter is confused as to how the NPRM amended this section to be 
consistent with 46 CFR part 232, as no proposed amendments to part 232 
could be found. The commenter added that, for the definitions of 
working capital, equity and long-term debt, the NPRM deleted references 
to GAAP, which revisions are not supported by the commenter.
    MARAD Response: The commenter appears to have misinterpreted the 
proposed amendment to this section of the Title XI regulations. The 
NPRM amended certain paragraphs of this section to make them consistent 
with 46 CFR Sec. 232, which was most recently amended by MARAD with the 
publication of a notice in the Federal Register on December 9, 1993. 
There is no indication in the discussion section of the NPRM that 
amendments to part 232 were also being proposed, which is the reason 
the commenter could not find any proposed amendments to part 232.
    With regard to the commenter's statement that the NPRM deleted 
references to GAAP in the definitions of working capital, equity and 
long-term debt, it is important to note that 46 CFR Sec. 232.2(a), 
which is separate from the Title XI regulations, requires that all 
contractors shall conform their accounting policies to GAAP 
(promulgated by the Financial Accounting Standards Board of the 
American Institute of Certified Public Accountants). Although the NPRM 
deletes references to GAAP in these Title XI regulations, working 
capital, equity and long-term debt definitions must conform to GAAP as 
such terms are defined in 46 CFR 232.2(a). Hence, MARAD sees no reason 
to change the present wording of paragraph (b).
    Sections 298.13 (d) and (e). These sections outline the primary and 
special requirements required at the Closing. Comments were received 
from only one commenter on these paragraphs. The commenter states that 
the maximum debt to equity rate of 2:1 is unrealistic and should be 
revised upwards. The commenter considers the ratio unrealistic because 
a company could have a large asset requisition and yet still be strong 
enough to pay back its loan. Furthermore, since banks allow a ratio of 
3:1 in certain cases, MARAD regulations are more burdensome. In 
addition, the commenter states that the working capital ratio is 
obsolete and should be replaced by a cash flow ratio for asset-based 
companies. A minimum ratio of 1.25:1 is recommended by the commenter in 
keeping with current banking requirements.
    MARAD Response: MARAD does not agree that a debt to equity ratio of 
2:1 and a positive working capital ratio are either unrealistic or 
obsolete standards, and is not amending these requirements. However, 
MARAD recognizes that these standards may not be appropriate in certain 
cases and does not apply them in every case. Financial requirements are 
determined on a case-by-case basis and are dependent upon numerous 
financial and economic factors. Pursuant to paragraph (h) of this 
section, the Secretary may waive or modify the financial terms or 
requirements otherwise applicable under this section, upon determining 
that there is adequate security for the Guarantees. Should an applicant 
have sufficient financial resources to justify a different ratio, the 
Secretary already has the authority to modify the financial 
requirements.

Section 298.14  Economic Soundness

    Section 298.14. One commenter stated that in evaluating the income 
stream for a one vessel project, MARAD should consider the assets of 
the entire company which back up the loan, including other vessels' 
income. In addition, loans should provide for repayment without the 
imposition of pre-payment penalties kicking in.

[[Page 21310]]

    MARAD Response: Paragraph (a)(1)(iii) of this section states that 
in making a finding of economic soundness MARAD shall consider all 
relevant factors, including, but not limited to, the projected revenues 
and expenses associated with employment of the vessel. Whether the 
project is a one Vessel project or a multi-Vessel project, MARAD 
believes that it is only reasonable to require that the projected cash 
flow and net income of the project support the Title XI debt service 
requirements. Therefore, MARAD declines to amend the requirement.
    As to the comment that loans should provide for repayment without 
pre-payment penalties kicking in, payment terms, conditions, and 
penalties, if any, are determined prior to the issuance of the 
Obligations and are subject to negotiation. For MARAD to require that 
no pre-payment penalties will kick in if a loan should be prepaid is 
inappropriate and MARAD sees no reason to take such a position as the 
issue of pre-payment penalties must be negotiated between the Obligor 
and the Obligee(s).
    Although no comments were specifically received regarding 
paragraphs (b)(3) and (b)(4), MARAD has re-evaluated this requirement 
and has determined that the IRR calculation is not necessary and is 
deleting the appropriate paragraphs. The IRR calculation regulation was 
originally intended to provide specific, clear procedures that would 
produce more accurate and complete information for selecting successful 
applicants. However, on August 6, 1992, MARAD issued a final rule which 
shifted the burden for computation of the IRR from the applicant to 
MARAD.
    This section already outlines relevant factors that are considered 
by MARAD in making the economic soundness finding for a project. MARAD 
can make an economic soundness finding for a particular project based 
on the revenue, cost data, cash flows and other data already required 
to be submitted by all applicants. In view of the foregoing, the IRR 
calculation is not necessary to make a finding of economic soundness.

Section 298.18  Financing Advanced or Modern Shipbuilding Technology

    Section 298.18(a). This paragraph states that the Secretary will 
approve Guarantees to finance Advanced or Modern Shipbuilding 
Technology only upon a finding by the Secretary that the Guarantees 
will aid in the transition from naval shipbuilding to commercial ship 
construction for domestic and export sales, encourage shipyard 
modernization, and support increased productivity.
    MARAD Response: Although no comments were received on this 
paragraph, MARAD has reevaluated the requirement for this finding as 
part of its overall concern to reduce regulatory burden. This finding 
is not a statutory requirement; it was incorporated in the Title XI 
regulations on March 31, 1994, with the publication of the interim 
final rule which became final on September 16, 1994. Subtitle D of the 
Authorization Act includes a similar requirement for eligible export 
vessels which does not apply to shipyard modernization and improvement.
    In view of the fact that: (1) There is no statutory requirement for 
the Secretary to include the provision in paragraph (a) of this 
section; (2) Section 298.17 of the regulations already provides that, 
in evaluating project applications, the Secretary shall also consider 
whether, in the case of an Eligible Shipyard, the application provides 
for the capability of the shipyard to engage in naval vessel 
construction in time of war or national emergency; (3) paragraph (b) of 
this section states that the Secretary shall not approve applications 
for Advanced or Modern Shipbuilding Technology which, after taking into 
consideration certain factors, would preclude approval of another 
application which would result in a more desirable use of appropriated 
funds; and (4) Sec. 298.3(e) states that priority will be given to 
applications from General Shipyard Facilities that have engaged in 
naval Vessel construction and that have pilot programs for shipyard 
modernization and Vessel construction, with respect to funds 
appropriated to the Secretary of Defense, it is now MARAD's position 
that General Shipyard Facilities applying for Guarantees to finance 
Advanced or Modern Shipbuilding Technology need not satisfy a mandatory 
requirement as to prior naval shipbuilding. The language in the 
paragraph is being amended accordingly.

Section 298.20  Term, Redemption and Interest Rate.

    Section 298.20. One commenter stated that where charter rates are 
very low, financial assistance could be provided to an operator such as 
an extension of the Title XI maturity from 20 years to 25 years or a 
moratorium of the principal payments for a certain period of time to 
enable an owner to keep a ship out of lay-up.
    MARAD Response: This section outlines Obligation criteria with 
respect to term limitations, required redemptions and interest rate. 
Title XI Obligations shall not have a maturity which exceeds the 
anticipated physical and economic life of the asset being financed and, 
with respect to vessels, no more than twenty-five years from certain 
dates. MARAD already has the authority to defer principal payments, if 
warranted. Further, to protect, preserve or improve the collateral held 
as security by MARAD to secure Title XI debt, Sec. 298.28 provides 
MARAD discretion to make, or commit to make, an advance or payment of 
funds for Vessel-related expenses or fees.

Section 298.21  Limits

    Section 298.21(c). One commenter supports inclusion of Guarantee 
Fees as an item of Actual Cost in addition to certain broker 
commissions and underwriting fees for export vessels.
    MARAD Response: MARAD agrees with the comment that if Guarantee 
Fees are to be paid up front and are eligible to be financed with Title 
XI, then Guarantee Fees should be included as an item of Actual Cost. 
No further changes to paragraph (c) are necessary. With regard to 
broker commissions and underwriting fees for Eligible Export Vessels, 
paragraph (c)(4) does not allow ``fees, commissions or charges for 
granting or arranging for financing'', and paragraph (c)(6) does not 
allow ``underwriting or trustee's fees'' to be included in Actual Cost. 
Recognizing the importance that the payment of commissions plays in the 
export market, MARAD will allow commissions to be included in the 
foreign equipment and services amount of the Actual Cost of the 
project, provided: (1) A majority of the work done by the parties 
receiving the commissions is in the form of design and engineering 
work, and (2) the commissions represent a small amount of the total 
contract price. As the commissions represent a portion of the total 
shipyard contract price, therefore, there is no need to amend 
paragraphs (c)(4) and (c)(6). A new sentence is being added to 
paragraph (b) which states that commissions may be included in the 
amount of the Actual Cost of a project, subject to the foregoing 
provisions.
    Section 298.21(d). As mentioned previously in the preamble, the 
NPRM solicited public comments regarding the guarantee of construction 
period financing, as authorized by the Title XI regulations. MARAD 
specifically invited comments on available forms of security, in 
addition to surety bonds, that could protect MARAD's interests as a 
lender, how progress should be monitored, what new procedures/
methodologies should be developed to

[[Page 21311]]

improve the progress payment system, and if payment of interest on the 
obligations should be made on a more frequent basis (i.e., weekly, 
monthly or quarterly) than that outlined in Sec. 298.22, Amortization 
of Obligations. In addition, MARAD solicited comments on how the Title 
XI applicant will verify/certify to MARAD that certain costs have been 
paid prior to disbursement of Title XI funds from the escrow account, 
including, for example, the use of an agent on MARAD's behalf to verify 
that certain costs have been paid.
    On the payment of interest issue, one commenter states that the 
question of whether interest should be paid more frequently has no 
bearing on construction risk. A requirement for more frequent payment 
than would be required after delivery would make issuance of long-term 
bonds during the construction period more awkward. Another commenter 
adds that interest during the construction period should be paid semi-
annually. Finally, one commenter recommended that interest be collected 
monthly in arrears.
    On the agent issue, one commenter states that the use of an agent 
is an unnecessary complication. Actual Cost is readily determined by 
inspection of invoice payments. The issue is really whether progress 
payment criteria established in the contract have been met. The 
commenter adds that MARAD should adopt a system with only four or five 
progress payments that are keyed to readily ascertained events, such as 
keel laying or start of fabrication. MARAD should avoid any elaborate 
audit procedures for costs incurred by the shipyard since the cost 
basis for the project is a fixed price. A second commenter states that 
the use of an agent by MARAD for certification of completion and 
payment of costs is similar to the ``privatization'' going on in many 
agencies and departments today and supports the concept. A final 
commenter adds that progress could be monitored by an approved agent 
and the shipyard and owner should have flexibility to develop 
procedures/methodologies. The commenter adds that the applicant could 
verify/certify certain costs paid prior to disbursement using an agent 
on behalf of MARAD.
    Finally, one commenter suggests that the words ``or Advanced 
Shipbuilding Technology or Modern Shipbuilding Technology'' should not 
be inserted as proposed in Sec. 298.21(d) because they are already in 
the current regulations.
    MARAD Response: MARAD disagrees with the comment that the words 
``or Advanced Shipbuilding Technology or Modern Shipbuilding 
Technology'' should not be inserted in Sec. 298.21(d) because the words 
are already in the current regulations. Although Sec. 298.21 (b) has 
already been amended to reflect the expansion of the Title XI program 
for financing Advanced Shipbuilding Technology and/or Modern 
Shipbuilding Technology, it is necessary that the applicant submit to 
MARAD documents substantiating all claimed costs eligible under that 
section prior to payment from the Escrow Fund or Construction Fund and 
prior to the final Actual Cost determination for the Advanced 
Shipbuilding Technology and/or Modern Shipbuilding Technology.
    On the payment of interest issue, MARAD agrees that the frequency 
of making interest payments has no bearing on construction risk, and a 
requirement for a more frequent payment than would be required after 
delivery would make issuance of long-term bonds during the construction 
period more difficult. In view of the foregoing, MARAD does not believe 
that interest on Obligations should be paid on a more frequent basis 
than that outlined in Sec. 298.22, which, in most cases, is semi-
annually.
    On the agent issue, MARAD disagrees with the comment that the use 
of an agent is an unnecessary complication. Provided that the 
methodology for substantiation of Actual Cost is determined prior to 
the establishment of an Escrow Fund or Construction Fund, using an 
agent on behalf of MARAD to verify/certify certain costs paid prior to 
disbursement can improve the administration of the Title XI program. 
MARAD believes that it is important to maintain flexibility in the 
procedures/methodologies for agent certification, and therefore 
declines to adopt by regulation a progress payment schedule based on 
specified milestones as such a payment schedule keyed to definitive 
events is already permissible.
    Hence, MARAD will not amend the text of paragraph (d) as proposed 
in the NPRM.

Section 298.28  Advances

    Concerning paragraph (a), one commenter suggested that the fourth 
sentence should be removed because the net result of the proposed 
inserts and deletions render the fourth sentence meaningless.
    MARAD Response: MARAD agrees and the fourth sentence is being 
deleted.

Section 298.32  Required Provisions in Documentation

    Section 298.32 (b). Pursuant to this section, the Obligor shall 
assign certain rights and shall covenant certain items as required by 
the Secretary.
    Paragraph (b)(4) requires covenants relating to the annual filing 
of satisfactory evidence of continuing U.S. citizenship, in accordance 
with 46 CFR part 355, with the exception of Eligible Export Vessels and 
shipyards with Advanced or Modern Shipbuilding Technology projects. One 
commenter states that this requirement is inappropriate for those 
classes of Vessels which must be documented under the laws of the U.S. 
but are not required by Section 1101(b) of the Act to be owned by 
Section 2 citizens. Since, the Coast Guard is the agency charged with 
enforcing the documentation laws of the U.S. and its regulations at 46 
CFR 67.163 require an annual report of eligibility for such 
documentation from the owners of all documented Vessels, the commenter 
writes that no useful purpose is served by requiring owners of cargo 
and passenger Vessels, tugs and towboats and barges and dredges to file 
affidavits pursuant to Part 355.
    MARAD Response: Until the Act is further amended, MARAD will retain 
the regulation regarding the filing of affidavits pursuant to 46 CFR 
part 355.
    Paragraph (b)(6) requires covenants to maintain marine and war risk 
hull and machinery insurance on the Vessel in an amount equal to 110 
percent of the outstanding Obligations or up to the full commercial 
value of the Vessel, whichever is greater. One commenter recommends 
that making the required insurance co-extensive with the Guarantee 
amount (as MARAD only guarantees up to 87\1/2\ percent of the Actual 
Cost of the Vessel) would ensure that MARAD is ``made whole'' in the 
event of a disaster, while not creating an unnecessary financial burden 
for the owners. In addition, the commenter recommends that war risk 
coverage should not be required for vessels operating in U.S. waters.
    MARAD Response: War risk insurance covers other perils besides war, 
such as strikes, riots and civil commotions. MARAD has not required war 
risk insurance for inland Vessels, Great Lakes Vessels, or Vessels 
operating solely in the intercoastal waterway because they are in a 
protected environment from risks of war. Vessels operating in domestic 
coastal trades and Jones Act offshore trades, including Puerto Rico and 
Hawaii, are required to have war risk insurance because these vessels 
are often out of protected U.S. territorial waters and in international 
waters, where they might encounter a hostile vessel or plane. For 
example, in the

[[Page 21312]]

early 1960s a U.S.-flag vessel, the FLORIDIAN was attacked by a Cuban 
fighter plane in international waters off the coast of Florida. Another 
U.S.-flag vessel, operating in the U.S. coastwise trade during that 
timeframe, the MARINE SULFUR QUEEN, vanished without a trace or 
established cause somewhere off the Florida coast on a voyage from the 
U.S. Gulf Coast to the U.S. East Coast. In addition, there is the 
possibility of minor regional flare ups where there might be the 
possibility of extending hostilities into international waters where 
U.S.-flag vessels are transiting. Accordingly, MARAD has only agreed to 
waive the war risk insurance requirement for vessels operating solely 
on or in inland protected waters. Finally, war risk insurance is 
relatively inexpensive, with coverage for a $10 million vessel costing 
$2,500 per year.
    With regard to the comments received on the covenants to maintain 
marine and war risk hull and machinery insurance on the Vessel in an 
amount equal to 110 percent of the outstanding Obligations or up to the 
full commercial value of the Vessel, whichever is greater, MARAD has 
considered the commenter's request to reduce the amount of coverage to 
equal the outstanding Obligations on a Vessel. In view of the fact 
that: (1) Any payoff by MARAD pursuant to its Guarantee would include 
interest accruals on the outstanding Obligations, and (2) the potential 
for a dispute with other parties over the insurance proceeds is reduced 
if the Vessel is insured in an amount equal to 110 percent of the 
outstanding Obligations or up to the full commercial value of the 
Vessel, whichever is greater, MARAD does not agree with the commenter 
that the amount of insurance coverage should equal the amount of the 
outstanding Obligations. Hence, MARAD sees no reason to change the 
present wording of paragraph (b).

Section 298.33  Escrow Fund

    Section 298.33 One commenter states that, in the requirement that a 
satisfactory certification as to the percentage of completion of the 
Vessel be made in conjunction with distributions from the Escrow Fund, 
the upfront payment of the Guarantee Fee as an item of Actual Cost 
needs to be factored into the percentage of completion.
    MARAD Response: Paragraph (e) of this section outlines the 
necessary requirements for disbursing funds from the Escrow Fund. As 
the upfront Guarantee Fee will be included in the Actual Cost of a 
project and will be factored into the percentage of completion 
determination referenced in subparagraph (3), MARAD is not amending the 
present wording of this section.

Section 298.35  Reserve Fund and Financial Agreement

    Section 298.35. The purpose of this section is to outline the 
requirements in a Title XI Reserve Fund and Financial Agreement (RFFA), 
which a company must enter into at the first Closing at which 
Obligations are issued. As mentioned previously, MARAD specifically 
solicited comments in the NPRM on any proposed amendments to the 
standard documentation, particularly with regard to Eligible Export 
Vessels and shipyard modernization.
    Several commenters stated that inadequate time was given to review 
and comment on the RFFA; a reduction in all documentation, not just the 
RFFA, is badly needed but is too complex an issue to be dealt with now. 
The Title XI documentation is overly complicated and greatly increases 
transaction costs and discourages applicants according to these 
commenters. As a general comment, the documentation needs to be revised 
to be consistent with the recent changes in law for shipyard 
modernization and Eligible Export Vessels. One commenter suggests the 
establishment of an advisory committee composed of representatives from 
MARAD, the maritime bar, investment and commercial banking industry, 
shipbuilding industry and the shipowning and operating industry to 
review and assist in documentation revisions.
    MARAD Response: As noted in Sec. 298.3(a) above, MARAD has decided 
to defer consideration of this matter in order to avoid delay in 
issuance of this rule. MARAD supports the suggestion that a forum be 
established by a non-Governmental authority composed of representatives 
from MARAD, the maritime bar, investment and commercial banking 
industry, shipbuilding industry and the shipowning and operating 
industry to review and assist in revisions to the Title XI documents.

Section 298.36  Annual Guarantee Fee

    Section 298.36. Most commenters oppose the lump sum prepayment of 
the annual Guarantee Fee, especially without the right of reimbursement 
in the event of prepayment. If the non-refundable-if-prepaid aspect 
were removed, then some of the commenters would support the lump sum 
payment of the annual Guarantee Fee. One commenter opposes the increase 
and prepayment of the Guarantee Fee unless it results in an increase in 
guarantee authority, as is provided in a current legislative proposal. 
Several commenters believe that the lump sum payment of the Guarantee 
Fee would force an applicant to incur increased project costs beyond 
those which would otherwise be due, making it more economical to build 
in other countries and resulting in MARAD and the applicant forfeiting 
currently existing program flexibility. One commenter states that the 
annual nature of the fee allows MARAD a second look at project exposure 
and provides an incentive for the prepayment of principal, as a means 
of reducing the applicant's real project financing costs. The commenter 
concludes by stating that the proposed change appears to be clearly 
outside the scope of the Title XI program.
    Another commenter stated that there is no indication as to the 
discount rate to be used in calculating the present value of the lump 
sum Guarantee Fee. The commenter proposes that a discount rate equal to 
the coupon rate (expected to be carried for the guaranteed bonds issued 
for the project) be applied to calculate the guarantee fee due at the 
time of the date of the security agreement. The commenter adds that it 
should be made clear that no additional Guarantee Fee is required in 
the event of a refinancing.
    Finally, a commenter argues that the calculation of the annual 
Guarantee Fee schedule should be based on the company's overall rating, 
i.e., whether the company is governed by the Section 12 or Section 13 
covenants of its Title XI Reserve Fund and Financial Agreement, rather 
than a debt to equity ratio. The commenter recommends a 50 basis points 
fee for Section 13 governed companies and a 75 basis points fee for 
Section 12 governed companies.
    MARAD Response: Section 1104(A)(e) of the Act, 46 App. U.S.C. 1274, 
provides that the Secretary is authorized to fix the Guarantee Fee for 
an Obligation and that all fees shall be computed and shall be payable 
to the Secretary under such regulations as prescribed by the Secretary. 
MARAD has exercised its authority to require the lump sum payment of 
the annual Guarantee Fee, especially without the right of reimbursement 
in the event of prepayment, to ensure that the Government will retain 
the full amount of the Guarantee Fee should the Obligations be retired 
prior to maturity, i.e., if a default occurs on the Obligations or the 
Obligations are prepaid. The regulatory change which indicates a 
modification in agency policy is within the scope of the Title

[[Page 21313]]

XI program. In addition, the lump sum Guarantee Fee payment would 
create an incentive for applicants to enhance the financial structure 
of their transactions in order to merit eligibility for the lowest 
possible Guarantee Fee rate, and therefore, reduce the risk associated 
with the project.
    Contrary to the comments of one party, the lump sum payment of the 
annual Guarantee Fee would not result in an increase in the Title XI 
guarantee authority. The lump sum payment was part of a legislative 
proposal previously submitted to Congress which increased the Guarantee 
Fees charged for a Commitment. As the language increasing the Guarantee 
Fees charged has been deleted from the legislation, the lump sum 
payment of the Guarantee Fee will not lower the subsidy rate MARAD is 
required to calculate according to the Credit Reform Act of 1990. 
Therefore, the commenter is incorrect in stating that receipt of the 
guarantee fee up front will result in an increase of the amount of 
available Title XI funding without increasing appropriations.
    The belief of several commenters that the lump sum payment of the 
Guarantee Fee would force an applicant to incur increased project costs 
beyond those which would otherwise be due is not true. It is estimated 
that the following amounts are similar: (1) The full payment of the 
first year's annual Guarantee Fee at the Closing as required prior to 
this final rule, and (2) the equity portion, or a minimum of 12\1/2\ 
percent of the lump sum payment being financed. With these 
similarities, the lump sum payment of the Guarantee Fee, and the 
potential of financing up to a maximum of 87\1/2\ percent of this 
amount, it is incorrect to assume the lump sum payment of the Guarantee 
Fee would force an applicant to incur increased project costs beyond 
those which would otherwise be due.
    The comment that there is no indication in the NPRM as to the 
discount rate to be used in calculating the present value of the lump 
sum Guarantee Fee is also incorrect. The NPRM revised paragraph (e) of 
this section and stated, among other things, that in ``determining the 
amount of the Guarantee Fee to be paid, MARAD will use a discount rate 
based on information contained in the Department of Commerce's Economic 
Bulletin Board quarterly rates.'' MARAD agrees with the comment that 
where bonds are issued in more than one series, the Guarantee Fee 
should be payable only to the extent of the total amount of obligations 
issued. The third sentence of the paragraph is deleted to coordinate 
the payment of the fee with Sec. 298.36(b), which sets forth the method 
of calculating the fee.
    Finally, MARAD disagrees with the comment that the calculation of 
the annual Guarantee Fee schedule should be based on the company's 
overall rating, i.e., whether the company is governed by the Section 12 
or Section 13 covenants of its Title XI Reserve Fund and Financial 
Agreement, rather than a debt to equity ratio. The extent to which a 
company is leveraged is a reasonable basis for assessing risk insofar 
as determining the appropriate guarantee fee. In addition, the 
commenter proposes a fee range of \1/2\ percent to \3/4\ percent; but 
this does not take into account the full Guarantee Fee range outlined 
in the statute of \1/4\ percent to \1/2\ percent for undelivered 
vessels and \1/2\ percent to 1 percent for delivered vessels.

Section 298.40  Defaults

    Paragraphs (b) and (d) of Sec. 298.40, Defaults, provide that if a 
demand for payment of the Guarantees is made, the Secretary shall make 
payment of the unpaid principal amount of Obligations and unpaid 
interest accrued and accruing thereon up to, but not including, the 
date of payment. One commenter suggested that the mandatory requirement 
for MARAD to pay off 100% of the outstanding debt in the case of a 
defaulting owner should be changed to provide an option for an 
assumption of the Obligations rather than an early payoff.
    MARAD Response: In view of the fact that the Act provides that in 
the event of a default, the Secretary may assume the Obligor's rights 
and duties under the Title XI Obligation and agreements and may make 
any payments in default, MARAD is modifying paragraphs (b) and (d) 
accordingly.

Other Comments

    In addition to the above comments received in response to the NPRM, 
several commenters provided comments which are not within the scope of 
this rulemaking. One commenter suggested that: (1) MARAD should 
consider making the Depository Trust Company (DTC) eligible as a 
Depository (there would be more competition and therefore better 
interest rates), (2) MARAD should be more adaptable to new financing 
techniques as they arise, and (3) Title XI Closings should take place 
at regional offices rather than in Washington. One other commenter 
expressed opposition to proposed legislation which increases the 
Guarantee Fee 50 percent.
    MARAD Response: Any proposed legislation is not within the scope of 
this rulemaking. As to the other comments, MARAD has the flexibility 
under its existing regulations to consider a DTC as a Depository, to 
adapt to new financing techniques, and to allow Closings at regional 
offices if appropriate. As a result, no change in Section 298 is 
necessary.
    The NPRM proposed removing and reserving Sec. 298.25, financing 
repayment of construction-differential subsidy. Section 298.25 is 
removed but has not been reserved. As a result, Sec. 298.26 through 
298.28 have been redesignated sections 298.25 through 298.27.
    In addition to the above, minor administrative changes have been 
made to Secs. 298.3(e), 298.13(e)(1)(i), 298.13(e)(1)(i)(A), 
298.14(a)(2)(i)(B), 298.14(a)(2)(iii)(G), 298.14(b)(1)(ii), and 
298.32(a)(3). '

Rulemaking Analyses and Notices

Executive Order 12866  (Regulatory Planning and Review) and Other 
Requirements of Law

    This rulemaking has been reviewed under section 3(f) of Executive 
Order 12866, Regulatory Planning and Review, and it has been determined 
that this is not an economically significant regulatory action. 
However, since this rule would further the implementation of the 
National Shipbuilding Initiative program established under Subtitle D 
of Title XIII, Pub. L. 103-160, to support the industrial base and 
national security objectives by assisting in the reestablishment of a 
United States shipbuilding industry as a self-sufficient 
internationally competitive industry, and is of great interest to the 
U.S. maritime industry, it has been determined to be a significant rule 
under the Department's Regulatory Policies and Procedures. Accordingly, 
it is considered to be a significant regulatory action under E.O. 12866 
and has been reviewed by the Office of Management and Budget. Because 
the economic impact should be minimal, further regulatory evaluation is 
not necessary. These amendments are intended only to simplify and 
clarify the procedural requirements for obtaining Guarantees, 
principally to expedite the process for MARAD's review of applications. 
Its purpose is to encourage the construction of ships in U.S. shipyards 
both for the domestic and the Eligible Export Vessel programs and the 
modernization and improvement of U.S. general shipyard facilities.
    MARAD is publishing this final rule to carry out the Secretary's

[[Page 21314]]

responsibilities under Title XI and to improve program administration.

Federalism

    MARAD has analyzed this rulemaking in accordance with the 
principles and criteria contained in Executive Order 12612 and has 
determined that these regulations do not have sufficient federalism 
implications to warrant the preparation of a Federalism Assessment.

Regulatory Flexibility Act

    MARAD certifies that this regulation will not have a significant 
economic impact on a substantial number of small entities.

Environmental Assessment

    MARAD has considered the environmental impact of this rulemaking 
and has concluded that an environmental impact statement is not 
required under the National Environmental Policy Act of 1969.

Paperwork Reduction Act

    This rulemaking contains reporting requirements that have 
previously been approved by the Office of Management and Budget 
(Approval No. 2133-0018). Use of the present Maritime Administration 
Title XI Obligation Guarantees form will be continued pending revision 
and issuance of new forms, which must be approved by the Office of 
Management and Budget.

List of Subjects in 46 CFR Part 298

    Loan programs-Transportation, Maritime carriers, and Mortgages.

    Accordingly, 46 CFR part 298 is revised as follows:

PART 298--OBLIGATION GUARANTEES

Subpart A--Introduction

Sec.
298.1  Purpose.
298.2  Definitions.
298.3  Applications.

Subpart B--Eligibility

298.10  Citizenship.
298.11  Vessel requirements.
298.12  Applicant and operator's qualifications.
298.13  Financial requirements.
298.14  Economic soundness.
298.15  Investigation fee.
298.16  Substitution of participants.
298.17  Evaluation of applications.
298.18  Financing Advanced or Modern Shipbuilding Technology.
298.19  Financing Eligible Export Vessels.

Subpart C--Guarantees

298.20  Term, redemptions and interest rate.
298.21  Limits.
298.22  Amortization of Obligations.
298.23  Refinancing.
298.24  Financing facilities and equipment related to marine 
operations.
298.25  Excess interest or other consideration.
298.26  Lease payments.
298.27  Advances.

Subpart D--Documentation

298.30  Nature and content of Obligations.
298.31  Mortgage.
298.32  Required provisions in documentation.
298.33  Escrow fund.
298.34  Construction fund.
298.35  Reserve Fund and Financial Agreement.
298.36  Annual Guarantee Fee.
298.37  Examination and audit.
298.38  Partnership agreements.
298.39  Exemptions.
Subpart E--Defaults and Remedies, Reporting Requirements, Applicability 
of Regulations
298.40  Defaults.
298.41  Remedies after default.
298.42  Reporting requirements-financial statements.
298.43  Applicability of the regulations.

Subpart F--Administration [Reserved]

    Authority: 46 App. U.S.C. 1114(b), 1271 et seq.; 49 CFR 1.66.

Subpart A--Introduction


Sec. 298.1  Purpose.

    This part prescribes regulations implementing the provisions of 
Title XI of the Merchant Marine Act, 1936, as amended, governing 
Federal ship financing assistance (46 App. U.S.C. 1271 et seq.).


Sec. 298.2  Definitions.

    For the purpose of this part:
    (a) Act means the Merchant Marine Act, 1936, as amended (46 App. 
U.S.C. 1101 through 1294).
    (b) Actual Cost of a Vessel or Advanced or Modern Shipbuilding 
Technology means, as of any specified date, the aggregate, as 
determined by the Secretary, of all amounts paid by or for the account 
of the Obligor on or before that date and all amounts which the Obligor 
is then obligated to pay from time to time thereafter, for the 
construction, reconstruction or reconditioning of such Vessel or 
Advanced or Modern Shipbuilding Technology (described in 
Sec. 298.21(b)).
    (c) Advanced Shipbuilding Technology means:
    (1) Numerically controlled machine tools, robots, automated process 
control equipment, computerized flexible manufacturing systems, 
associated computer software, and other technology for improving 
shipbuilding and related industrial production which advance the state-
of-the-art; and
    (2) Novel techniques and processes designed to improve shipbuilding 
quality, productivity, and practice, and to promote sustainable 
development, including engineering design, quality assurance, 
concurrent engineering, continuous process production technology, 
energy efficiency, waste minimization, design for recyclability or 
parts reuse, inventory management, upgraded worker skills, and 
communications with customers and suppliers.
    (d) Closing means a meeting of various participants or their 
representatives in a Title XI financing, at which a commitment to issue 
Guarantees is executed, or at which all or part of the Obligations are 
authenticated and issued and the proceeds are made available for a 
purpose set forth in section 1104(a) of the Act, or at which a Vessel 
is delivered and a Mortgage is executed as security to the Secretary.
    (e) Depository means a bank or other financial institution 
organized and doing business under the laws of the United States, any 
State or territory thereof, the District of Columbia or the 
Commonwealth of Puerto Rico that is authorized under such laws to 
exercise corporate trust powers, is a member of the Federal Deposit 
Insurance Corporation, and accepts deposits for purposes of 
implementing the program authorized by Title XI of the Act; but in the 
case of an Eligible Export Vessel can also mean, with the specific 
approval of the Secretary, foreign branches, but not the foreign 
subsidiaries, of such United States financial institutions.
    (f) Depreciated Actual Cost of a Vessel or Advanced or Modern 
Shipbuilding Technology means the Actual Cost of the Vessel or Advanced 
or Modern Shipbuilding Technology, as defined in paragraph (b) of this 
section (less a residual value of 2\1/2\ percent of United States 
shipyard construction cost or, in the case of Advanced or Modern 
Shipbuilding Technology, a residual value as appropriate), depreciated 
on a straightline basis over the useful life of the Vessel or Advanced 
or Modern Shipbuilding Technology as determined by the Secretary, not 
to exceed twenty-five years from the date the Vessel or Advanced or 
Modern Shipbuilding Technology was delivered by the shipbuilder or 
manufacturer or, if the Vessel or Advanced or Modern Shipbuilding 
Technology has been reconstructed or reconditioned, the Actual Cost of 
the Vessel or Advanced or Modern Shipbuilding Technology depreciated on 
a straightline basis from the date the Vessel or Advanced or Modern 
Shipbuilding Technology was

[[Page 21315]]

delivered by the shipbuilder or manufacturer to the date of such 
reconstruction or reconditioning, on the basis of the original useful 
life of the Vessel or Advanced or Modern Shipbuilding Technology, and 
from the date of said reconstruction or reconditioning on a 
straightline basis and on the basis of a useful life of the Vessel or 
Advanced or Modern Shipbuilding Technology determined by the Secretary, 
plus all amounts paid or obligated to be paid for the reconstruction or 
reconditioning, depreciated on a straightline basis and on the basis of 
a useful life of the Vessel or Advanced or Modern Shipbuilding 
Technology determined by the Secretary.
    (g) Documentation means all or part of the agreements relating to 
an entire Title XI financing which must be furnished to the Secretary, 
irrespective of whether the Secretary is a party to each agreement.
    (h) Eligible Export Vessel means a Vessel constructed, 
reconstructed, or reconditioned in the United States for use in world-
wide trade which will, upon delivery or redelivery, be placed under or 
continued to be documented under the laws of a country other than the 
United States.
    (i) Eligible Shipyard means a private shipyard located in the 
United States.
    (j) General Shipyard Facility means:
    (1) For operations on land, any structure or appurtenance thereto 
designed for the construction, repair, rehabilitation, refurbishment, 
or rebuilding of any Vessel, including graving docks, building ways, 
ship lifts, wharves and pier cranes; the land necessary for any 
structures or appurtenances; and equipment necessary for the 
performance of any function referred to in this paragraph; and
    (2) For operations other than on land, any Vessel, floating 
drydock, or barge built in the United States, within the meaning of 
Sec. 298.11(a), and used for, or a type that is usually used for, 
activities referred to in paragraph (k) of this section.
    (k) Guarantee means the contractual commitment of the United States 
of America, represented by the Secretary, endorsed on each Obligation, 
to make payment to the Obligee or an agent, upon demand, of the unpaid 
interest on, and the unpaid balance of the principal of such 
Obligation, including interest accruing between the date of default 
(described in Sec. 298.40 of this part) and the date of payment.
    (l) Guarantee Fee means the annual fee payable to the Secretary in 
consideration for the continuing Guarantees.
    (m) Indenture Trustee means a bank with corporate trust powers, or 
a trust company, with a combined capital and surplus of at least 
$3,000,000, which is located in and organized and doing business under 
the laws of the United States, any State or territory thereof, the 
District of Columbia or the Commonwealth of Puerto Rico, which has 
duties under the terms of a Trust Indenture, entered into with the 
Obligor, providing for the issuance and registration of the ownership 
and transfer of Obligations, the disbursement of funds held in trust by 
the Indenture Trustee for the redemption and payment of interest and 
principal with respect to Obligations, demands by the Indenture Trustee 
for payment under the Guarantees in the event of default and the 
remittance of payments received to the Obligees. Pursuant to a specific 
authorization of the Secretary, the Indenture Trustee may also 
authenticate the Guarantees.
    (n) Letter Commitment means a letter from the Secretary to an 
applicant for Guarantees, setting forth specific determinations made by 
the Secretary with respect to the applicant's proposed project, as 
required by the Act and regulations of this part, and stating the 
Secretary's commitment to execute Guarantees, subject to compliance by 
the applicant with any conditions specified therein.
    (o) Maritime Administration means that agency created within the 
Department of Transportation by Reorganization Plan No. 21 of 1950 (64 
Stat. 1273), amended by Reorganization Plan No. 7 of 1961 (75 Stat. 
840), as amended by Pub. L. 91-469 (84 Stat. 1036).
    (p) Modern Shipbuilding Technology means a technology to be 
introduced into the shipyard that is comprised of the best available 
proven technology, techniques, and processes appropriate to advancing 
the state-of-the-art of the applicant shipyard, or exceeds the best 
available processes of American shipbuilding, and that will enhance its 
productivity and make it more competitive internationally.
    (q) Mortgage means a first Preferred Mortgage on any Vessel or a 
first mortgage with respect to Advanced Shipbuilding Technology or with 
respect to Modern Shipbuilding Technology.
    (r) Obligation means any note, bond, debenture, or other evidence 
of indebtedness, as defined in section 1101(c) of the Act, issued for 
one of the purposes specified in section 1104(a) of the Act.
    (s) Obligee means the holder of an Obligation.
    (t) Obligor means any party primarily liable for payment of 
principal of or interest on any Obligation.
    (u) Paying Agent means any Person appointed by the Obligor to pay 
the principal of or interest on the Obligations on behalf of the 
Obligor.
    (v) Person means any individual, estate, foundation, corporation, 
partnership, limited partnership, joint venture, association, joint-
stock company, trust, unincorporated organization or other acceptable 
legal business entity, government, or any agency or political 
subdivision thereof.
    (w) Preferred Mortgage means:
    (1) In the case of a mortgage on a Vessel documented under United 
States law, whenever made, a mortgage that--
    (i) Includes the whole of a Vessel;
    (ii) Is filed in substantial compliance with 46 U.S.C. 31321;
    (iii) Covers a documented Vessel or a Vessel for which an 
application for documentation has been filed that is in substantial 
compliance with the requirements of 46 U.S.C. Ch. 121 and the 
regulations prescribed under that Chapter by the United States Coast 
Guard; and
    (iv) Has as the mortgagee--
    (A) A State;
    (B) The United States Government;
    (C) A Federally insured depository institution, unless disapproved 
by the Secretary for that Vessel;
    (D) An individual who is a citizen of the United States;
    (E) A Person qualifying as a citizen of the United States pursuant 
to a provision of 46 App. U.S.C. 802; or
    (F) A Person approved by the Secretary pursuant to regulations at 
46 CFR 221.23(d); and
    (2) In the case of a mortgage on an Eligible Export Vessel, 
whenever made, a mortgage that--
    (i) Constitutes a mortgage that is established as security on an 
Eligible Export Vessel under the laws of a foreign country;
    (ii) Was executed under the laws of that foreign country and under 
which laws the ownership of the Vessel is documented;
    (iii) Is registered under the laws of that foreign country in a 
public register at the port of registry of the Vessel or at a central 
office;
    (iv) Otherwise satisfies the requirements of 46 U.S.C. 31301(6)(B) 
to constitute a Preferred Mortgage; and
    (v) Has the Secretary as the mortgagee, or such other mortgagee as 
is permitted by the applicable foreign law and approved by the 
Secretary.
    (x) Related Party means as that term is defined by generally 
accepted

[[Page 21316]]

accounting principles outlined in paragraph 24 of Statement of 
Financial Accounting Standards No. 57, Related Party Disclosures.
    (y) Secretary means the Secretary of Transportation, acting by and 
through the Maritime Administrator, Department of Transportation, the 
Maritime Administrator or any official of the Maritime Administration 
to whom is duly delegated the authority, from time to time, to perform 
the functions of the Secretary of Transportation or the Maritime 
Administrator, Department of Transportation.
    (z) Secretary's Note means a promissory note from the Obligor to 
the Secretary in an amount equal to the aggregate amount of the 
Obligations, which is issued simultaneously with the Guarantees.
    (aa) Security Agreement means the primary contract between the 
Obligor and the Secretary, providing for the transfer to the Secretary 
by the Obligor of all right, title and interest of the Obligor in 
certain described property (including rights under contracts in 
existence or to be entered into), and containing other provisions 
relating to representations and responsibilities of the Obligor to the 
Secretary as security for the issuance of Guarantees.
    (bb) Vessel means all types of vessels, whether in existence or 
under construction, including passenger, cargo and combination 
passenger-cargo carrying vessels, tankers, towboats, barges and dredges 
which are or will be documented under the laws of the United States, 
floating drydocks which have a capacity of at least thirty-five 
thousand or more lifting tons and a beam of one hundred and twenty-five 
feet or more between the wing walls and oceanographic research or 
instruction or pollution treatment, abatement or control vessels, which 
are owned by citizens of the United States; except that an Eligible 
Export Vessel shall not be documented under the laws of the United 
States.


Sec. 298.3  Applications.

    (a) Content and amendment. Each application for a commitment to 
execute Guarantees shall be made on Form MA 163 to the Secretary, 
Maritime Administration, U.S. Department of Transportation, Washington, 
DC 20590, and be certified in the manner prescribed on said form. All 
required information, including copies of any demise charters, time 
charters in excess of six months, contracts of affreightment, drilling 
contracts or other contractual arrangements with respect to the Vessel 
or Vessels, shall be presented on the form or in exhibits and schedules 
submitted with the application. In addition, the Declaration of 
Lobbying form as required by 31 U.S.C. 1352 shall be filed with the 
initial application, as part of the formal submission. Each exhibit and 
schedule shall contain a statement, on the first page thereof, clearly 
identifying the document as an attachment to an application for 
Obligation Guarantees, stating the name of the applicant and the date 
of the application. Any amendment of data contained in the application 
filed shall be marked ``Amendment,'' and shall contain a statement on 
the first page thereof, clearly identifying the document as an 
amendment to an application for Obligation Guarantees, stating the name 
of the applicant and the date of application. The certification 
required on Form MA 163 shall be affixed to each amendment.
    (b)(1) Time requirements for application. Each application shall be 
submitted to the Secretary at least four months prior to the 
anticipated date by which the applicant requires a Letter Commitment. 
The Secretary may consider applications with less notice prior to the 
anticipated date by which the applicant requires a Letter Commitment, 
upon written documentation that extenuating circumstances exist. During 
the first 15 calendar day period after submission, the Secretary will 
perform a preliminary review of the application for adequacy and 
completeness. If the application is found to be incomplete, or if 
additional data is required, the Secretary will notify the applicant 
promptly in writing and the applicant will have 15 calendar days to 
correct deficiencies from the date of each request for additional 
information. If the applicant has not corrected the deficiencies, or 
made substantial progress toward correcting them, within this 15 
calendar day period, then the Secretary may terminate the processing of 
the application without prejudice. Once the Title XI application is 
considered complete by the Secretary, the Secretary will act on the 
application within a period of 60 calendar days, unless for good cause 
the Secretary deems it necessary to extend such period. If an 
application is not completed by the applicant and acted upon by the 
Secretary within four months from the submission date, unless such time 
period is extended by the Secretary, the Secretary will notify the 
applicant in writing that processing of the application is terminated 
and that the applicant may reapply at a later date. If an application 
is terminated by MARAD without prejudice, no new filing fee will be 
assessed for a subsequent application for a similar project that is 
filed within one year of the termination date. If a subsequent 
application is for a substantially different project as determined by 
MARAD on a case-by-case basis a new filing fee will be assessed.
    (2) Time requirements for documentation. An applicant to whom a 
Letter Commitment has been issued shall submit four sets of the 
documentation to the Secretary for review. The documentation shall be 
submitted to the Secretary for review at least six weeks prior to the 
anticipated closing to afford the Secretary time to complete an 
adequate review of the documentation. The applicant shall utilize the 
standard form of documentation which will be provided by the Secretary.
    (3) Processing applications. In processing applications, the 
Secretary shall consider the different degrees of risk involved with 
different applications.
    (4) Additional assurances. For those applications not involving 
well established firms with strong financial qualifications and strong 
market shares, seeking financing guarantees for replacement vessels in 
an established market, in which projected demand exceeds supply, the 
Secretary may require additional assurances prior to approval, such as 
firm charter commitments, parent company guarantees, greater equity 
participation, private financing participation, security interest on 
other property and similar arrangements.
    (c) Filing Fee. Each application must be accompanied by a filing 
fee in the amount of $5,000, which will be non-refundable, irrespective 
of whether the Secretary subsequently issues a Letter Commitment.
    (d) Confidential Information. If the application, including 
attachments thereto, contains information which the applicant considers 
to be trade secrets or commercial or financial information and 
privileged or confidential, or otherwise exempt from disclosure under 
the Freedom of Information Act (5 U.S.C. 552), the applicant shall 
assert a claim of exemption at the time of application. The same 
requirement shall apply to any amendment to the application. If no 
claim of exemption is made when the application or amendment is filed, 
the Maritime Administration shall not oppose any request subsequently 
made for disclosure, pursuant to the Freedom of Information Act (FOIA), 
of any information contained in the

[[Page 21317]]

application. The following procedures shall apply with respect to the 
assertion and review of FOIA exemption claims:
    (1) Form and bases for claim. Any claim of exemption shall be made 
in a memorandum or letter contained in a sealed envelope marked 
``Confidential Information,'' addressed to the Secretary, Maritime 
Administration, and shall be subscribed by the applicant, or with 
respect to a corporate applicant, by a responsible corporate officer of 
the applicant. The applicant shall specifically and separately 
designate each part of the application, including attachments or 
amendments thereto, to which exemption from disclosure is claimed by 
noting ``Confidential Information'' thereon, and shall place each page 
in the sealed envelope. The applicant shall state in the memorandum or 
letter the bases, in detail, for each assertion of exemption, including 
but not limited to statutory and decisional authority.
    (2) The Secretary, Maritime Administration, shall make a 
determination as to any claim of exemption at the time a request is 
made for the information pursuant to the Freedom of Information Act. If 
the Secretary, Maritime Administration makes a determination 
unfavorable to the applicant as to any item of information in the 
application or amendment, the applicant will be advised that the 
Maritime Administration will not honor the request for confidentiality 
at the time of any request for production of information made pursuant 
to the Freedom of Information Act by third parties.
    (e) Priority. The Maritime Administration shall give priority for 
processing applications to vessels capable of serving as a naval and 
military auxiliary in time of war or national emergency, and requests 
for financing construction of equipment or vessels less than one year 
old as opposed to the financing of existing equipment or vessels that 
are one year old or older. Any applications involving the purchase of 
vessels currently financed under Title XI will also receive priority 
consideration for purposes of processing the assumption of the 
obligations as will applications from those willing to take guarantees 
for less than the normal term for that class of vessel. In regard to 
shipyards, priority will be given to applications from General Shipyard 
Facilities that have engaged in naval Vessel construction and that have 
pilot projects for shipyard modernization and Vessel construction, with 
respect only to funds appropriated to the Secretary of Defense, 
pursuant to provision of section 1359(a) of Pub. L. 103-160, 107 Stat. 
1547. With regard to Eligible Export Vessels, the Secretary may not 
issue a commitment to guarantee Obligations for an Eligible Export 
Vessel unless the Secretary determines, in the sole discretion of the 
Secretary, that the issuance of a commitment to guarantee obligations 
for an Eligible Export Vessel will result in the denial of an 
economically sound application to issue a commitment to guarantee 
Obligations for vessels documented under the laws of the United States 
operating in the domestic or foreign commerce of the United States, 
after considering:
    (1) The status of pending applications for commitments to guarantee 
obligations for vessels documented under the laws of the United States 
and operating or to be operated in the domestic or foreign commerce of 
the United States;
    (2) The economic soundness of the applications referred to in 
paragraph (e)(1) of this section; and
    (3) The amount of guarantee authority available.

(Approved by the Office of Management and Budget under control 
number 2133-0018)

Subpart B--Eligibility


Sec. 298.10  Citizenship.

    (a) Applicability. Prior to acquiring a legal or beneficial 
interest in a Vessel financed under Title XI of the Act, except as 
provided in paragraph (e) of this section, the applicant and any other 
Person (including, but not limited to shipowners and, if applicable, 
owner trustees, equity participants and bareboat charterers) shall 
establish their United States citizenship within the meaning of Section 
2 of the Shipping Act, 1916, as amended, (``1916 Act'') (46 App. U.S.C. 
802) and MARAD's regulation at 46 CFR 221.3(c). All persons holding a 
Preferred Mortgage on the Vessel who do not qualify as citizens of the 
United States shall submit on the date of the Closing evidence that 
they qualify for the MARAD approval granted pursuant to 46 CFR 221.23, 
or that they have received approval pursuant to 46 CFR 221.25. The 
Secretary will not approve an application providing for ownership of 
such Vessel by, or bareboat chartering of such Vessel to, a non-U.S. 
citizen. Citizenship may also be required of any Person who is deemed 
by the Secretary to be an operator of the Vessel or who has authority 
to direct the operation of the Vessel on behalf of the shipowner. 
Certain chartering arrangements, including time chartering and 
contracts of affreightment, have been given general approval by the 
Secretary pursuant to Sections 9, 37, and 41 of the 1916 Act. See part 
221 of title 46 for more details on these approvals and other approvals 
granted concerning chartering and mortgaging of U.S. documented 
Vessels.
    (b) Prior to Letter Commitment. The applicant and any Person 
identified in paragraph (a) of this section, who is required to 
establish United States citizenship shall, prior to the issuance of the 
Letter Commitment, establish United States citizenship in form and 
manner prescribed in 46 CFR part 355.
    (c) After Letter Commitment. Any Person who has become identified 
with the project, for a reason indicated in paragraph (a) of this 
section, and who has not previously established United States 
citizenship within the prior twelve calendar months, promptly shall 
establish its United States citizenship in the form and manner 
prescribed in 46 CFR part 355.
    (d) Supplemental proof. Unless otherwise waived by the Secretary 
for good cause, at least 10 days prior to every Closing, all Persons 
identified with the project who have previously established United 
States citizenship in accordance with paragraphs (a) and (c) of this 
section shall submit pro forma Supplemental Affidavits of Citizenship 
which have previously been approved as to form and substance by the 
Secretary, and on the date of such Closing such Persons shall submit to 
the Secretary three executed copies of such Supplemental Affidavits of 
Citizenship evidencing the continuing United States citizenship of such 
Persons bearing the date of such Closing.
    (e) Exemption. With regard to Eligible Export Vessels and Eligible 
Shipyards, the applicant and any other Person, (including, but not 
limited to settlors, owner trustees, owner participants and bareboat 
charterers) shall be exempted from complying with the provisions of 
paragraphs (a) through (d) of this section.


Sec. 298.11  Vessel requirements.

    Each Vessel to be constructed, reconstructed or reconditioned and 
financed by issuance of Guarantees shall meet the following criteria:
    (a) United States Construction. A Vessel, including an Eligible 
Export Vessel, financed by an Obligation Guarantee is considered to be 
of United States construction if the Vessel is assembled in a shipyard 
geographically located within the United States. A U.S.-flag Vessel 
must meet the applicable United States Coast Guard requirements. An 
Eligible Export Vessel must meet the applicable laws, rules,

[[Page 21318]]

and regulations of its country of documentation, all applicable 
treaties, conventions on international agreements to which that country 
is a signatory, and the laws of the ports it serves. An Eligible Export 
Vessel shall be constructed in accordance with the requirements of the 
International Maritime Organization.
    (b) Actual Cost. The applicant's estimated Actual Cost as described 
in Sec. 298.21(b), must be approved by the Secretary for the 
construction, reconstruction, reconditioning of a Vessel as a condition 
for issuance of the Letter Commitment. The Secretary may require the 
applicant to have the shipyard that has contracted to build the vessel 
to submit additional technical data, backup cost details, and other 
evidence if the Secretary has insufficient data. The estimated cost of 
the Vessel may include escalation for the anticipated construction 
period of the Vessel, as described in Sec. 298.21(e).
    (c) Class condition and operation. The Vessel shall be constructed, 
maintained, and operated so as to meet the highest classification, 
certification, rating, and inspection standards for Vessels of the same 
age and type imposed by the American Bureau of Shipping (ABS), or other 
such standards as may be approved by the United States Coast Guard, or 
in the case of an Eligible Export Vessel, such standards as may be 
imposed by a member of the International Association of Classification 
Societies (IACS) classification societies to be ISO 9000 series 
registered or Quality Systems Certificate Scheme qualified IACS members 
who have been recognized by the United States Coast Guard as meeting 
acceptable standards with such recognition including, at a minimum, 
that the society meets the requirements of IMO Resolution A.739(18) 
with appropriate certificates required at delivery, so long as the home 
country of that IACS member accords equal reciprocity, as determined by 
the Secretary, to United States classification societies. A Vessel, 
except an Eligible Export Vessel, shall comply with all applicable 
laws, rules, and regulations as to condition and operation, including, 
but not limited to, those administered by the United States Coast 
Guard, Environmental Protection Agency, Federal Communications 
Commission, Public Health Service, or their respective successor 
agencies, and all applicable treaties and conventions to which the 
United States is a signatory, including, but not limited to, the 
International Convention for Safety of Life at Sea. An Eligible Export 
Vessel shall be documented in a country that is party to the 
International Convention for Safety of Life at Sea, or other treaty, 
convention, or international agreement governing vessel inspection to 
which the United States is a signatory, and shall comply with the 
applicable laws, rules, and regulations of its country of 
documentation, all applicable treaties, conventions on international 
agreements to which that country is a signatory, and the laws of the 
ports it serves. An Eligible Export Vessel shall be constructed in 
accordance with the requirements of the International Maritime 
Organization.
    (d) Reconstruction or reconditioning. Repairs necessary for the 
Vessel to meet the classification standards approved by the Secretary, 
or any regulatory body, or because of previous inadequate maintenance 
and repair, shall not constitute reconstruction or reconditioning 
within the meaning of this paragraph. An applicant for Guarantees 
secured by a Vessel to be reconstructed or reconditioned shall make the 
Vessel available at a time and place acceptable to the Secretary for a 
condition survey to be conducted by representatives of the Secretary. 
The applicant shall pay the cost of the condition survey. The scope and 
extent of the condition survey shall not be less effective than that 
required by the last ABS special survey completed (if the Vessel is 
classified), next due or overdue, whichever date is nearest in 
accordance with the Vessel's age. The Vessel shall meet the standard of 
the survey necessary for retention of class (if the Vessel is 
classified), and the operating records of the Vessel shall reflect 
normal operation of the Vessel's main propulsion and other machinery 
and equipment, consistent with accepted commercial experience and 
practice.
    (e) Metric Usage. The preferred system of measurement and weights 
for Vessels and Advanced and Modern Shipbuilding Technology shall be 
the metric system.


Sec. 298.12  Applicant and operator's qualifications.

    (a) Operator's qualifications. No Letter Commitment shall be issued 
by the Secretary without a prior determination that the applicant, 
bareboat charterer, or other Person identified in the application as 
the operator of the Vessel, possesses the necessary experience, ability 
and other qualifications to properly operate and maintain the Vessel or 
Vessels which serve as security for the Guarantees, and otherwise to 
comply with all requirements of this part.
    (b) Identity and ownership of applicant. In order to assess the 
likelihood that the project will be successful, the Secretary needs 
information about the applicant and the proposed project. To permit 
this assessment, each applicant shall provide the following information 
in its application for Title XI guarantees.
    (1) Incorporated companies. If the applicant is an incorporated 
company, it shall submit the following identifying information:
    (i) Exact name of applicant and tax identification number of a U.S. 
corporation, or if appropriate, international identification number of 
the applicant;
    (ii) State or country in which incorporated and date of 
incorporation; and
    (iii) Address of principal executive offices and of important 
branch offices, if any.
    (2) Partnerships, joint-ventures, associations, unincorporated 
companies. If the applicant is a partnership, joint-venture, 
association, or unincorporated company, it shall submit the following 
identifying information:
    (i) Name of partnership, association, or unincorporated company, 
and tax identification number, or if appropriate, international 
identification number of applicant;
    (ii) Business address;
    (iii) Date of organization;
    (iv) Name of partners (general and special) of the partnership or 
trustee and holders of beneficial interest in the association or 
company;
    (v) Certified copy of Partnership or Joint Venture Agreement, as 
amended; and
    (vi) A detailed statement regarding financial, management and/or 
equity transactions which could have a significant impact on the 
ability of the applicant to meet the requirements placed on the 
applicant under its financing.
    (3) Other entities. For any entity that does not fit the 
descriptions in paragraphs (b)(1) through (b)(3) of this section, MARAD 
will specify the information that the entity shall submit regarding its 
identity and ownership.
    (c) Applicants: Business and affiliations. The applicant shall 
include:
    (1) A brief description of the principal business activities during 
the past 5 years of applicant and of any predecessor of the applicant. 
If any change in the principal business activities is presently 
contemplated (whether in connection with the work to be financed by the 
guarantees applied for, or otherwise), applicant shall give a

[[Page 21319]]

brief statement of the nature and circumstances thereof;
    (2) A list of all companies or persons (hereinafter referred to as 
related companies) that directly or indirectly, through one or more 
intermediaries, control, are controlled by, or are under common control 
with, the applicant. Also indicate the nature of the business 
transacted by each, the relationships between the companies named, and 
the nature and extent of the control. This information may be furnished 
in the form of a chart. Specify whether any related companies have 
previously applied for or received any Title XI assistance;
    (3) A statement of whether or not during the past 5 years the 
applicant, or any predecessor or related company, has been in 
bankruptcy or in reorganization under the Federal Bankruptcy Act or in 
any other insolvency or reorganization proceedings under either 
domestic or foreign statutes, and whether or not any substantial 
property of the applicant or a predecessor or related company has been 
acquired in any such proceedings or has been subject to foreclosure or 
receivership during such period, and details of all such occurrences; 
and
    (4) A statement of whether or not the applicant or any predecessor 
or related company is now, or during the past 5 years has been, in 
default under any agreement or undertaking:
    (i) With others, the United States or a country other than the 
United States; or
    (ii) Guaranteed or insured by the United States or a country other 
than the United States.
    (d) Management of applicant. The applicant shall include:
    (1) A brief description of the principal business activities during 
the past 5 years of each director and each principal executive officer 
of the applicant; and
    (2) The name and address of each organization engaged in business 
activities related to those carried on or to be carried on by the 
applicant with which any person named in answer to paragraph (d)(1) of 
this section has any present business connection, the name of each such 
person and, briefly, the nature of such connection.
    (e) Applicant's property and activity. The applicant shall provide:
    (1) A brief description of the general character and location of 
the principal properties of the applicant employed in its business, 
other than vessels, describing encumbrances, if any;
    (2) A statement with respect to each vessel owned by the applicant, 
or operated by it under charter, stating name, gross tonnage, net 
tonnage, deadweight tonnage, age, type, speed, registry, cargo capacity 
and number and type of cargo units (container, trailer, etc.); and
    (3) A summary statement which addresses the services, routes, or 
line (including ports served) on which the applicant operates any of 
the vessels owned or chartered by it. Also, a schedule and tonnage of 
cargo carried by the applicant during the two preceding years, the 
units carried (containers, barges, passengers, etc.) and the cargo 
capacity utilization factor experienced.
    (f) Operating ability. (1) In the case of an applicant for a vessel 
financing Guarantee, the applicant shall submit a detailed statement 
showing its ability to successfully operate the Vessel(s), including 
name, education, background of, and licenses held by all senior 
supervisory personnel concerned with the physical operation of the 
ships owned by the applicant or proposed for construction. If not now 
an operator of Vessel(s), the applicant shall indicate a proposed 
organizational structure of key operating personnel or the name of the 
proposed operating agent. If now the owner and/or operator of ships, 
the applicant shall furnish data as to union affiliations and existing 
contracts necessary to the management and operation of the Vessel(s) 
covering such items as bunkers, repairs, stores and stevedoring, and 
names of companies (domestic and foreign) for which the company acts as 
agent. If a company other than the applicant is designated to operate 
the Vessel(s), then the above information shall be provided for that 
company, together with a copy of the proposed operating agreement(s).
    (2) In the case of an Eligible Shipyard which is an applicant for a 
Guarantee for Advanced or Modern Shipbuilding Technology, a detailed 
statement shall be submitted evidencing its ability to successfully 
construct/reconstruct vessel(s), including name, education, background 
of, and licenses, if any, held by all senior supervisory personnel in 
the shipyard concerned with the physical operation of the shipyard, 
union affiliations and existing contracts necessary to the management 
and operation of the shipyard.


Sec. 298.13  Financial requirements.

    (a)(1) In general. To be eligible for guarantees, the applicant 
and/or the parent organization (when applicable), and any other 
participants in the project having a significant financial or 
contractual relationship with the applicant shall submit information, 
respectively, on their financial condition. This information shall be 
submitted at the time of the application and supplemented as 
subsequently required by the Secretary. In addition, the applicant 
shall submit information satisfactory to the Secretary that financial 
resources are available to support the project which is the subject of 
the Title XI application.
    (2) Cost of the project. Applicant shall submit the following cost 
information with respect to the project:
    (i) In the case of an applicant for Vessel financing Guarantees, a 
detailed statement of the estimated Actual Cost of construction, 
reconstruction or reconditioning of the Vessel(s) including those items 
which would normally be capitalized as Vessel construction costs. Net 
interest during construction is the total estimated construction period 
interest on non-equity funds less estimated earnings from the escrow 
fund, if such fund is to be established prior to Vessel(s) delivery. 
Each item of foreign components and services shall be excluded from 
Actual Cost, unless a waiver is specifically granted for the item, 
which waiver shall not be granted for major foreign components of the 
hull and superstructure. The standard for granting a waiver is 
certification by the applicant, to be reviewed by the Secretary, that a 
foreign item or service is not available in the United States on a 
timely or price-competitive basis, or is not of sufficient quality. 
Although excluded from Actual Cost, foreign components of the hull and 
superstructure can be regarded as owner-furnished equipment that may be 
used in satisfying the applicant's equity requirements imposed by 
paragraph (a)(3) of this section. An illustration of how the cost of 
foreign components of the hull and superstructure may be used to 
satisfy an applicant's equity requirements is outlined below. If any of 
the costs have been incurred by written contracts such as the shipyard 
contract, management or operating agreement, signed copies should be 
forwarded with the application. The applicant may be required to have 
the contracting shipyard submit back-up cost details and technical 
data. This information shall be submitted in the format as prescribed 
by the Title XI application procedures.

ILLUSTRATION--COST OF FOREIGN COMPONENTS SATISFYING EQUITY 
REQUIREMENTS.

    Assuming that the total project cost is $100 million, of which 
the cost of major foreign components in the hull and superstructure 
total $20 million, and that the Title XI applicant has requested 
financing for 87\1/2\ percent of the cost of the project, the 
following is a demonstration of how the value of the major foreign 
components in the

[[Page 21320]]

hull and superstructure may be used in meeting the equity 
requirements of Sec. 298.13 (a)(3):

Cost of Foreign Components Excluded from Actual Cost

Cost of Project..........................................$100.0 million
Cost of Major Foreign Components in Hull and Superstructure.......$20.0 
                                                                million
Total Actual Cost of Project..............................$80.0 million
Required Equity (12\1/2\ percent).........................$10.0 million
Total Project Cost Financed w/Title XI (87\1/2\ percent)..........$70.0 
                                                                million

    The $10 million in required equity may be satisfied by the 
owner's contribution of the foreign components of hull and 
superstructure to the project.

    (ii) In the case of Advanced or Modern Shipbuilding Technology, a 
detailed statement of the actual cost of such technology, including 
those items which would normally be capitalizable. If any of the costs 
have been incurred by written contracts, signed copies shall be 
forwarded with the application. The applicant may be required to have 
manufacturers submit back-up cost details and technical data. This 
information shall be submitted in the format prescribed by the Title XI 
application procedures.
    (iii) A detailed statement showing the actual cost of any shore 
facilities, cargo containers, etc., required to be purchased in 
conjunction with the project.
    (iv) A detailed statement showing any other costs associated with 
the project which were not included in paragraphs (a)(2) (i) through 
(iii) of this section, such as: Legal and accounting fees, printing 
costs, guarantee fees, vessel insurance, underwriting fees, fee to a 
Related Party, etc.
    (v) If the project involves refinancing, the exhibit entitled 
Request for Actual Cost Approval and Reimbursement, its summary sheet 
and supplemental schedules shall be submitted at the time of filing the 
application.
    (3) Financing. The applicant shall describe, in detail, how the 
costs of the project (sums referred to in paragraph (a)(2) of this 
section) are to be funded and the timing of such funding. The applicant 
shall include any vessel trade-ins, related or third party financings, 
etc. The applicant shall also provide the proposed terms and conditions 
of all private funding, from both equity and debt sources and clearly 
identify all parties involved. If the applicant intends to utilize co-
financing (involving a blend of Title XI and private financing for the 
debt portion), the terms and conditions of such financing shall be 
subject to approval by the Secretary. The applicant shall demonstrate 
with financial statements that at least 12\1/2\ percent of the 
construction or reconstruction costs of the Vessel(s) or the cost of 
the Advanced Shipbuilding Technology or Modern Shipbuilding Technology 
will be in the form of equity and not additional debt, except to the 
extent allowed by paragraph (g) of this section. The applicant shall 
disclose all of the Vessel(s), Advanced Shipbuilding Technology or 
Modern Shipbuilding Technology financing in the format prescribed by 
the Title XI application procedures. If the applicant uses co-financing 
(involving a blend of Title XI and private financing for the debt 
portion of the project), the ability of the co-financiers to exercise 
their rights against collateral shared with the Secretary for any 
transaction shall be subject to the approval of the Secretary.
    (4) Financial Information. The applicant shall submit the following 
additional financial statements with respect to both the proposed Title 
XI project and the overall operations of the applicant, prepared in 
accordance with 46 CFR part 232 and including notes to explain the 
basis used for arriving at the figures (in the case of Eligible Export 
Vessels, the Secretary may accept financial information provided in the 
normal accounting system used by the applicant provided that it is an 
accepted accounting system in the applicant's country of origin and, 
further, provided that the applicant provides a reconciliation of the 
major differences between the accounting system employed and U.S. 
generally accepted accounting principles):
    (i) The three most recent audited financial statements of the 
applicant, its parent, if any, and other significant participants. If 
the applicant is a new entity or is to be funded from or guaranteed by 
external source(s), it shall provide the audited financial statements 
of the funding source(s);
    (ii) A pro forma balance sheet of the applicant as of the estimated 
date of execution of the Guarantees reflecting the assumption of the 
Title XI Obligations;
    (iii) A schedule of amortization of all existing debt (Title XI or 
otherwise) of the applicant for the period in which the Guarantees are 
to be outstanding; and
    (iv) A Sources and Uses Statement for the first full year of 
operations and the following five years, including a clear source of 
funding for the payment of all debt when due.
    (b) Financial definitions. For the purpose of this section and 
Secs. 298.35 and 298.42 of this part:
    (1) Company means any Person subject to financial requirements 
imposed under paragraphs (d) and (e) of this section and paragraphs (b) 
and (c) of Sec. 298.35, as well as the reporting requirements imposed 
by Sec. 298.42.
    (2) Working Capital means the difference between current assets and 
current liabilities, adjusted as follows:
    (i) Current assets shall exclude:
    (A) Amounts in or required to be set aside in any Title XI Reserve 
Fund, pursuant to Sec. 298.35(e) or Capital Construction Fund Security 
Amount prescribed by Sec. 298.35(f), (excluding that portion of such 
fund which is available for the payment of current liabilities) that is 
being maintained pursuant to an agreement covering a Vessel owned or 
leased by the company, or in another similar fund required under any 
other mortgage, indenture or other agreement to which the company is a 
party; and
    (B) Any receivables from a Related Party or from any stockholder, 
director, officer or employee (or their family) of the company or of a 
Related Party other than current receivables arising out of the 
ordinary course of business and not outstanding for more than 60 days.
    (ii) Current liabilities shall include the current portion of 
charter hire and other lease obligations not already included as a 
current liability.
    (3) Equity (net worth) shall be exclusive of:
    (i) Any receivables from a Related Party or from any stockholder, 
director, officer or employee (or their family) of the company or of a 
Related Party other than current receivables arising out of the 
ordinary course of business and not outstanding for more than 60 days, 
and
    (ii) Any increment resulting from the reappraisal of assets.
    (4) Long Term Debt shall exclude the balance of Escrow Fund 
deposits attributable to the principal of Obligations sold, where 
deposits are required in accordance with Sec. 298.33. However, there 
shall be included any guarantee or other liability for the debt of any 
other Person.
    (5) Capitalizable Cost means the aggregate of the Actual Cost of 
the Vessel or Advanced or Modern Shipbuilding Technology and those 
other items which customarily would be capitalized as Vessel costs or 
Advanced or Modern Shipbuilding Technology costs under generally 
accepted accounting principles and those other items which customarily 
would be capitalized as Vessel costs under generally accepted 
accounting principles.
    (6) Depreciated Capitalizable Cost means the Capitalizable Cost of 
a Vessel or Advanced or Modern Shipbuilding Technology, depreciated on 
a straight

[[Page 21321]]

line basis over the same useful life as determined by the Secretary for 
Actual Cost, and depreciated as required by Sec. 298.21(g).
    (c) Applicability. The financial resources shall be adequate to 
meet the Equity requirements in the project and existing Working 
Capital requirements, as set forth in paragraphs (d) and (e) of this 
section.
    (1) The various financial requirements shall be met by the owner of 
the Vessel or Vessels or Advanced or Modern Shipbuilding Technology to 
be security to the Secretary for the Guarantees, except that if the 
owner is not the operator, the overall financial requirements shall be 
allocated among the owner, the operator and other parties as determined 
by the Secretary.
    (2) The Company shall satisfy the applicable financial 
requirements, in addition to any other financial requirements already 
imposed or which may be imposed upon it in connection with other 
Vessels financed under the Title XI program or in connection with other 
Advanced or Modern Shipbuilding Technology financed under the Title XI 
program.
    (3) A determination as to whether the Company has satisfied all 
financial requirements shall be based on the assumption that the 
projected financing has been completed. Accordingly, a pro forma 
balance sheet shall be submitted at the time of the application, 
reflecting any adjustment made pursuant to paragraph (d)(1)(i) of this 
section, and a revised pro forma balance sheet, reflecting the 
completion of the projected financing, shall be submitted at least five 
business days before the first Closing at which the Obligations are 
issued.
    (d) Primary financial requirements at Closing. Where the primary 
minimum financing requirements at Closing are satisfied, the financial 
convenants in Sec. 298.35(b) are applicable. Primary financial 
requirements can apply to one or more Companies, and are determined as 
follows:
    (1) Owner as operator. Where the owner is to be the Vessel 
operator, minimum requirements at Closing usually are as follows:
    (i) Working Capital. The Company's Working Capital shall not be 
less than one dollar. This Working Capital requirement is based on the 
premise that the Company engages in a service-type activity with only 
normal Vessel inventory. If Working Capital includes other inventory, 
in addition to such normal Vessel inventory, the Secretary may adjust 
the requirement as considered appropriate. Also, if the Secretary 
determines that the Company's Working Capital includes amounts 
receivable that it reasonably could not expect to collect within one 
year, the Secretary may make adjustments to the Working Capital 
requirements.
    (ii) Equity (net worth). The Company's Equity shall be the greater 
of:
    (A) 50 percent of its Long Term Debt or
    (B) 90 percent of its Equity as shown on the last audited balance 
sheet, dated not earlier than six months before the date of issuance of 
the Letter Commitment.
    (2) Lessee or charterer as operator. Where a lessee or charterer is 
to be the Vessel operator, minimum requirements at Closing usually are 
as follows:
    (i) Working Capital. The operator's Working Capital requirement 
shall be the same as that which would have otherwise been imposed on 
the owner as operator under paragraph (d)(1)(i) of this section and 
based on the same premise stated therein.
    (ii) Long Term Debt. The operator's Long Term Debt shall not be 
greater than twice its Equity.
    (iii) Equity (net worth). Different Equity requirements shall be 
imposed on the owner and operator of the Vessel, respectively, as 
follows:
    (A) The owner's Equity shall at least be equal to the difference 
between the Capitalizable Cost or Depreciated Capitalizable Cost of the 
Vessel (whichever is applicable) and the total amount of the 
Guarantees.
    (B) The operator's Equity shall be the same as that which would 
have otherwise been required of the owner as operator under paragraph 
(d)(1)(ii) of this section.
    (3) Owner as General Shipyard Facility. Where the owner of Advanced 
or Modern Shipbuilding Technology is a General Shipyard Facility, 
minimum requirements at Closing will be the same as those set forth in 
paragraph (d)(1) of this section for an owner as operator.
    (e) Special financial requirements at closing. If the proposed 
project involves a leverage lessor, parent company or ``hell or high 
water'' charterer committed to financing the debt service for the term 
of the Guarantees and who meets the primary financial requirement at 
closing, then with respect to the applicant, the eligibility for 
Guarantees may be based upon satisfaction of special financial 
requirements, in which the financial covenants imposed and the 
requirements for maintenance of a Title XI Reserve Fund shall be as 
provided for in Sec. 298.35(c) of this part. Special financial 
requirements are as follows:
    (1) Owner as operator. Where the owner is the Vessel operator, the 
special requirements at Closing are as follows:
    (i) Working Capital. The Company's Working Capital, which may be 
adjusted by the Secretary in accordance with the provisions set forth 
in paragraph (d)(1)(i) of this section, shall be an amount at least 
equal to the sum of the following:
    (A) The first year's debt service relating to the Vessel to be 
financed upon delivery (redelivery in the case of a reconstructed or 
reconditioned Vessel), or the first year's debt service relating to the 
Vessel to be financed or refinanced after delivery. With respect to a 
reconstructed or reconditioned Vessel, the estimated Capitalizable Cost 
or Depreciated Capitalizable Cost, whichever is applicable (depending 
upon when financing occurs), shall be that related only to the cost of 
work performed in the reconstruction or reconditioning;
    (B) One year's premium for vessel insurance including Hull, 
Machinery, Protection and Indemnity, and War Risk coverage; and
    (C) One year's Guarantee Fee.
    (ii) Equity (net worth). The Company's Equity shall be at least 
equal to 90 percent of the Equity as shown on the last audited balance 
sheet dated not earlier than six months before the issuance of the 
Letter Commitment, but not less than the sum of the following:
    (A) The difference between:
    (1) The estimated Capitalizable Cost of a new Vessel to be financed 
upon delivery, the estimated Capitalizable Cost of the work to be 
performed in reconstructing or reconditioning a Vessel, the Depreciated 
Capitalizable Cost of an existing Vessel to be refinanced or the 
Depreciated Capitalizable Cost of a new Vessel to be financed after 
delivery, and
    (2) The amount of the Guarantees; and
    (B) The amount of Working Capital as determined in accordance with 
the provisions of paragraph (e)(1)(i) of this section.
    (2) Lessee or charterer as operator. Where the lessee or charterer 
is the Vessel operator, the special financial requirements at Closing 
are as follows:
    (i) Working Capital. The Company shall have Working Capital in an 
amount determined in accordance with the provisions of paragraph 
(e)(1)(i) of this section, applicable as if the owner were the 
operator.
    (ii) Equity (net worth). Different Equity requirements shall be 
imposed on the operator and the owner, respectively as follows:
    (A) The operator shall have Equity at least equal to 90 percent of 
the Equity

[[Page 21322]]

shown on the last audited balance sheet dated not earlier than six 
months before the issuance of the Letter Commitment, but no less than 
its Working Capital requirement.
    (B) The owner shall have Equity in an amount determined in 
accordance with the provisions of paragraph (e)(1)(ii)(A) of this 
section.
    (3) Owner as General Shipyard Facility. Where the owner of Advanced 
or Modern Shipbuilding Technology is a General Shipyard Facility, 
special financial requirements at Closing will be the same as those 
outlined in paragraph (e)(1) of this section for an owner as operator 
insofar as they apply to such technology.
    (f) Adjustments to financial requirements at Closing. If the owner, 
although not operating a Vessel, assumes any of the operating 
responsibilities, the Secretary may adjust the respective Working 
Capital and Equity requirements of the owner and operator, otherwise 
applicable under paragraphs (d) and (e) of this section, by increasing 
the requirements of the owner and decreasing those of the operator by 
the same amount.
    (g) Subordinated debt considered to be Equity. With the consent of 
the Secretary, part of the Equity requirements applicable under 
paragraphs (a)(3), (d) and (e) of this section may be satisfied by 
debt, fully subordinated as to the payment of principal and interest on 
the Secretary's Note and any claims secured as provided for in the 
Security Agreement or the Mortgage. Repayment of subordinated debt may 
be made only from funds available for payment of dividends or for other 
distributions, in accordance with requirements of the Reserve Fund and 
Financial Agreement (described in Sec. 298.35 of this part). Such 
subordinated debt shall not be secured by any interest in property that 
is security for Guarantees or mortgage insurance under Title XI, unless 
the Obligor and the lender enter into a written agreement, satisfactory 
to the Secretary, providing, among other things, that if any Title XI 
financing or advance by the Secretary to the Obligor shall occur in the 
future, such security interest of the lender shall become subordinated 
to any indebtedness incurred by the Obligor and to any security 
interest obtained by the Secretary in that property or other property, 
with respect to the subsequent indebtedness.
    (h) Modified requirements. The Secretary may waive or modify the 
financial terms or requirements otherwise applicable under 
Secs. 298.13, 298.35 and 298.42, upon determining that there is 
adequate security for the Guarantees. The Secretary may impose similar 
financial requirements on any Person providing other security for the 
Guarantees.


Sec. 298.14  Economic soundness.

    (a) Economic Evaluation. No Letter Commitment for guarantees shall 
be given by the Secretary without a finding that the proposed project, 
with respect to which the Vessel(s) or Advanced or Modern Shipbuilding 
Technology to be financed or refinanced under Title XI, will be 
economically sound.
    (1) Basic feasibility factors. In making the economic soundness 
findings the Secretary shall consider all relevant factors, including, 
but not limited to:
    (i) The need in the particular segment of the maritime industry for 
new or additional capacity, including any impact on existing equipment 
for which a guarantee under this title is in effect;
    (ii) The market potential for the employment of the Vessel or 
utilization of the Advanced Shipbuilding Technology or Modern 
Shipbuilding Technology of a General Shipyard Facility over the life of 
the guarantee;
    (iii) Projected revenues and expenses associated with employment of 
the Vessel or utilization of the Advanced Shipbuilding Technology or 
Modern Shipbuilding Technology of a General Shipyard Facility;
    (iv) Any charters, contracts of affreightment, transportation 
agreements, or similar agreements or undertakings relevant to the 
employment of the Vessel or utilization of the Advanced Shipbuilding 
Technology or Modern Shipbuilding Technology of a General Shipyard 
Facility;
    (v) For inland waterways, the need for technical improvements 
including but not limited to increased fuel efficiency, or improved 
safety; and
    (vi) Other relevant criteria.
    (2) Project Feasibility. The applicant shall state in detail the 
purpose for the obligations to be guaranteed and shall supplement the 
application by exhibits deemed to be necessary. The applicant shall 
submit the following information to demonstrate the economic 
feasibility of the project over the Guarantee period.
    (i) Relevant market. A written narrative of the market (or 
potential market) for the project including full details on the 
following, as applicable:
    (A) Nature and amount of cargo/passengers available for carriage 
and applicant's projected share (provide also the number of units; 
i.e., containers, trailers, etc.);
    (B) Services or routes in which the Vessel(s) will be employed, 
including an itinerary of ports served, with the arrival and departure 
times, sea time, port time, hours working or idle in port, off hire 
days and reserve or contingency time, proposed number of annual 
sailings and number of annual working days for the Vessel(s) or, with 
respect to Advanced or Modern Shipbuilding Technology, how the 
equipment will be employed;
    (C) Suitability of the Vessel(s) or Advanced or Modern Shipbuilding 
Technology for their anticipated use;
    (D) Significant factors influencing the applicant's expectations 
for the future market for the Vessel(s) or Advanced or Modern 
Shipbuilding Technology, for example, competition, government 
regulations, alternative uses, and charter rates; and
    (E) Particulars of any charters, contracts of affreightment, 
transportation agreements, etc. The narrative should be supplemented by 
providing copies of any marketing studies and/or supporting information 
(for instance, existing or proposed charters, contracts of 
affreightment, transportation agreements, and letters of intent from 
prospective customers).
    (F) The potential for purchasing existing equipment of a reasonable 
condition and age from another source, including information 
regarding--
    (1) Market assessment concerning the availability and cost of 
existing equipment that may be an alternative to new construction or 
the new technology;
    (2) The cost of modification, reconditioning or reconstruction of 
existing equipment to make it suitable for intended use; and
    (3) Descriptions of any bids or offers which the company had made 
to purchase existing equipment, especially Vessels which currently are 
financed with Title XI Obligations including date of offer, Vessels and 
amount of offer.
    (ii) Revenues. A detailed statement of the revenues expected to be 
earned from the project based upon the information in paragraph (a)(2) 
of this section. The revenues shall be based on a realistic estimate of 
the Vessel(s) or the new technology utilization rate at a breakeven 
rate for the project. A justification for the utilization rate shall be 
supplied and should indicate the number of days per year allowed for 
maintenance, drydocking, inspection, etc.
    (iii) Expenses. A detailed statement of estimated daily vessel 
expense or expenses associated with Advanced or Modern Shipbuilding 
Technology, including the following (where applicable):

[[Page 21323]]

    (A) Wages, including staffing (submit itemized staffing schedule 
and wages, identifying the seamen's unions involved), and aggregated as 
to straight time, overtime and fringe benefits;
    (B) Subsistence cost (indicate cost per person per day);
    (C) Fuel cost (specify purchase ports), including estimated fuel 
consumption at design speed loaded and in port;
    (D) Cost of stores, supplies and equipment, segregated as to Deck, 
Engine and Stewards Departments;
    (E) Maintenance and repair cost at midlife of ship (specify in 
years) segregated as to voyage repairs, special surveys, drydocking and 
tailshaft removal, annual survey and structural renewals;
    (F) Insurance costs, Hull and Machinery, Protection and Indemnity, 
War Risk and other (an insurance broker's estimate based upon current 
premium rates, if available, is considered preferable); and
    (G) Other expenses directly allocable to the asset (indicate items 
included).
    (iv) Estimated voyage expense: These items shall include:
    (A) Port expense segregated by port as to agency fees, wharfage and 
dockage and other port expenses;
    (B) Cargo expense, segregated as to stevedoring and other cargo 
expense (show average cost per ton for loading and discharging for each 
port or geographic area);
    (C) Brokerage expense, segregated as to freight and passenger; and
    (D) Other voyage expense segregated as to canal tolls and other 
expense (indicate items included).
    (v) Owner's expenses annually. These expenses shall be segregated 
as to:
    (A) Interest and amortized principal on mortgage indebtedness;
    (B) Estimated government Guarantee Fee; and
    (C) Salaries and other administrative expenses (indicate basis of 
allocations).
    (b) Objective Criteria. The Secretary shall make a finding of 
economic soundness with respect to each proposed project based on an 
assessment of the entire project. In order to be considered for 
approval, a project must meet the following criteria as determined by 
the Secretary:
    (1) The projected long-term demand (equal to length of financing 
being requested) for the particular Vessel(s) or new technology to be 
financed must exceed the supply of similar Vessels or new technology in 
the applicable markets, based on the Secretary's assessment of existing 
equipment, similar Vessels or new technology under construction and the 
projected need for new equipment in that particular segment of the 
maritime industry. Such an assessment shall be determined by the 
Secretary's analysis of the following three elements:
    (i) Conformity of the company's projections with supply and demand 
analyses prepared by the Maritime Administration;
    (ii) Availability of charters, letters of intent, outstanding 
contractual commitments, contracts of affreightment, transportation 
agreements or similar agreements or undertakings; and
    (iii) The applicant's existing market share compared with the 
market share necessary to meet projected revenues.
    (2) A projected cash flow and net income, supported by the findings 
of paragraph (b)(1) of this section, that is sufficient to meet the 
projected Title XI debt service requirements and any other debt 
obligations of the company.


Sec. 298.15  Investigation fee.

    (a) In general. Prior to the issuance of the Letter Commitment the 
applicant shall pay an Investigation Fee, computed as hereinafter 
provided, to the Secretary in the amount stated in the Letter 
Commitment. This fee is imposed to pay for the investigation of the 
project described in the application and the participants in the 
project, the appraisal of properties offered as security, Vessel 
inspection during construction, reconstruction or reconditioning (where 
applicable) and other administrative expenses. If, for any reason, the 
Secretary shall subsequently disapprove the application, one-half of 
the Investigation Fees shall be due and payable.
    (b) Base Fee. The investigation fee shall be one-half of one 
percent on obligations to be issued up to and including $10,000,000 and 
\1/8\ of one percent on all obligations to be issued in excess of 
$10,000,000. The $1,000 filing fee previously paid upon filing the 
original application (described in Sec. 298.3 of this part) shall be 
credited against the investigation fee.


Sec. 298.16  Substitution of participants.

    (a) Application may be made to the Maritime Administration for 
permission to substitute participants to a Mortgage and/or Security 
Agreement in a financing that is receiving assistance authorized by 
Title XI of the Act, both prior and subsequent to amendment by Pub. L. 
92-507. A non-refundable fee shall be imposed, payable at the time of 
application. This fee shall be in addition to the Annual Guarantee Fee 
or annual premium charge for Mortgage insurance, whichever is 
applicable.
    (b) A $3,000 fee shall be required to defray all costs of 
processing and reviewing a joint application by a mortgagor and/or 
Obligor and a proposed transferee of a Vessel or Advanced or Modern 
Shipbuilding Technology, which is security for Title XI debt, if the 
proposed transferee is to assume the Mortgage and/or the Security 
Agreement.


Sec. 298.17  Evaluation of applications.

    (a) In evaluating project applications, the Secretary shall also 
consider whether the application provides for:
    (1) The capability of the Vessel(s) serving as a naval and military 
auxiliary in time of war or national emergency.
    (2) The financing of the Vessel(s) within one year after delivery.
    (3) The acquisition of Vessel(s) currently financed under Title XI 
by assumption of the total obligation(s).
    (4) The Guarantees extend for less than the normal term for that 
class of vessel.
    (5) In the case of an Eligible Shipyard, the capability of the 
shipyard to engage in naval vessel construction in time of war or 
national emergency.
    (6) In the case of Advanced or Modern Shipbuilding Technology, the 
Guarantees extend for less than the technological life of the asset.
    (b) In determining the amount of equity which must be provided by 
the applicant, the Secretary shall consider, among other things, the 
following:
    (1) The financial strength of the company;
    (2) Adequacy of collateral; and
    (3) The term of the Guarantees.


Sec. 298.18  Financing Advanced or Modern Shipbuilding Technology.

    (a) Initial criteria. The Secretary may approve Guarantees issued 
to finance Advanced or Modern Shipbuilding Technology at a General 
Shipyard Facility. The Secretary will approve such Guarantees after 
consideration of the following factors: whether the Guarantees will aid 
in the transition from naval shipbuilding to commercial ship 
construction for domestic and export sales, will encourage shipyard 
modernization, and/or will support increased productivity. The 
applicant shall provide a detailed statement with the Guarantee 
application which will provide the basis for such consideration by the 
Secretary.
    (b) Other conditions. Applications for loan guarantees under this 
section shall not be approved unless the Secretary determines that the 
following requirements have been met:
    (1) The term for such Guarantees will not exceed the reasonable 
economic

[[Page 21324]]

useful life of the collective assets which comprise this technology, as 
determined by the Secretary;
    (2) There is sufficient collateral to secure the Guarantee; and
    (3) Approval of the application will not preclude approval of any 
other pending application for Advanced or Modern Shipbuilding 
Technology Guarantees which, in the sole opinion of the Secretary, 
would result in a more desirable use of appropriated funds. The 
Secretary's opinion will take into consideration such factors as the 
types of vessels which will be built by the shipyard, the productivity 
increases which will be achieved, the geographic location of the 
shipyard, the long-term viability of the shipyard, the soundness of the 
financial transaction, any financial impact on other Title XI 
transactions, and the furtherance of the goals of the Shipbuilding Act.


Sec. 298.19  Financing Eligible Export Vessels.

    (a) Transmittal to Secretary of Defense. Upon receiving an 
application for a loan Guarantee for an Eligible Export Vessel, the 
Secretary shall promptly provide to the Secretary of Defense notice of 
the receipt of the application. During the 30-day period beginning on 
the date on which the Secretary of Defense receives such notice, the 
Secretary of Defense may disapprove the loan guarantee based on the 
assessment of the Secretary of Defense of the potential use of the 
Vessel in a manner that may cause harm to United States national 
security interests. The Secretary of Defense may not disapprove a loan 
Guarantee under this section solely on the basis of the type of vessel 
to be constructed with the loan Guarantee. The authority of the 
Secretary of Defense to disapprove a loan Guarantee under this section 
may not be delegated to any official other than a civilian officer of 
the Department of Defense appointed by the President, by and with the 
advice and consent of the Senate. The Secretary of Transportation may 
not make a loan guarantee disapproved by the Secretary of Defense.
    (b) Determinations by the Secretary. (1) If the loan Guarantee 
commitment cost of any such Vessel is made available from funds 
transferred from the Secretary of Defense pursuant to section 108 of 
the National Defense Authorization Act for Fiscal Year 1994 (Pub. L. 
103-160, 107 Stat. 1547), the Vessel must be of at least 5,000 gross 
tons and found by the Secretary to be commercially marketable on the 
international market. Vessels of less than 5,000 gross tons can receive 
Guarantees with funds appropriated to the Department of Transportation.
    (2) Such Guarantees shall not be approved unless:
    (i) The Secretary finds that the construction, reconstruction or 
reconditioning of the Vessel will aid in the transition of United 
States shipyards to commercial activities or will preserve shipbuilding 
assets that would be essential in time of war or national emergency; 
and
    (ii) The owner of the Vessel agrees with the Secretary that the 
Vessel shall not be transferred to any country designated by the 
Secretary of Defense as a country whose interests are hostile to the 
interests of the United States.
    (3) The Secretary may approve Guarantees issued to finance Eligible 
Export Vessels. Such Guarantee shall not be approved unless the 
Secretary determines that the countries in which the shipowner, its 
charterers, guarantors, or other financial interests supporting the 
transaction, if any, have their chief executive offices or have located 
a substantial portion of their assets, present an acceptable financial 
or legal risk to MARAD's collateral interests. The Secretary's 
determination shall be based on confidential risk assessments provided 
by the Export-Import Bank of the United States and country risk 
analyses provided by the Inter-Agency Country Risk Assessment System 
and shall take into account any other factors related to the loan 
guarantee transaction deemed pertinent by the Secretary.

Subpart C--Guarantees


Sec. 298.20  Term, redemptions and interest rate.

    (a) In general. To be eligible for Guarantees, Obligations shall 
have a maturity date satisfactory to the Secretary, not exceeding the 
anticipated physical and economic life of the Vessel or Vessels or 
Advanced or Modern Shipbuilding Technology. Such maturity date may be 
less than but in no event more than:
    (1) Twenty-five years from the date of delivery from the 
shipbuilder of a single new Vessel which is to be security for 
Guarantees;
    (2) Twenty-five years from the date of delivery from the shipyard 
of the last of multiple Vessels which are to be security for the 
Guarantees;
    (3) The later of twenty-five years from the date of original 
delivery of a reconstructed or reconditioned Vessel which is to be 
security for the Guarantees, or at the expiration of the remaining 
useful life of the Vessel, as determined by the Secretary; and
    (4) The technological life of the Advanced or Modern Shipbuilding 
Technology.
    (b) Required redemptions. Where multiple Vessels or multiple 
Advanced Shipbuilding Technology or Modern Shipbuilding Technology 
assets are to be used as security for the Guarantees, as set forth in 
paragraph (a) of this section, the Secretary may require payments of 
principal prior to maturity (redemptions) with respect to all related 
Obligations, as may be deemed necessary to maintain adequate security 
for the Guarantees.
    (c) Interest rate. The interest rate of each Obligation must be 
determined by the Secretary to be reasonable, taking into account the 
range of interest rates prevailing in the private market for similar 
loans and the risks assumed by the Secretary.


Sec. 298.21   Limits.

    (a) Actual Cost basis. The amount of Obligations to be issued shall 
be satisfactory to the Secretary based upon the economic soundness of 
the transaction. Such amount may be less than but in no event more than 
75 percent or 87\1/2\ percent, whichever is applicable under the 
provisions of section 1104A(b)(2) or section 1104B(b)(2) of the Act, of 
the Actual Cost of the Vessel or Vessels or Advanced Shipbuilding 
Technology or Modern Shipbuilding Technology asset(s). If minimum 
horsepower of the main engine is a requirement for Guarantees up to 
87\1/2\ percent of the Actual Cost, the standard with respect to such 
horsepower shall be continuous rated horsepower. Where existing debt is 
being refinanced, pursuant to section 1103A(a)(5) of the Act, the 
amount of new Obligations issued in respect to such existing debt may 
not exceed the lesser of:
    (1) The amount of outstanding debt being refinanced (whether or not 
receiving assistance under Title XI); or
    (2) Seventy-five or 87\1/2\ percent whichever is applicable, of the 
Depreciated Actual Cost of the Vessel or Advanced Shipbuilding 
Technology or Modern Shipbuilding Technology with respect to which the 
new Obligations are being issued.
    (b) Actual Cost items. Actual Cost is comprised essentially of 
those items which would customarily be capitalized as Vessel or 
Advanced Shipbuilding Technology or Modern Shipbuilding Technology 
construction costs such as designing, engineering, constructing 
(including performance bond premiums approved by the Secretary), 
inspecting, outfitting and equipping. There shall be included those 
cost items usually

[[Page 21325]]

specified in Vessel or Advanced Shipbuilding Technology or Modern 
Shipbuilding Technology construction contracts, e.g., changes and 
extras, cost of owner furnished equipment, shoreside spare parts and 
commitment fees and interest on the Obligations or other borrowings 
during the construction period (excluding interest paid on subordinated 
debt considered to be Equity, and incurred during the construction 
period), and less income realized from investment of Escrow Fund 
deposits during the construction period. Recognizing the importance 
that the payment of commissions plays in the export market, commissions 
(which represent a portion of the total shipyard contract price) may be 
included in the foreign equipment and services amount of the Actual 
Cost of an export project, provided:
    A majority of the work done by the parties receiving the 
commissions is in the form of design and engineering work, and
    The commissions represent a small amount of the total contract 
price. In addition, Guarantee Fees determined in accordance with the 
provisions of section 1104(e) of the Act shall be included in the items 
of Actual Cost. In approving Actual Cost the Secretary will consider 
all pertinent factors.
    (c) Items excludible from Actual Cost. Actual Cost shall not 
include any other costs such as the following:
    (1) Legal fees or expenses;
    (2) Accounting fees or expenses;
    (3) Commitment fees or interest other than those specifically 
allowed;
    (4) Fees, commissions or charges for granting or arranging for 
financing;
    (5) Fees or charges for preparing, printing and filing an 
application for Title XI Guarantees and supporting documents, for 
services rendered to obtain approval of the application and for 
preparing, printing and processing documents relating to the 
application for Guarantees;
    (6) Underwriting or trustee's fees;
    (7) Federal documentary tax stamps;
    (8) Investigation Fee determined in accordance with section 1104(f) 
of the Act and Sec. 298.15 of this part;
    (9) Predelivery Vessel operating expenses, Vessel insurance 
premiums and other items which may not be properly capitalized by the 
owner as costs of the Vessel under generally accepted accounting 
principles;
    (10) The cost of the condition survey required by Sec. 298.11(d) of 
this part and all work necessary to meet the standards set forth 
therein;
    (11) The cost to the Shipowner of a Vessel which is to be 
reconstructed or reconditioned, e.g., cost of acquisition or repair 
work;
    (12) Generally not include any amount payable to the shipyard for 
early delivery of the Vessel;
    (13) Generally not include any amount payable to the manufacturer 
of the Advanced Shipbuilding Technology or Modern Shipbuilding 
Technology for early delivery of the equipment to the General Shipyard 
Facility;
    (14) Predelivery Advanced Shipbuilding Technology or Modern 
Shipbuilding Technology expenses which may not be properly capitalized 
by the General Shipyard Facility as costs of the technology under 
Generally Accepted Accounting Principles; and
    (15) The cost of major foreign components and other foreign 
components for which there is no waiver and their assembly when 
comprising any part of the hull and superstructure of a Vessel.
    (d) Substantiation of Actual Cost. Prior to payment from the Escrow 
Fund or Construction Fund (described in Secs. 298.33 and 298.34 of this 
part), and prior to the final Actual Cost determination for each Vessel 
or Advanced Shipbuilding Technology or Modern Shipbuilding Technology, 
the applicant shall submit to the Secretary documents substantiating 
all claimed costs eligible under Sec. 298.21(b) or, alternatively, 
appropriate certification of such costs by an agent approved by the 
Secretary. These documents may include but need not be limited to 
copies of invoices, change orders, subcontracts, and where required by 
the Secretary, statements from independent certified or independent 
licensed public accountants that the costs for which payment or 
reimbursement is sought were actually paid or are payable with respect 
to the construction of a Vessel or Advanced Shipbuilding Technology or 
Modern Shipbuilding Technology. These documents must be summarized, 
indexed and arranged according to cost categories, pursuant to 
directions contained in forms prescribed by the Secretary.
    (e) Escalation as part of Actual Cost. Escalation clauses in 
construction contracts shall be subject to approval by the Secretary. 
After a review of the base contract price and the escalation clauses, 
the Secretary shall, in order to estimate the Actual Cost amount to be 
stated in the Letter Commitment, add to the approved base contract 
price the amount of estimated escalation as approved by the Secretary. 
The Secretary must subsequently approve the amount of escalation 
claimed by the applicant as Actual Cost.
    (f) Moneys received in respect of construction. If the Obligor or 
any Person acting in behalf of the Obligor shall from time to time 
receive moneys due in respect to construction of a Vessel or Advanced 
Shipbuilding Technology or Modern Shipbuilding Technology (described in 
the Security Agreement) from the shipbuilder, guarantors, sureties or 
other Persons, the Obligor shall give written notice of such fact to 
the Secretary. So long as the Guarantees have not been paid by the 
Secretary, the Obligor or other recipient shall promptly make deposit 
of these moneys in a Depository with a written notice that the 
Depository shall hold such moneys on deposit until it receives written 
instructions from the Secretary as to their disposition. The Secretary 
shall determine the extent to which Actual Cost is to be reduced with 
respect to these moneys. In no event shall Actual Cost be reduced with 
respect to payments by the shipyard to a Vessel or Advanced 
Shipbuilding Technology or Modern Shipbuilding Technology owner of 
liquidated damages for late delivery of the Vessel or Advanced 
Shipbuilding Technology or Modern Shipbuilding Technology. If the 
Secretary shall have paid the Guarantees, the Obligor or other 
recipient shall promptly pay these moneys including any liquidated 
damages to the Secretary for deposit into the Federal Ship Financing 
Fund.
    (g) Depreciated Actual Cost. After a Vessel or Advanced 
Shipbuilding Technology or Modern Shipbuilding Technology has been 
delivered or redelivered (in the case of reconstruction or 
reconditioning), the limitation on the amount of Guarantees shall be 75 
or 87\1/2\ percent, whichever is applicable, of the Depreciated Actual 
Cost of the Vessel or Advanced Shipbuilding Technology or Modern 
Shipbuilding Technology.


Sec. 298.22  Amortization of Obligations.

    Generally after Vessel or Advanced Shipbuilding Technology or 
Modern Shipbuilding Technology delivery, and until maturity of the 
Obligations, the Obligor shall be required by provision of the Trust 
Indenture or other part of the Documentation to make periodic payment 
of interest on and principal of the Obligations. Usually, the payment 
of principal (amortization) shall be made semi-annually, but in no 
event, less frequently than on an annual basis, and in either case 
shall be in equal parts (straightline basis), unless the Secretary 
consents to the periodic payment of a constant aggregate amount, 
comprised of both interest and principal components which are variable 
in

[[Page 21326]]

amount (level debt basis). No other proposed method of amortization 
will be allowed which would reduce the amount of periodic amortization 
below that determined under the straightline or level debt basis at any 
time prior to maturity of the Obligations, except where:
    (a) The Obligor can demonstrate to the satisfaction of the 
Secretary that there will be adequate funds to discharge the 
Obligations at maturity;
    (b) The Obligor establishes a fund acceptable to the Secretary in 
which the Obligor deposits an equal annual amount necessary to redeem 
the outstanding Obligations at maturity; or
    (c) With regard to Eligible Export Vessels, in accordance with such 
other terms as the Secretary determines to be more favorable and to be 
compatible with export credit terms offered by foreign governments for 
the sale of vessels built in foreign shipyards.


Sec. 298.23  Refinancing.

    The Secretary may approve guarantees with respect to Obligations to 
be secured by one or more Vessels or Advanced or Modern Shipbuilding 
Technology and issued to refinance existing debt, whether or not 
covered by mortgage insurance or Guarantees, so long as the existing 
debt has been issued for one of the purposes set forth in Sections 
1104(a) (1) through (4) of the Act. Section 1104(a)(1) of the Act 
requires that, if the existing indebtedness was incurred more than one 
year after the delivery or redelivery of the related Vessel or Advanced 
or Modern Shipbuilding Technology, the proceeds of such Obligations 
shall be applied to the construction, reconstruction or reconditioning 
of other Vessels or Advanced or Modern Shipbuilding Technology or for 
facilities or equipment pertaining to marine operation (described in 
Sec. 298.24 of this part). The Secretary may permit the refinancing of 
existing debt but only if any security lien on the Vessel(s) or 
Advanced or Modern Shipbuilding Technology is discharged immediately 
prior to the placing of any Mortgage thereon by the Secretary. The 
applicant shall satisfy all the eligibility requirements set forth in 
subpart B of this part, including economic soundness, as may be 
necessary. Refinancing of Title XI debt only shall be permitted for 
Advanced or Modern Shipbuilding Technology.


Sec. 298.24  Financing facilities and equipment related to marine 
operations.

    The Secretary may approve Guarantees secured by one or more Vessels 
and issued to finance the construction, reconstruction, or 
reconditioning of facilities or equipment pertaining to marine 
operations. Such facilities or equipment shall be of a specialized 
nature, used principally for servicing vessels and in handling 
waterborne cargo in the close proximity of the berthing area, excluding 
over-the-road equipment (other than chassis and containers), permanent 
or semipermanent structures and real estate.


Sec. 298.25  Excess interest or other consideration.

    The Secretary shall not execute Guarantees if any agreement in the 
Documentation directly or indirectly provides for:
    (a) The payment to an Obligee of interest, or other compensation 
for services which have not been performed, in a manner that such 
compensation or payment is being provided as interest in excess of the 
rate approved by the Secretary; or
    (b) Grants of security to an Obligee in addition to the Guarantees.


Sec. 298.26  Lease payments.

    If payment of principal and interest on Obligations would in any 
way be dependent upon the lease or charter hire payments for a Vessel 
or Advanced Shipbuilding Technology or Modern Shipbuilding Technology 
that is security for the Obligations, the amount and conditions of 
lease or charter payments shall be subject to the Secretary's approval.


Sec. 298.27  Advances.

    (a) In general. In accordance with the provisions of section 207 
and Title XI of the Act, the Secretary shall have the discretion to 
make or commit to make an advance or payment of funds to, or on behalf 
of the owner, or operator or directly to any other person or entity for 
items, including, but not limited to, principal, interest, insurance 
and other vessel-related expenses or fees. Such advances or payments 
shall be made only to protect, preserve or improve the collateral held 
as security by the Secretary to secure Title XI debt. The applicant 
making the request for an advance shall demonstrate (with market and 
cash flow analysis and other projections) that its problems are of a 
short term duration (less than two years); with the help of an 
advance(s), the applicant would be assisted over its temporary 
difficulties; and there is adequate collateral for the advance.
    (b) Filing requirements. Any company that desires to request an 
advance or other payment, or a commitment to make an advance or other 
payment from the Secretary for the purposes stated in Sec. 298.27 of 
this part, shall apply for such assistance as far in advance as is 
reasonably possible. A request for an advance for principal and 
interest payments shall be received by the Secretary at least 30 days 
prior to the initial payment date. A request for an advance of 
insurance payments shall be received by the Secretary at least 30 days 
prior to a renewal or termination date. The Secretary may consider 
requests for assistance with less notice, upon written documentation of 
extenuating circumstances. Any requests for assistance must be 
accompanied by supporting data with respect to the need for the 
advance, that financing assistance has been sought from other sources, 
that the company is taking and has taken measures to alleviate its 
situation, financial projections, proposed term of the repayment, 
current and projected market conditions, information on other available 
collateral, liens and other creditor information, and any other 
information which may be requested by the Secretary.

Subpart D--Documentation


Sec. 298.30  Nature and content of Obligations.

    An Obligation, whether issued in the form of a note, bond of any 
type, or other debt instrument, when engraved, printed or lithographed 
on a single sheet of paper shall include on its face the name of the 
Obligor, the principal sum, the rate of interest, the date of maturity, 
and the Guarantee of the United States, authenticated by the Indenture 
Trustee. If the Obligation is typewritten, printed or reproduced by 
other means on several pages of paper, the Guarantee of the United 
States and the authentication certificate of the Indenture Trustee may 
appear at the end of the typewritten Obligation. The instrument which 
is evidence of indebtedness shall also contain all information 
necessary to apprise the Obligees of their rights and responsibilities 
with respect thereto, including, but not limited to, time and manner 
for payment of principal and interest, redemptions, default procedure 
and notification (in case of registered Obligations) of sale or other 
transfer of the instruments.


Sec. 298.31

  Mortgage.

    (a) In general. (1) Under normal circumstances, a Guarantee shall 
not be endorsed on any Obligation until the Secretary receives 
satisfactory evidence of a Mortgage in one or more Vessels or a 
Mortgage or other security interest in

[[Page 21327]]

the Advanced Shipbuilding Technology or Modern Shipbuilding Technology 
(the ``Technologies''), in favor of the Secretary. During construction 
of a new Vessel or any of the Technologies, a security interest may be 
perfected by a filing under the Uniform Commercial Code.
    (2) In order to ensure that the Secretary's Mortgages or other 
security interests are valid and enforceable, the Secretary shall 
require that the Obligor obtain legal opinions, in form and substance 
satisfactory to the Secretary, from independent, outside legal counsel 
satisfactory to the Secretary, including foreign independent outside 
legal Counsel with respect to Eligible Export Vessels, which opinions 
shall state, among other things, that the Mortgage or other security 
interest(s) are valid and enforceable:
    (i) In the country in which the Vessel is documented (or, in the 
case of a security interest, in jurisdictions acceptable to the 
Secretary);
    (ii) In the United States; and
    (iii) For vessels operating on specified trade routes, in the 
country or countries involved in this service, unless the Secretary 
determines that those destinations are too numerous, in which case, the 
Secretary will instead require an opinion of foreign validity and 
enforceability in the Vessel's primary port of operation.
    (3) In the case where a Mortgage or security interest on the 
financed assets may not be available or enforceable, the Secretary 
shall require alternative forms of security.
    (4) The Security Agreement shall provide that upon delivery of a 
new Vessel or upon final installation of the Technologies, or at the 
time Guarantees are issued with respect to an existing Vessel or the 
Technologies, a Mortgage on the Vessel and a Mortgage or other security 
interest on the Technologies shall be executed in favor of the 
Secretary, unless the Secretary determines that a Mortgage or a 
security interest is not required in accordance with the preceding 
sentence.
    (5) The Mortgage shall be filed with the United States Coast Guard 
at the Vessel's port of record, or with the proper foreign authorities 
with respect to an Eligible Export Vessel, and with respect to assets 
of a General Shipyard Facility a Mortgage and security interest shall 
be filed with the proper authorities within the appropriate state and 
shall be delivered to the Secretary after being recorded.
    (b) Mortgage secured by multiple Vessels. When two or more Vessels 
are to be security for Guarantees, the Security Agreement may provide 
that one Mortgage relating to all the Vessels (Fleet Mortgage) shall be 
executed, perfected and delivered to the Secretary by the Obligor. If 
the Fleet Mortgage relates to undelivered Vessels, the Fleet Mortgage 
shall be executed upon delivery of the first vessel. At the time of 
each subsequent Vessel delivery, the Obligor shall execute a supplement 
to the Fleet Mortgage which makes that Vessel subject to the 
Secretary's Mortgage lien. The Fleet Mortgage shall provide that 
payment by the Obligor of the entire amount of Obligations covered or 
to be covered by Guarantees shall be required to discharge the Fleet 
Mortgage, regardless of the amount of the Secretary's Note or Notes 
issued and outstanding at the time of execution and delivery of the 
Fleet Mortgage or the number of Vessels covered by the Fleet Mortgage. 
The discharge date of the Fleet Mortgage shall be the maturity date of 
the Secretary's Note. The Secretary may require, as authorized by 
section 1104(c)(2) of the Act, such payments of principal prior to 
maturity (redemptions), with respect to all related Obligations, as 
deemed necessary to maintain adequate security for the Guarantees. Each 
Fleet Mortgage shall provide that in the event of constructive total 
loss, requisition of title or sale of any Vessel covered by the Fleet 
Mortgage, indebtedness represented by the Obligations shall be paid, 
unless the Secretary shall otherwise determine that there remains 
adequate security for the Guarantees, and the Vessel shall be 
discharged from the Mortgage lien.
    (c) Adequacy of collateral. Under normal circumstances, a First 
Preferred Mortgage on the Vessel(s) or Advanced or Modern Shipbuilding 
Technology will be adequate security for the Guarantees. If, however, 
the Secretary determines that the Mortgage on the Vessel(s) or Advanced 
or Modern Shipbuilding Technology is not sufficient to provide adequate 
security, the Secretary, as a condition to approving the Letter 
Commitment or processing the application may require additional 
collateral, such as a mortgage(s) on other vessel(s) or Advanced or 
Modern Shipbuilding Technology or on other assets, special escrow 
funds, pledges of stock, charters, contracts, notes, letters of credit, 
accounts receivable assignments, and guarantees.


Sec. 298.32  Required provisions in documentation.

    (a) Performance under shipyard and related contracts. Generally, 
shipyard and related contracts shall contain provisions for:
    (1) Furnishing by the shipyard or manufacturer of the Advanced 
Shipbuilding Technology or Modern Shipbuilding Technology of 
satisfactory insurance and a satisfactory performance bond where 
Obligations are issued during the construction period, except that if 
the shipyard or manufacturer of the Advanced Shipbuilding Technology or 
Modern Shipbuilding Technology demonstrates to the satisfaction of the 
Secretary that it has sufficient financial resources and operational 
capacity to complete the project, posting of a bond will not be 
required;
    (2) Allowing access to the Vessel or Advanced or Modern 
Shipbuilding Technology, as well as all related work projects being 
performed by the contractor and subcontractors, to a representative of 
the Secretary, at all reasonable times, to inspect performance of the 
work and to observe trials and other tests for the purpose of 
determining that the Vessel or Advanced or Modern Shipbuilding 
Technology is being constructed, reconstructed or reconditioned in 
accordance with contract plans and specifications approved by the 
Secretary;
    (3) Submitting to the Secretary, upon request, one set of shipyard 
plans, in form and substance satisfactory to the Secretary, for the 
Vessel or Advanced or Modern Shipbuilding Technology as built;
    (4) Making periodic payments for the work in accordance with an 
agreed schedule, submitted by the shipyard in a form acceptable to the 
Secretary, based on percentage of completion, after such percentage and 
satisfactory performance are certified by the Obligor, shipyard and a 
representative of the Secretary as to each payment;
    (5) Prohibiting the use of proceeds from the sale of Obligations 
for the payment of work performed outside the shipyard, unless the 
Secretary consents in writing to such use; and
    (6) Requiring that all components of the hull and superstructure of 
a U.S.-documented Vessel and an Eligible Export Vessel shall be 
assembled in the United States. If obligations will not be issued 
during the period of construction of a Vessel, shipyard-related 
contracts shall generally include the provisions specified in 
paragraphs (a)(2) and (a)(3) of this section and this paragraph (a)(6).
    (b) Assignments and general covenants from Obligor to Secretary. 
The Obligor shall assign rights and shall covenant with the Secretary, 
as required by the Secretary, including, but not limited to, the 
following:

[[Page 21328]]

    (1) Assignment of all or part of the right, title and interest 
under the construction contract and related contracts, except those 
rights expressly reserved therein by the Obligor relating to such 
things as patent infringement and liquidated damages;
    (2) Assignment of rights to receive all moneys which from time to 
time become due with respect to Vessel or Advanced or Modern 
Shipbuilding Technology construction;
    (3) Assignment, where applicable, of all or a part of the bareboat 
charter, time charter, contracts of affreightment or other agreements 
relating to the use of the Vessel or Advanced or Modern Shipbuilding 
Technology and all hire payable to the Obligor, and delivery to the 
Secretary of required consents by appropriate parties to any such 
assignments;
    (4) Covenants relating to the annual filing of satisfactory 
evidence of continuing United States citizenship, in accordance with 46 
CFR part 355, with the exception of Eligible Export Vessels and 
shipyards with Advanced or Modern Shipbuilding Technology projects; 
warranty of Vessel or Advanced or Modern Shipbuilding Technology title 
free from all liens other than those specifically excepted; maintaining 
United States documentation of the Vessel or documentation under the 
laws of a country other than the United States with regard to an 
Eligible Export Vessel; compliance with the provisions of 46 U.S.C. 
31301-31343, except that Eligible Export Vessels shall comply with the 
definition of a ``preferred mortgage'' in 46 U.S.C. 31301(6)(B), 
requiring, among other things, that the Mortgage shall comply with the 
mortgage laws of the foreign country where the Vessel is documented and 
shall have been registered under those laws in a public register; 
Notice of Mortgage, payment of all taxes (except if being contested in 
good faith); annual financial statements audited by independent 
certified or independent licensed public accountant.
    (5) Covenants to keep records of construction costs paid by or for 
the Obligor's account and to furnish the Secretary with a detailed 
statement of those costs, distinguishing between:
    (i) Items paid or obligated to be paid, attested to by independent 
certified public accountants unless otherwise verified by the 
Secretary; and
    (ii) Costs of American and foreign materials (including services) 
in the hull and superstructure.
    (6) Covenants to maintain Marine and War Risk Hull and Machinery 
insurance on the Vessel or Eligible Export Vessel in an amount equal to 
110% of the outstanding Obligations or up to the full commercial value 
of the Vessel or Eligible Export Vessel, whichever is greater; Marine 
and War Risk Protection and Indemnity insurance; Interim War Risk 
Binders for Hull and Machinery, and Protection and Indemnity coverages 
underwritten by the Maritime Administration as authorized by Title XII 
of the Act; and such additional insurance as may be required by the 
Secretary. All insurance required to be maintained shall be placed with 
the United States Government and American and/or British (and/or other 
foreign, if permitted by the Secretary by prior written notice) 
insurance companies, underwriters' associations or underwriting funds 
approved by the Secretary through marine insurance brokers and/or 
underwriting agents approved by the Secretary. All insurance required 
to be maintained shall be placed under the latest (at the time of 
issue) forms of American Institute of Marine Underwriters policies 
approved by the Secretary and/or under such other forms of policies 
which the Secretary may approve in writing and/or policies issued by or 
for the Maritime Administration insuring the Vessel or Eligible Export 
Vessel against the usual risks provided for under such forms, including 
such amounts of increase value other forms of ``total loss only'' 
insurance permitted by the Hull and Machinery insurance policies;
    (7) Collateralize other debt due to the Secretary under other Title 
XI financings;
    (8) Covenants to maintain shipyard insurance on the Advanced 
Shipbuilding Technology or Modern Shipbuilding Technology in an amount 
equal to 110% of the outstanding Obligations or up to the full 
commercial value of the technology, whichever is greater, and such 
additional insurance as may be required by the Secretary; and
    (9) Covenants to maintain additional types of insurance as may be 
required by the Secretary with respect to Eligible Export Vessels, i.e. 
political risk insurance, to cover such items as the political, 
financial, and/or economic risk in a foreign country.


Sec. 298.33  Escrow fund.

    (a) Circumstances requiring deposits. The Obligor may be required 
to establish a fund with the Secretary (Escrow Fund) in accordance with 
section 1108(a) of the Act and the Security Agreement. The deposit with 
the Secretary shall be in cash or Federal Reserve Bank funds.
    (b) Principal Deposit-Single Vessel or Advanced or Modern 
Shipbuilding Technology. If a single Vessel or Advanced or Modern 
Shipbuilding Technology is security for the Guarantees, the deposit of 
principal shall be calculated by subtracting from the aggregate 
principal amount of the Obligations sold, 75 or 87\1/2\ percent 
(whichever is applicable under section 1104(b)(2) of the Act) of the 
amount of Actual Cost or Depreciated Actual Cost determined by the 
Secretary to have been paid, as of the date of the deposit, by or for 
the account of the Obligor for construction, reconstruction or 
reconditioning of the Vessel or Advanced or Modern Shipbuilding 
Technology. In the event that Obligations are issued and sold on a date 
subsequent to the initial issuance and sale of Obligations, a deposit 
shall be calculated in the same manner as for the first sale of 
Obligations.
    (c) Principal deposit--multiple Vessels or Advanced or Modern 
Shipbuilding Technology. If multiple Vessels or Advanced or Modern 
Shipbuilding Technology are security for the Guarantees, with the 
Secretary's approval, the Obligor may calculate the aggregate deposit 
of principal amount in the Escrow Fund by computing on an individual 
Vessel or Advanced or Modern Shipbuilding Technology basis by prorating 
the proceeds of the sale of Obligations, within the meaning of the 
proviso in section 1108(a) of the Act, based on the ratio of the 
Vessel's Actual Cost or Depreciated Actual Cost, to the total Actual 
Cost and Depreciated Actual Cost of all Vessels or Advanced or Modern 
Shipbuilding Technology which are security for the Guarantees less 75 
or 87\1/2\ percent (whichever is applicable under section 1104(b)(2) of 
the Act) of the amount of Actual Cost or Depreciated Actual Cost 
determined by the Secretary to have been paid, as of the date of 
deposit, by or for the account of the Obligor for the construction, 
reconstruction or reconditioning of the Vessel or Advanced or Modern 
Shipbuilding Technology for which the deposit is being computed or by 
allocating portions of the proceeds (up to 75 or 87\1/2\ percent, 
whichever is applicable under section 1104(b) of the Act) from the sale 
of the Obligations to specific Vessels or Advanced or Modern 
Shipbuilding Technology and computing the deposit based on the Actual 
Cost or Depreciated Actual Cost of such Vessels or Advanced or Modern 
Shipbuilding Technology paid, as of the date of deposit, by or for the 
account of the Obligor. In the event that Obligations are issued and 
sold on a

[[Page 21329]]

date subsequent to the initial issuance and sale of Obligations, a 
deposit shall be calculated in the same manner as for the first sale of 
Obligations. The foregoing allocations are for the purpose of 
calculating the deposits only and are not applicable or controlling 
with respect to disbursements from the Escrow Fund.
    (d) Interest deposit. Interest on the aggregate principal amount 
deposited pursuant to paragraphs (b) and (c) of this section, shall be 
computed at the same rate borne by the Obligations, for one interest 
payment period, unless the Secretary shall find the existence of 
adequate consideration or accept other consideration in lieu of the 
interest deposit. If the Obligations issued and sold bear more than one 
rate of interest, the amount of interest required to be deposited shall 
be based upon the weighted average of such interest rates. The 
calculation of the amount of interest to be deposited shall take into 
account the principal and interest, if any, remaining on deposit in the 
Escrow Fund.
    (e) Disbursements prior to Termination Date. Unless the Guarantees 
shall become payable prior to the Termination Date (described in 
paragraph (h) of this section) of the Escrow Fund, the Secretary shall, 
subject to the satisfaction of any applicable conditions contained in 
the Security Agreement, and within a reasonable time after written 
request from the Obligor, make disbursements from the fund directly to 
the Indenture Trustee or any Paying Agent for the payment of interest 
on the Obligations, for periods prior to Vessel or Advanced or Modern 
Shipbuilding Technology delivery or redelivery, and to the shipbuilder, 
the Obligor or to any other Person entitled thereto, with respect to 
costs included in Actual Cost. Also, the Secretary may disburse to the 
Obligor, upon request made at least 10 business days prior to, and no 
later than 30 days after the date on which the payment of interest on 
the Obligations is due, any excess, as determined by the Secretary, of 
required interest on deposit in the Escrow Fund on the date of 
disbursement. However, no payment or reimbursement shall be made from 
the Escrow Fund to any Person until:
    (1) The Construction Fund (described in Sec. 298.34 of this part), 
where provided for in the Security Agreement, has been exhausted;
    (2) At least 12\1/2\ or 25 percent (whichever is applicable) of the 
Actual Cost or Depreciated Actual Cost of the Vessel or Advanced or 
Modern Shipbuilding Technology for which the disbursement is requested 
has been paid by or for the account of the Obligor from sources other 
than the proceeds of the Obligations, except that where the Obligor is 
required to pay in 25 percent of the Actual Cost or Depreciated Actual 
Cost, and demonstrates to the Secretary's satisfaction the ability to 
pay in such 25 percent, after the Obligor has paid the first 12\1/2\ 
percent of the Actual Cost or Depreciated Actual Cost, the Obligor may 
be permitted to withdraw moneys from the Escrow Fund, for payment of 
the next 37\1/2\ percent of such Actual Cost or Depreciated Actual 
Cost, and withdraw the remainder of the Escrow Fund moneys after paying 
in the next 12\1/2\ percent of Actual Cost or Depreciated Actual Cost; 
and
    (3) The Secretary has approved the Actual Cost items and has 
determined that the amounts for which reimbursement is requested have 
been paid and that there has been satisfactory certification as to the 
percentage of completion of the Vessel or Vessels or Advanced or Modern 
Shipbuilding Technology, at least equal to that amount of Actual Cost 
paid, except where the Secretary has specifically consented to an 
alternative procedure.
    (f) Where Guarantees become payable. If, prior to the Termination 
Date of the Escrow Fund, the Guarantees shall become payable by the 
Secretary, all amounts in the Escrow Fund at such time (including 
interest and realized income which have not yet been paid to the 
Obligor) shall be paid into the Federal Ship Financing Fund, created by 
section 1102 of the Act, and be credited against any amounts due or to 
become due to the Secretary from the Obligor with respect to all 
Guarantees, and to the extent not so required, be paid to the Obligor.
    (g) Requisition of title, termination of construction contract or 
total loss of Vessel or Advanced or Modern Shipbuilding Technology. In 
the event of requisition of title to or seizure or forfeiture of the 
Vessel or Advanced or Modern Shipbuilding Technology, termination of 
the construction contract (unless the Obligor and the Secretary elect 
to have the Vessel or Advanced or Modern Shipbuilding Technology 
completed) or the construction-differential subsidy contract (where 
applicable), or the actual or constructive total loss of the Vessel or 
Advanced or Modern Shipbuilding Technology, all moneys remaining on 
deposit in the Escrow Fund may be disbursed by the Secretary for any of 
the following purposes:
    (1) Redemption or payment of Obligations and accrued interest 
thereon to the date of redemption or payment, in accordance with the 
applicable provisions of the Documentation relating to such redemption 
or payment, where there is no existing default;
    (2) Payment to the Obligor, if all outstanding Obligations are 
retired and paid other than by payment of the Guarantees, and all 
amounts payable to the Secretary and secured by the Mortgage have been 
paid; and
    (3) Payment in accordance with the priorities set forth in 
Sec. 298.41 of this part, if a default has occurred and if the 
Secretary shall have paid the Guarantees.
    (h) Disbursement upon Termination Date. The Escrow Fund shall 
terminate on a date agreed upon by the Obligor and the Secretary as set 
forth in the Security Agreement (Termination Date). If on such 
Termination Date the full amount of Actual Cost of the Vessel or 
Advanced or Modern Shipbuilding Technology has not been paid by or for 
the account of the Obligor, or is not then due and payable, the Obligor 
and the Secretary may extend the Termination Date by agreement. When 
the Secretary makes a final determination of Actual Cost at the written 
request of the Obligor, or at the instance of the Secretary if the 
Termination Date has occurred without such a request, the Termination 
Date shall be deemed to be the date of such final determination of 
Actual Cost. If payments under the Guarantees have not become due prior 
to the Termination Date, then on or immediately after said Termination 
Date, any balance in the Escrow Fund shall be disbursed by the 
Secretary in the following manner:
    (1) Where the principal amount of the Obligations issued less the 
principal amount of Obligations which have been retired or paid on or 
before such Termination Date, and not availed of as a credit against 
any mandatory redemptions otherwise required to be made on or before 
such Termination Date, shall be in excess of 75 or 87\1/2\ percent 
(whichever is applicable) of the Actual Cost or Depreciated Actual Cost 
of the Vessel or Advanced or Modern Shipbuilding Technology as finally 
determined by the Secretary as of the Termination Date, the Secretary 
shall pay such excess to the Indenture Trustee in accordance with the 
provisions of the Documentation relating to such payment. A written 
notice from the Secretary and the Obligor shall accompany such payment, 
stating the Termination Date and directing the Indenture Trustee to 
redeem an equal amount of Obligations;
    (2) From the balance remaining after the deduction of the principal 
amount of the Obligations to be redeemed, an amount equal to interest 
accrued to the

[[Page 21330]]

date fixed for redemption of the principal amount of Obligations to be 
redeemed shall be simultaneously paid from the Escrow Fund by the 
Secretary to the Indenture Trustee to be applied to the payment of 
interest to the date to be fixed for redemption. In the event the 
balance remaining in the Escrow Fund, after giving effect to paragraph 
(h)(1) of this section, is insufficient to pay the interest accrued to 
the date fixed for redemption, such balance shall be paid from the 
Escrow Fund to the Indenture Trustee and the Obligor shall 
simultaneously deposit with the Indenture Trustee an amount equal to 
the difference between the balance being paid to the Indenture Trustee 
from the Escrow Fund and the total amount required for the payment of 
accrued interest; and
    (3) Any balance of the Escrow Fund shall be paid to the Obligor.
    (i) Investment and liquidation of the Escrow Fund. The Secretary 
may invest and reinvest deposits to the Escrow Fund in securities which 
are obligations of the United States and with maturities such that 
sufficient cash will be reasonably available to the Escrow Fund as 
required to make periodic authorized disbursements. The Secretary shall 
deposit the Escrow Fund into a special Treasury Department account with 
instructions, pursuant to an agreement with the Obligor, for the 
investment, reinvestment and liquidation of the Escrow Fund.
    (j) Income Earned on the Escrow Fund. If the Guarantees shall not 
have become due, after receiving notice that the Treasury Department 
has deposited income earned on the Escrow Fund into the special 
account, the Secretary shall direct the payment of such income to the 
Obligor. Income shall include the excess of the cash received from the 
sale of securities or the payment of securities at maturity (less any 
losses from the sale of securities not made up by payments by the 
Obligor pursuant to provisions of the Security Agreement) over the cost 
thereof, and interest received with respect to the securities.
    (k) Redeposit. If, at any time, the Secretary shall have determined 
that there has been an improper disbursement from the Escrow Fund, the 
Secretary shall give written notice to the Obligor of the amount 
improperly disbursed, the amount to be redeposited into the Escrow Fund 
on account thereof and the reasons for such determination. The Obligor 
shall thereafter promptly redeposit such amount into the Escrow Fund.


Sec. 298.34  Construction fund.

    (a) Deposit. Where the Security Agreement provides for an Escrow 
Fund deposit, usually a provision shall also be included therein for 
establishing Construction Fund deposits. Under the terms of this 
provision, at the time of each sale of Obligations the Obligor shall 
deposit with a Depository, in a special account subject to the joint 
control of the Obligor and the Secretary, cash equal to the principal 
amount of the Obligations issued at such time less the sum of the 
aggregate principal amount then required to be in the Escrow Fund and 
the amount in excess of 12\1/2\ or 25 percent of Actual Cost or 
Depreciated Actual Cost, as applicable (whichever is payable under 
Sec. 298.33(e) of this part) which the Secretary determines has been 
paid by or for the account of the Obligor. The balance of the proceeds 
from the sale of the Obligations, after depositing the amounts required 
to be deposited in the Escrow Fund and/or the Construction Fund, shall 
be retained by the Obligor.
    (b) Withdrawals. The Secretary shall, subject to the satisfaction 
of any applicable conditions contained in the Security Agreement, 
periodically approve disbursements from the Construction Fund directly 
to the Indenture Trustee or any Paying Agent for the payment of 
interest on the Obligations, for periods prior to Vessel or Advanced or 
Modern Shipbuilding Technology delivery, and to the shipbuilder, the 
Obligor, or to any other Person entitled thereto with respect to costs 
included in Actual Cost. The Secretary shall not authorize any 
disbursement from the Construction Fund unless payments have been made 
by or for the account of the Obligor from sources other than the 
Obligations, in accordance with the requirements of paragraphs (e) (2) 
and (3) of Sec. 298.33.
    (c) Redeposit. If, at any time, the Secretary shall have determined 
that there has been an improper disbursement from the Construction 
Fund, the Secretary shall give written notice to the Obligor of the 
amount improperly disbursed, the amount to be redeposited into the 
Construction Fund on account thereof and the reasons for such 
determination. The Obligor shall thereafter promptly redeposit such 
amount into the Construction Fund.


Sec. 298.35  Reserve Fund and Financial Agreement.

    (a) Purpose. In order to provide further security to the Secretary 
and to insure payment of the interest and principal due on the 
Obligations, the Company shall be required to enter into a Title XI 
Reserve Fund and Financial Agreement (Agreement) at the first Closing 
at which Obligations are issued. The Secretary may waive or modify 
provisions of the Agreement based on an evaluation of the aggregate 
security for the Guarantees.
    (b) Financial Covenants for Companies meeting primary financial 
requirements. Covenants shall be imposed on the Company which is 
subject to compliance with the primary financial requirements at 
Closing, set forth in Sec. 298.13(d), as follows:
    (1) Continuous covenants. So long as Guarantees are in effect the 
Company shall not, without the prior written consent of the Secretary, 
undertake any actions prohibited by the Documentation, which actions 
include but are not limited to those of the following nature:
    (i) Enter into a service, management or operating agreement with 
respect to a Vessel or Advanced or Modern Shipbuilding Technology 
financed with the assistance of Title XI Guarantees;
    (ii) Sell, transfer or demise charter the Vessel or transfer the 
Vessel to a Related Party under any form of charter or contract,
    (iii) Sell or transfer a substantial part of its assets, enter into 
a merger or consolidation, engage in new business activities not 
directly connected with marine operations or guarantee (or otherwise be 
liable for) debts of other Persons.
    (iv) Pay any dividend except as may be permitted by paragraph 
(b)(1)(iv) (A) or (B) of this section. If the Company is party to an 
operating-differential subsidy contract, the payment of dividends is 
subject to the provisions of Sec. 298.35(g).
    (v) Sell, transfer, or lease any Modern or Advanced Shipbuilding 
Technology financed with the assistance of Title XI guarantees or 
transfer such technology to a Related Party under any form of contract.
    (A) From retained earnings in an amount specified in paragraph 
(b)(1)(iv)(C) of this section providing that the year in which the 
dividend is paid there is no operating loss in the current fiscal year 
to the date of the payment of the dividend and
    (1) There was no operating loss in the immediate preceding three 
fiscal years, or
    (2) There was a one year operating loss during the immediate 
preceding three fiscal years and
    (i) Such loss was not in the immediate preceding fiscal year, and
    (ii) There was positive net income for the three year period.
    (B) If dividends are not payable under paragraph (b)(1)(iv)(A) of 
this section, a

[[Page 21331]]

dividend can be paid in an amount equal to the total operating net 
income for the immediate preceding three fiscal year period provided 
that
    (1) There were no two successive years of losses,
    (2) In the year in which the dividend is paid there is no operating 
loss in such fiscal year to the date of payment of the dividend, and
    (3) The dividend paid would not exceed an amount specified in 
paragraph (b)(1)(iv)(C) of this section.
    (C) Dividends may be paid from earnings of prior years in an 
aggregate amount equal to:
    (1) 40 percent of the Company's total net income after tax for each 
of the prior years, less any dividends that were paid in such years; or
    (2) The aggregate of the Company's total net income after tax for 
such prior years, providing that after the payment of such dividend, 
the Company's long term debt does not exceed its net worth. In 
computing net income extraordinary gains, such as gains from the sale 
of assets, etc., shall be excluded.
    (2) Additional Covenants which may become applicable. If the 
Company shall at any time no longer satisfy the primary financial 
requirements, or such condition would occur after giving effect to any 
of the proposed transactions set forth below, the Company shall not, 
without the prior written consent of the Secretary, undertake any 
actions prohibited by the Documentation, which actions include but are 
not limited to those of the following nature:
    (i) Withdraw or redeem capital, covert capital into debt, make 
distributions, or pay any dividends, provided, however, if the Company 
is subject to an operating-differential subsidy contract, the dividend 
restriction shall be governed by Sec. 298.35(g);
    (ii) Make loans, advances, investments in or repayments of existing 
debts to a Related Party, stockholders, officers or directors;
    (iii) Incur indebtedness or become subject to any liens (except if 
necessary in the ordinary course of existing business); acquire fixed 
assets or become liable (directly or indirectly) under charters or 
leases (having a term of six months or more) for the payment of charter 
hire or rent on all such charters or leases which have annual payments 
aggregating in excess of an amount specified by the Secretary in the 
Agreement;
    (iv) Pay salaries in excess of amounts specified in the Agreement, 
pay subordinated indebtedness or make loans; or
    (v) Invest in securities other than those that qualify as eligible 
investments under the Agreement.
    (c) Financial Covenants for Companies meeting the special financial 
requirements. Covenants shall be imposed on the Company which is 
subject to the special financial requirements at Closing, set forth in 
Sec. 298.13(e), as follows:
    (1) Continuous covenants. So long as the Guarantees are in effect 
the Company shall not, without the prior written consent of the 
Secretary, undertake any actions, prohibited by the Documentation, 
which actions include but are not limited to those of the following 
nature.
    (i) Enter into a service, management or operating agreement for a 
Vessel or Advanced or Modern Shipbuilding Technology financed with the 
assistance of Title XI Guarantees;
    (ii) Sell, transfer or demise charter the Vessel or transfer the 
Vessel to a Related Party under any form of Charter or Contract.
    (iii) Sell or transfer a substantial part of its assets, enter into 
a merger or consolidation, engage in any new business activities not 
directly connected with marine operations or guarantee (or otherwise 
become liable for) debts of other Persons;
    (iv) Incur indebtedness or become subject to any liens (except if 
necessary in the ordinary course of existing business); acquire fixed 
assets or become liable (directly or indirectly) under charters or 
leases (having a term of six months or more) for the payment of charter 
hire or rent on all such charters or leases which have annual payments 
aggregating in excess of an amount specified for the Secretary in the 
Agreement;
    (v) Make any loans or invest in any securities other than Eligible 
Investments for Title XI Reserve Fund;
    (vi) Pay any subordinated indebtedness other than in accordance 
with a subordination agreement approved by the Secretary; or
    (vii) Sell, transfer, or lease any Advanced or Modern Shipbuilding 
Technology financed with the assistance of Title XI guarantees or 
transfer such technology to a Related Party under any form of contract.
    (2) Additional covenants which may become applicable. If the 
Company shall at any time no longer satisfy the special financial 
requirement (after including the annual financial liability relating to 
the Obligations as a current liability in computing Working Capital), 
or such condition would occur after giving effect to any proposed 
transaction set forth below, the Company shall not, without the prior 
written consent of the Secretary, undertake any actions prohibited by 
the Documentation, which actions include but are not limited to those 
of the following nature:
    (i) Withdraw or redeem capital, convert capital into debt, make 
distributions, or pay any dividend, provided however, if the Company is 
subject to an operating-differential subsidy contract, the dividend 
restriction shall be governed by Sec. 298.35(g);
    (ii) Make loans, advances, investments or prepayments of existing 
debts to a Related Party, stockholders, officers or directors, or 
invest in the securities of any Related Party; or
    (iii) Pay salaries in excess of amounts specified in the Agreement.
    (3) Covenants where Company's financial condition improves to meet 
primary financial requirements. Whenever the Company, based on a review 
of its financial position, determines that it meets the primary 
financial requirements set forth in Sec. 298.13(d), it may inform the 
Secretary of this fact, and submit such financial statements and all 
additional information which the Secretary shall consider necessary to 
verify compliance with such financial requirements. With the consent of 
the Secretary, the Company may elect thereafter to be subject to 
covenants applicable to a Company which had satisfied the primary 
financial requirements at Closing.
    (d) Title XI Reserve Fund Net Income. The Agreement shall provide 
that within 105 days after the end of its accounting year, the Company 
shall compute its net income attributable to the operation of one or 
more Vessels that were constructed, reconstructed, reconditioned or 
refinanced with Title XI financing assistance (Title XI Reserve Fund 
Net Income). The computation utilizes a ratio expressed as a 
percentage, and applies this percentage to the Company's total net 
income after taxes. The numerator of the ratio shall be the total 
original capitalized cost of all Company Vessels (whether leased or 
owned) which were constructed, reconstructed, reconditioned or 
refinanced with the assistance of Guarantees. The denominator shall be 
the total original capitalized cost of all the Company's fixed assets. 
In the case of Advanced or Modern Shipbuilding Technology, the 
Agreement shall provide that within 105 days after the end of its 
accounting year, the Company shall submit its audited financial 
statements showing its net cash flow in a manner acceptable to the 
Secretary, in lieu of any other computation of Reserve

[[Page 21332]]

Fund Net Income specified herein for Vessels. The net income after 
taxes, computed in accordance with generally accepted accounting 
principles, shall be adjusted as follows:
    (1) The depreciation expense applicable to the accounting year 
shall be added back.
    (2) There shall be subtracted:
    (i) An amount equal to the principal amount of debt required to be 
paid or redeemed, and actually paid or redeemed by the Company (other 
than from the Title XI Reserve Fund) during the year; and
    (ii) The principal amount of Obligations retired or paid (as 
defined in the Security Agreement), prepaid or redeemed, in excess of 
the required redemptions or payments which may be used by the Company 
as a credit against future required redemptions or other required 
payments with respect to the Obligations.
    (e) Deposits. Unless the Company, as of the close of its accounting 
year, was subject to and in compliance with the primary financial 
requirements set forth in Sec. 298.13(d), the Company shall make one or 
more deposits to a special joint depository account with the Secretary 
(the Title XI Reserve Fund) to be established pursuant to an agreement 
in writing (Depository Agreement) at the time the first deposit is 
required to be made. The amount of deposit as to any year, or period 
less than a full year, where applicable, shall be determined as 
follows:
    (1) If the Company is the owner of the Vessel or Advanced or Modern 
Shipbuilding Technology, an amount (pro rated for a period of less than 
a full year) that is equal to 10 percent of the Company's aggregate 
original equity investment in the Vessel or Vessels or Advanced or 
Modern Shipbuilding Technology shall be deducted from Title XI Reserve 
Fund Net Income.
    (2) Fifty percent of the Title XI Reserve Fund Net Income adjusted 
where applicable, in accordance with paragraph (e)(1) of this section 
shall be deposited into the Title XI Reserve Fund.
    (3) There shall also be deposited any additional amounts that may 
be required, pursuant to provisions of the Security Agreement or any 
other agreement in the documentation to which the Company is a party.
    (4) Irrespective of the Company's deposit requirement, as stated in 
preceding paragraphs (e) (1) through (3) of this section, the Company 
shall not be required to make any deposits into the Title XI Reserve 
Fund if any of the following events shall have occurred:
    (i) The Company shall have discharged the Obligations and related 
Secretary's Note and shall have paid other sums secured under the 
Security Agreement and Preferred Mortgage;
    (ii) All Guarantees with respect to outstanding Obligations shall 
have terminated pursuant to the provisions of the Security Agreements, 
other than by reason of payment of the Guarantees; or
    (iii) The amount in the Title XI Reserve Fund, (including any 
securities at market value), is equal to, or in excess of 50 percent of 
the principal amount of outstanding Obligations.
    (5) In the case of Advanced or Modern Shipbuilding Technology, 
unless the shipyard as of the close of its accounting year was subject 
to and in compliance with the primary financial requirements, the 
shipyard shall make a deposit at two percent of its net cash flow, as 
defined by GAAP, and as shown on its audited financial statements.
    (f) Fund in lieu of Title XI Reserve Fund. If the Company has 
established a Capital Construction Fund (CCF), pursuant to section 607 
of the Act, whether interim or permanent, at any time when a deposit 
would otherwise be required to be made into the Title XI Reserve Fund, 
and the Company elects to make such deposits to the CCF, the Company 
shall enter into an agreement, satisfactory to the Secretary, providing 
that all such deposits of assets therein shall be security (CCF 
Security Amount) to the United States in lieu of the Title XI Reserve 
Fund. The deposit requirements of the Title XI Reserve Fund and 
Financial Agreement shall be deemed satisfied by deposits of equal 
amounts in the CCF, and withdrawal of the CCF Security Amount shall be 
subject to the Secretary's prior written consent. If, for any reason, 
the CCF terminates prior to the payment of the Obligations, the 
Secretary's Note and all other amounts due under or secured by the 
Security Agreement or Mortgage, the CCF Security Amount shall be 
deposited or redeposited in the Title XI Reserve Fund.
    (g) Dividend restrictions applicable to companies who are parties 
to an operating-differential subsidy contract. [Reserved]


Sec. 298.36  Annual Guarantee Fee.

    (a) Rates in general. For annual periods, beginning with the date 
of the Security Agreement and prior to the delivery date of a Vessel or 
Advanced or Modern Shipbuilding Technology, the Secretary shall charge 
the Obligor an annual fee (Guarantee Fee) at a rate of not less than 
\1/4\ of 1 percent and not more than \1/2\ of 1 percent of the excess 
of the average principal amount of the Obligations estimated to be 
outstanding during the annual period covered by said Guarantee Fee over 
the average principal amount, if any, on deposit in the Escrow Fund 
during said annual period (Average Principal Amount of Obligations 
Outstanding). For annual periods beginning with the delivery date of a 
Vessel or Advanced or Modern Shipbuilding Technology, the Guarantee Fee 
shall be imposed at an annual rate of not less than \1/2\ of 1 percent 
and not more than 1 percent of the Average Principal Amount of 
Obligations Outstanding during the annual period covered by the 
Guarantee Fee. The Obligor shall be responsible for payment of the 
Guarantee Fee.
    (b) Rate calculation. The Guarantee Fee rate generally shall vary 
inversely with the ratio of Equity to Long Term Debt of the Person 
considered by the Secretary to be the primary source of credit in the 
transaction (Credit Source), e.g., the long term time charterer (where 
the charter hire represents the source of payment of interest and 
principal with respect to the Obligations), the guarantor of the 
Obligations, Obligor or the bareboat charterer. Where the ratio of 
Equity to Long Term Debt (Variable Rate) is used, the Secretary may 
make such adjustments to the computation of Equity and Long Term Debt 
considered necessary to reflect more accurately the financial condition 
of the Credit Source. The determination of Equity and Long Term Debt 
shall be based on information contained in forms or statements on file 
with the Secretary prior to the date on which the Guarantee Fee is to 
be paid. With the consent of the Secretary, there shall be included in 
equity, but excluded from Long Term Debt, any subordinated indebtedness 
representing loans to the credit source, evidence of which has been 
delivered to the Secretary. The Secretary may establish a fixed rate or 
other method of calculation of the Guarantee Fee, upon an evaluation of 
the aggregate security for the Guarantees.
    (c) Variable Rate prior to Vessel or Advanced or Modern 
Shipbuilding Technology delivery. For annual periods beginning prior to 
the delivery date of a Vessel or Advanced or Modern Shipbuilding 
Technology being constructed, reconstructed, or reconditioned, the 
Guarantee Fee shall be determined as follows:
    (1) If the Equity is less than 15 percent of the Long Term Debt, 
the annual Guarantee Fee rate shall be \1/2\ of 1 percent of the 
Average Principal Amount of Obligations Outstanding during the annual 
period covered by the Guarantee Fee.

[[Page 21333]]

    (2) If the Equity is at least 15 percent of the Long Term Debt, but 
less than the Long Term Debt, the annual Guarantee Fee rate shall be 
\3/8\ of 1 percent of the Average Principal Amount of Obligations 
Outstanding during the annual period covered by the Guarantee Fee.
    (3) If the Equity is equal to or exceeds the Long Term Debt, the 
annual Guarantee Fee rate shall be \1/4\ of 1 percent of the Average 
Principal Amount of Obligations Outstanding during the annual period 
covered by the Guarantee Fee.
    (d) Variable Rate after Vessel or Advanced or Modern Shipbuilding 
Technology delivery. For annual periods beginning on or after the 
Vessel or Advanced or Modern Shipbuilding Technology delivery date, the 
Guarantee Fee shall be determined as follows:
    (1) If the Equity is less than 15 percent of the Long Term Debt, 
the annual Guarantee Fee rate shall be 1 percent of the Average 
Principal Amount of Obligations Outstanding during the annual period 
covered by the Guarantee Fee.
    (2) If the Equity is at least 15 percent of the Long Term Debt but 
less than 60 percent of the Long Term Debt, the annual Guarantee Fee 
rate shall be \3/4\ of 1 percent of the Average Principal Amount of 
Obligations Outstanding during the annual period covered by the 
Guarantee Fee.
    (3) If the Equity is at least 60 percent of the Long Term Debt, but 
less than the Long Term Debt, the annual Guarantee Fee rate shall be 
\5/8\ of 1 percent of the Average Principal Amount of Obligations 
Outstanding during the annual period covered by the Guarantee Fee.
    (4) If the Equity shall equal or exceed the Long Term Debt, the 
Guarantee Fee rate shall be \1/2\ of 1 percent of the Average Principal 
Amount of Obligations Outstanding during the annual period covered by 
the Guarantee Fee.
    (e) Payment of Guarantee Fee. The Guarantee Fee covering the full 
period of the stated maturity of the Obligations commencing with the 
date of the Security Agreement shall be paid to the Secretary 
concurrently with the execution and delivery of said Agreement. The 
project's entire Guarantee Fee payment shall be made by the Obligor to 
the Secretary in an amount equal to the sum of the present value of the 
separate products obtained by applying the Guarantee Fee rate to the 
projected amount of the Obligations Outstanding for each year of the 
stated maturity of the Obligations. In calculating the present value 
used in determining the amount of the Guarantee Fee to be paid, MARAD 
will use a discount rate based on information contained in the 
Department of Commerce's Economic Bulletin Board quarterly rates. Under 
no circumstances will the Secretary refund the Guarantee Fee to the 
Obligor. A Guarantee Fee paid pursuant to this section may be included 
in Actual Cost and is eligible to be financed.
    (f) Proration of Guarantee Fee. The Guarantee Fee shall be prorated 
where a Vessel delivery is scheduled to occur during the annual period 
with respect to which payment of said Guarantee Fee is being made, as 
follows:
    (1) Undelivered Vessel. If the Guarantee Fee relates to an 
undelivered Vessel, the predelivery rate is applicable to the Average 
Principal Amount of Obligations Outstanding for the period from the 
date of the Security Agreement to the delivery date, and the delivered 
Vessel rate is applicable for the balance of the annual period in which 
the delivery occurs.
    (2) Multiple Vessels. If the Guarantee Fee relates to more than one 
Vessel, the amount of outstanding Obligations shall be allocated to 
each Vessel in the manner prescribed in Sec. 298.33(d), and an amount 
shall be determined for each Vessel by using the rate that is 
applicable under paragraph (c) or (d) of this section and the proration 
as set forth above. The Guarantee Fee shall be the aggregate of the 
amounts calculated for each Vessel.


Sec. 298.37  Examination and audit.

    The Secretary shall have the right to examine and audit the books, 
records (including original logs, cargo manifests and similar records) 
and books of account, which pertain directly to the project, of the 
Obligor, bareboat charterer, time charterer or any other Person who has 
control of or a financial interest in a Vessel or Advanced or Modern 
Shipbuilding Technology, as well as records of a Related Party and 
domestic agents connected with such Persons, and shall have full, free 
and complete access thereto at all reasonable times. Also, the 
Secretary shall have full, free and complete access at all reasonable 
times to each Vessel or Advanced or Modern Shipbuilding Technology with 
respect to which Guarantees or an insurance contract is in force. When 
a Vessel is in port or undergoing repairs, the Secretary may make 
photostatic or other copies of any books, records and other relevant 
documents or papers being examined or audited. Adequate office space 
and other facilities reasonably required by any representatives of the 
Secretary engaged in an examination, audit or inspection shall be 
furnished without charge by the Person in control of the premises where 
the examination or audit is being conducted.


Sec. 298.38  Partnership agreements.

    Partnership agreements shall be in form and substance satisfactory 
to the Secretary prior to any Guarantee closing, especially relating, 
but not limited to, four basis areas:
    (a) Duration of the partnership,
    (b) adequate partnership funding requirements and mechanisms,
    (c) dissolution of the partnership and the withdrawal of a general 
partner and
    (d) the termination, amendment, or other modification of the 
partnership agreement without the prior written consent of the 
Secretary.


Sec. 298.39  Exemptions.

    The Secretary may exempt an applicant from any requirement of this 
Part not required by law, in exceptional cases, on written findings 
that:
    (a) The case materially involves factors not considered in the 
promulgation of this part;
    (b) (1) a national emergency makes it necessary to approve the 
exemption or
    (2) the financial liability of the United States will be 
substantially relieved;
    (c) the exemption will not substantially affect effective 
regulation of the Title XI program, consistent with the objectives of 
this part; and
    (d) exemption will not be unjustly discriminatory. In the case of 
Eligible Export Vessels, the Secretary may also exempt an applicant 
from any requirement of this part not required by law if the Secretary 
makes a written determination that such exemption would assist in 
creating financing terms that would be compatible with export credit 
terms for the sale of vessels built in shipyards other than those in 
the United States.

Subpart E--Defaults and Remedies, Reporting Requirements, 
Applicability of Regulations


Sec. 298.40  Defaults.

    (a) In General. Provisions concerning the existence and declaration 
of a default and demand for payment of the Obligations (described in 
paragraphs (b) and (c) of this section) shall be included in the 
Security Agreement and in other parts of the Documentation.
    (b) Payment Default. In the case of any default in the payment of 
principal or interest with respect to the Obligations (provided that 
the Secretary shall not have, upon such terms as may be provided in the 
Obligation or related

[[Page 21334]]

agreements, prior to that demand, assumed the obligor's rights and 
duties under the Obligation and agreements and shall have made any 
payments in default), the following procedures shall be applicable:
    (1) No demand shall be made for payment under the Guarantees unless 
the default shall have continued for 30 days (Payment Default).
    (2) After the expiration of said 30-day period, demand for payment 
of all amounts due under the Guarantees must be made no later than 60 
days thereafter.
    (3) After demand for payment is made by or on behalf of the 
Obligees, the Secretary shall make payment under the Guarantees, except 
if the Secretary determines that a Payment Default has not occurred or 
that such Payment Default has been remedied prior to demand being made.
    (c) Security Default. If a default occurs under the Security 
Agreement which is other than a Payment Default (Security Default), the 
Secretary, as provided in section 1105(b) of the Act, shall have the 
sole discretion to declare such default a Security Default and may 
notify the Obligee or agent of the Obligee of such Security Default, 
stating that demand for payment under the Guarantees must be made no 
later than 60 days after the date of such notification.
    (d) Payment of Guarantees. If demand for payment of the Guarantees 
is made, the Secretary shall, no later than 30 days after the date of 
such demand (provided that the Secretary shall not have, upon such 
terms as may be provided in the Obligations or related agreements, 
prior to that demand, assumed the Obligor's rights and duties under the 
Obligation and agreements and shall have made any payments in default), 
make payment to the Obligees, Indenture Trustee or any other agent of 
the unpaid principal amount of Obligations and unpaid interest accrued 
and accruing thereon up to, but not including, the date of payment.


Sec. 298.41  Remedies after default.

    (a) In general. Provisions governing remedies after a default, 
which relate to rights and duties of the Obligor, the Secretary and 
other Persons (where appropriate), shall be included in the Security 
Agreement or in other parts of the Documentation.
    (b) Action by Secretary. After a default has occurred and is 
continuing and before making payment required under the Guarantees, the 
Secretary may take the Vessel or Advanced or Modern Shipbuilding 
Technology and hold, lease, charter, operate or use the Vessel or 
Advanced or Modern Shipbuilding Technology, accounting only for the net 
profits to the Obligor. After making payment required under the 
Guarantees, the Secretary may initiate or otherwise participate in 
legal proceedings of every type, or take any other action considered 
appropriate, to protect rights and interests granted to the Secretary 
by sections 1105(c), 1105(e) and 1108(b) of the Act, the Security 
Agreement or other applicable provisions of law and of the 
Documentation.
    (c) Security proceeds to Secretary. The Secretary's interest in 
proceeds realized from the disposition of or collection with respect to 
security granted to the Secretary in consideration for the Guarantees 
(except all proceeds from the sale, requisition, charter or other 
disposition of property purchased by the Secretary at a foreclosure or 
other public sale, which proceeds shall belong to and vest exclusively 
in the Secretary), shall be an amount equal to, but not in excess of, 
the sum of (in order of priority of application of the proceeds):
    (1) Guarantee Fees, if any, due the Secretary under the Security 
Agreements;
    (2) All moneys due and unpaid and secured by the Mortgage or 
Security Agreement;
    (3) All advances, including interest thereon, by the Secretary, 
pursuant to the Security Agreement and all reasonable charges and 
expenses of the Secretary;
    (4) The accrued and unpaid interest on the Secretary's Note;
    (5) The accrued and unpaid balance of the principal of the 
Secretary's Note; and
    (6) To the extent of any collaterization by the Obligor of other 
debt due to the Secretary from the Obligor under other Title XI 
financings, such other Title XI debt.
    (d) Security proceeds to Obligor. The Obligor shall be entitled to 
the proceeds from the sale or other disposition of security, described 
in paragraph (c) of this section, if and to the extent that the 
proceeds realized are in excess of the amounts described in paragraphs 
(c) (1) through (6) of this section.


Sec. 298.42  Reporting requirements--financial statements.

    The financial statements of the Company shall be audited at least 
annually, in accordance with generally accepted auditing standards, by 
independent certified public accountants licensed to practice by the 
regulatory authority of a State or other political subdivision of the 
United States or, licensed public accountants licensed to practice by 
the regulatory authority or other political subdivision of the United 
States on or before December 31, 1970. In the case of Eligible Export 
Vessels, the accounts of the Company shall be audited at least 
annually, and the Secretary may require that the financial statements 
be in accordance with generally accepted accounting principles, by 
accountants as described in the first sentence of this section or by 
independent public accountants licensed to practice by the regulatory 
authority or other political subdivision of a foreign country, provided 
such accountants are satisfactory to the Secretary. The accountants 
performing such audits may be the regular auditors of the Company.
    (a) Reports of Company and other Persons. Except as otherwise 
required by the Secretary, the Company shall file a semiannual 
financial report and an annual financial report, prepared in accordance 
with generally accepted accounting principles, with the Maritime 
Administration as specified in the Documentation. Included shall be the 
balance sheet and a statement of paid-in-capital and retained earnings 
at the close of the required reporting period, a statement of income 
for the period and any other statement that the Secretary shall 
consider necessary to accurately reflect the Company's financial 
condition and the results of its operations. By letter to the Company, 
the Secretary shall specify the form required for reporting and the 
number of copies to be submitted. The Secretary may, by notice to the 
Company, also require the Company to submit financial statements of any 
other Person, directly or indirectly participating in the project, if 
the financial condition of that Person affects the Secretary's security 
for the Guarantees. The required financial report for the annual period 
shall be due within 105 days after the close of each fiscal year of the 
Company, commencing with the first fiscal year ending after the date of 
the Security Agreement. The required semiannual report shall be due 
within 105 days after each semiannual period, commencing with the first 
semiannual period ending after the date of the Security Agreement. The 
annual report shall be accompanied by the public accountant's report 
based on an audit of the company's financial statements. An audit by 
the public accountants of the financial statements contained in the 
company's semiannual report may be required by the Secretary. 
Certification of the semiannual report by the accountants may be 
required by the Secretary. Where independent certification is not 
required, a responsible corporate officer shall attach a certification 
that such report is based

[[Page 21335]]

on the accounting records and, to the best of that officer's knowledge 
and belief, is accurate and complete.
    (b) Leveraged lease financing. If the method of financing involved 
is a leveraged lease financing, or a trust is the owner of the Vessels, 
the requirements for annual and semiannual accounting reports of the 
Obligor may be modified accordingly by the Secretary.
    (c) The Company shall furnish, along with its semi-annual report, a 
letter of confirmation issued by its insurance underwriter(s) or 
broker(s) that the Company has paid premiums on insurance applicable to 
the preservation, protection and operation of the asset, which 
information shall state the term for which the insurance is in force.


Sec. 298.43  Applicability of the regulations.

    The regulations in this part shall be in effect as to all Letter 
Commitments, commitments to guarantee Obligations and Guarantees of 
Obligations made, issued or entered into after the effective date 
hereof pursuant to section 1104(a) of the Act, and all mortgages and 
loans covered thereby. These regulations supersede those issued under 
part 298 of this title (43 FR 60912) as of the effective date hereof, 
but shall not affect any Letter Commitments, commitment for Guarantees, 
Guarantees or contracts of insurance in existence on the effective date 
of these regulations. The regulations in this part may be amended, but 
said amendments shall have no effect upon any existing Letter 
Commitments, guarantees, insurance contracts, commitments for 
Guarantees or Documentation.

Subpart F--Administration [Reserved]

    Dated: May 2, 1996.

    By order of the Maritime Administrator.
Joel C. Richard,
Secretary, Maritime Administration.
[FR Doc. 96-11289 Filed 5-8-96; 8:45 am]
BILLING CODE 4910-81-P