[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]
[[Page 21301]]
_______________________________________________________________________
Part IV
Department of Transportation
_______________________________________________________________________
Maritime Administration
_______________________________________________________________________
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
[[Page 21304]]
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-
[[Page 21305]]
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