[Federal Register Volume 64, Number 156 (Friday, August 13, 1999)]
[Proposed Rules]
[Pages 44152-44164]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20757]


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DEPARTMENT OF TRANSPORTATION

Maritime Administration

46 CFR Part 298

[Docket No. MARAD-98-3468]
RIN 2133-AB14


Putting Customers First in the Title XI Program

AGENCY: Maritime Administration, Department of Transportation.

ACTION: Notice of Proposed Rulemaking.

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SUMMARY: The Maritime Administration (``MARAD'') is seeking public 
comment

[[Page 44153]]

on a proposed rule which modifies certain provisions of the existing 
regulations which implement Title XI of the Merchant Marine Act, 1936, 
as amended (``Act''). This rule intends to improve administration of 
the Title XI program. Title XI guarantees are issued for all types of 
vessel construction and shipyard modernization and improvement 
projects, 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.

DATES: You should submit your comments early enough to ensure that 
Docket Management receives them not later than September 13, 1999.

ADDRESSES: You should mention the docket number that appears at the top 
of this document and submit your written comments to: Docket 
Management, Room PL-401, Department of Transportation, 400 Seventh 
Street, S.W., Washington, D.C. 20590. You may call Docket Management at 
(202) 366-9324. Comments may also be submitted by electronic means via 
the Internet at http://dmses.dot.gov/submit/. You may visit the docket 
room to inspect and copy documents at the above address from 10 a.m. to 
5 p.m., local time, Monday through Friday, except on Federal holidays. 
An electronic version of this document is available on the World Wide 
Web at http://dms.dot.gov.

FOR FURTHER INFORMATION CONTACT: You may call Mitchell D. Lax of the 
MARAD Office of Ship Financing, at (202) 366-5744, or you may write to 
him at the following address: MAR-530, Room 8122, 400 Seventh Street, 
S.W., Washington, D.C. 20590.

SUPPLEMETARY INFORMATION:

Comments

How do I prepare and submit comments?

    Your comments must be written and in English. To ensure that your 
comments are correctly filed in the Docket, please include the docket 
number of this document in your comments. We encourage you to write 
your primary comments in a concise fashion. However, you may attach 
necessary additional documents to your comments. There is no limit on 
the length of the attachments.
    Please submit two copies of your comments, including the 
attachments, to Docket Management at the address given above under 
ADDRESSES.

How can I be sure that my comments were received?

    If you wish Docket Management to notify you upon its receipt of 
your comments, enclose a self-addressed, stamped postcard in the 
envelope containing your comments. Upon receiving your comments, Docket 
Management will return the postcard by mail.

How do I submit confidential business information?

    If you wish to submit any information under a claim of 
confidentiality, you should submit three copies of your complete 
submission, including the information you claim to be confidential 
business information, to the MARAD Chief Counsel at the address given 
above under FOR FURTHER INFORMATION CONTACT. In addition, you should 
submit two copies, from which you have deleted the claimed confidential 
business information, to Docket Management at the address given above 
under ADDRESSES. When you send a comment containing information claimed 
to be confidential business information, you should include a cover 
letter setting forth with specificity the basis for any such claim.

Will the agency consider late comments?

    We will consider all comments that Docket Management receives 
before the close of business on the comment closing date indicated 
above under DATES. To the extent possible, we will also consider 
comments that Docket Management receives after that date. If Docket 
Management receives a comment too late for us to consider it in 
developing a final rule, we will consider that comment as an informal 
suggestion for future rulemaking action.

How can I read the comments submitted by other people?

    You may read the comments received by Docket Management at the 
address given above under ADDRESSES. The hours of the Docket Room are 
indicated above in the same location.
    You may also see the comments on the Internet. To read the comments 
on the Internet, take the following steps:
     Go to the Docket Management System (DMS) Web page of the 
Department of Transportation (http://dms.dot.gov/).
     On that page, click on ``search.''
     On the next page (http://dms.dot.gov/search/), type in the 
four-digit docket number shown at the beginning of this document. 
Example: If the docket number were ``MARAD-1999-1234,'' you would type 
``1234.''
     After typing the docket number, click on ``search.''
     On the next page, which contains docket summary 
information for the docket you selected, click on the desire comments.
     You may download the comments.
    Please note that even after the comment closing date, we will 
continue to file relevant information in the Docket as it becomes 
available. Further, some people may submit late comments. Accordingly, 
we recommend that you periodically check the Docket for new material.
    Title XI of the Act authorizes the Secretary of Transportation 
(Secretary) to guarantee debt issued for the purpose of financing or 
refinancing: (a) the construction, reconstruction or reconditioning of 
U.S.-flag vessels or eligible export vessels built in United States 
shipyards, and (b) the construction of advanced shipbuilding technology 
and modern shipbuilding technology of a general shipyard facility 
located in the United States. You should submit Title XI applications 
to MARAD acting under authority delegated by the Secretary to the 
Maritime Administrator. Prior to execution of a guarantee, we must, 
among other things, make determinations of economic soundness of the 
project, and your financial and operating capability. The Title XI 
program enables you to obtain long-term financing on terms and 
conditions that may otherwise not be available.

National Performance Review

    In response to a 1993 recommendation from Vice President Gore's 
National Performance Review team, President Clinton issued Executive 
Order 12862, September 11, 1993, calling for a revolution within the 
Federal Government to change the way it does business by putting 
customers first and striving for a customer-driven government that 
matches or exceeds the best service available in the private sector. In 
October 1997, the National Performance Review team reported that 
Federal agencies, implementing the Executive Order, had launched a 
massive effort to improve governmental service and had made a 
noticeable difference.
    On December 1, 1997, in a memorandum to heads of Operating 
Administrations and Departmental offices at the United States 
Department of Transportation, Secretary of Transportation Rodney E. 
Slater urged all Departmental offices and heads of Operating 
Administrations to ask their customers what is important to them in the 
kinds and quality of services they

[[Page 44154]]

want and what is their level of satisfaction with existing services. 
Secretary Slater emphasized that it is ``this customer feedback that 
will be the basis for improving, revising, adding, or deleting 
standards when it makes sense and, ultimately, for helping us become a 
more customer focused DOT.''

ANPRM

    We published an advanced notice of proposed rulemaking (ANPRM) on 
February 17, 1998, in the Federal Register (63 FR 7744) and are now 
issuing this notice of proposed rulemaking concerning program 
administration and how it can be improved. The ANPRM requested that you 
provide us with your views about how the Title XI program is 
administered and how it could be improved. Specifically, we solicited 
comments on ten sets of questions, which can be grouped into the 
following general categories:
     The standard application Form MA-163, including the 
requirement for vessel plans and specifications.
     The requirements for information on your and/or your 
operator's qualifications.
     The requirements for financial information and certain 
financial tests.
     The requirements for information on economic soundness and 
the economic soundness criteria.
     The inclusion in the Title XI regulations of the 
provisions of Maritime Administrative Order (MAO) No. 520-1, Amendment 
2.
     The documentation requirements for a closing on a 
commitment to guarantee obligations.
    On July 30, 1998, a notice was published in the Federal Register 
advising that the Title XI application form and closing documentation 
had been modified. The modifications were made after consideration of 
your comments received in response to the ANPRM and the notice invited 
your further comments on the modifications. Comments on the proposals 
were due by the end of August, 1998. Because most of the revisions of 
the application form and the closing documentation are not within the 
scope of this rulemaking, your comments received on these issues are 
not discussed herein, except to the limited extent that certain of the 
application and documentation requirements are contained in the Title 
XI regulations.
    The ANPRM stated that any changes to the existing regulation that 
we proposed would be the subject of a future notice of proposed 
rulemaking. Our proposed changes are the subject of this rule. The 
following is a summary of the comments we received by nine commenters 
on the ANPRM which are divided into the above-mentioned categories, 
with the omission of the categories concerning the application form and 
closing documentation, for the reason previously discussed.

Applicant and Operator Qualifications

    We solicited your comments as to whether the requirements for 
information on the your and/or your operator's qualifications 
referenced in section 298.12 are unnecessary, redundant or not 
generally required in commercial transactions of this type. 
Additionally, we solicited your comments as to whether the requirements 
ask sufficient information to permit us to screen out inexperienced and 
inappropriate applicants and operators. Finally, we solicited comments 
on what specific changes, if any, you thought should be made to the 
Title XI regulations.
    As a general matter, you stated that too much information is 
required in section 298.12 regarding the applicant's and operator's 
qualifications, particularly for established companies and exceeds that 
ordinarily requested in commercial transactions. One commenter stated 
that this section is largely formatted and phrased for U.S. based firms 
and should be rewritten to focus more broadly on the global community. 
The commenter suggested that national shipping or shipbuilder's 
associations could endorse an applicant's qualifications. Another 
commenter stated that listing all vessels owned and operated is 
unnecessary as a brief statement for each type of equipment with the 
number and average vessel age should suffice. The commenter also 
maintained that naming each officer, director, and their principal 
business activity for the past five years is unnecessary as operational 
proficiency of company personnel is addressed under the economic 
soundness section of the regulations.
    Regarding the applicant and operator qualification requirements, 
one commenter stated that tough requirements should be maintained to 
ensure that the Title XI project fosters long term Title XI goals. 
Another commenter suggested that the shipowner's operating ability 
should be addressed only insofar as it bears on market-share viability 
and preserving the ship asset value.

Financial Requirements

    We asked whether the financial information requested in section 
298.13 is unnecessary or redundant and if it is sufficient to permit us 
to make valid determinations. We also solicited comments on whether the 
financial requirements pose impractical or excessive tests and on 
suggested changes to the regulations.
    With regard to the financial information requirements, comments 
were received concerning the requirement that, in the case of an 
eligible export vessel application, the applicant may provide financial 
information in the normal accounting system you are using provided that 
it is an accepted accounting system in your country of origin and 
provided that you submit a reconciliation of the major differences 
between the accounting system employed and U.S. Generally Accepted 
Accounting Principles (GAAP). Several commenters believe that the 
requirement for reconciliation of financial statements with GAAP is 
time-consuming, burdensome, and unnecessary. One commenter stated that 
we should either have the ability to analyze the financial statements 
as prepared by the applicant or should retain an accounting firm to 
handle the reconciliation to GAAP. Other commenters stated that we 
should accept statements prepared in accordance with international 
accounting standards.
    We received several comments on the question of whether the 
financial requirements in section 298.13 pose impractical or excessive 
tests. One commenter stated that any significant changes to the 
financial requirements to make them more lenient would be unfair to 
previous applicants who were required to meet, and would still be 
subject to, the existing requirements. Another commenter thought that 
the existing qualifying requirements were too rigid and not current 
with commercial practice which focuses on coverage ratios. A third 
commenter stated that MARAD needs to assess an applicant's market share 
or its balance sheet but not both.
    With respect to specific requirements, one commenter believes that 
the requirement for the Owner as Operator to maintain an equity level 
of 90 percent of the equity as shown on its most recent audited 
financial statement should be eliminated because this requirement is 
excessively restrictive to the Owner; the requirement of a 2:1 debt to 
equity ratio as well as the working capital requirements should be 
sufficient to ensure debt repayment. Another commenter believes that we 
should be more flexible with regard to the requirement for 
subordination of debt considered as equity.
    We received some comments concerning the need for a waiver for the

[[Page 44155]]

inclusion of foreign material in vessel actual cost. One commenter 
recommended that all exclusions of foreign components and services in 
Title XI financing be waived so that U.S. shipyards have the greatest 
opportunity to attract new foreign customers. The commenter stated that 
many foreign shipowners specify outfitting, propulsion, bridge 
electronics or accommodation items that are original equipment 
manufactured in foreign countries in large part because the U.S. 
manufacturing industry has stopped producing the items or does not meet 
global standards. The commenter stated that ``principles that apply to 
automobiles or computers may be considered so that the U.S. steel, 
assembly labor and overhead costs are the principal factors required 
for Title XI guarantees. When the U.S. share of the global shipbuilding 
market approaches five percent, then the existing restrictions could be 
reevaluated and reapplied.'' Another commenter believes that the 
exclusion of foreign content from actual cost is seen as arrogant in 
the international marketplace and adds difficulty to selling for 
export. The commenter states that a foreign buyer often has a distinct 
main engine preference because of his existing fleet and usually wants 
equipment he can resupply or repair locally. The commenter recommended 
that we scrap the foreign content waiver or revise it to conform to the 
Export-Import Bank's 15 percent foreign content allowance with no 
waiver and a higher percentage with a waiver.

Economic Soundness

    We requested comments concerning the information requirements for 
an economic soundness determination under Section 298.14. We asked if 
the information required is unnecessary or redundant and if it is 
sufficient to permit us to make valid determinations. We also requested 
comments as to whether the requirements pose impracticable or excessive 
tests and what specific changes should be made.
    Regarding the information required under section 298.14, one 
commenter stated that it is excessive. Another commenter said that the 
economic soundness criteria should be streamlined. A third commenter 
recommended consideration of additional economic factors such as double 
hull or safety or environmental requirements.
    As to the criteria on which an economic soundness finding is based, 
several commenters suggested we should look not only at the cash flow 
generated by the project to determine if the borrower will have the 
ability to repay the Title XI debt but also at the overall financial 
strength of the applicant. Two commenters said that the economic 
soundness should be judged not only on the applicant's ability to 
ultimately repay the obligations but also upon the ability to 
successfully operate the project as a stand-alone project. Another 
respondent said that the applicant's demonstrated ability to repay its 
debts should be our primary criteria for approval and that we should 
place a greater emphasis on the applicant's overall credit and 
operational quality as opposed to the economic soundness of a project. 
One commenter said that the economic soundness criteria should consider 
the overall corporate entity rather than the specific project. Two 
respondents stated that the criteria should be tailored to the specific 
purpose of the application (vessel financing vs. shipyard 
modernization).

MAO 520-1, Amendment 2

    We solicited as to whether the provisions of MAO 520-1, Amendment 
2, should be included in the regulations. The administrative guidelines 
in the MAO were intended to clarify our existing policies and 
procedures with respect to economic considerations employed in 
evaluating Title XI applications.
    Four commenters stated that the MAO provisions should be 
incorporated into the Title XI regulations to provide clarification and 
additional information as our requirements. Two of these commenters 
believe that the inclusion of the MAO will properly place emphasis on 
operating cash flow, with one commenter adding that historical 
operating experience will be emphasized as well. Another commenter 
stated that any changes in core policy should be determined before 
determining what policy belongs in the regulations.

Miscellaneous Issues

    We received several comments on miscellaneous other requirements of 
the Title XI program. Two commenters opposed the lump sum prepayment 
feature of the guarantee fee, stating respectively that it is a 
disincentive to attracting business to U.S. shipyards and that it 
amounts to a prepayment penalty. One commenter stated that the 
performance bonding requirement and progress payment feature of 
construction period financing makes construction period financing 
prohibitive in terms of cost. Another commenter urged that we more 
proactively assist U.S. shipbuilders in obtaining business by 
expediting the Title XI review process and approving more risky 
projects. Finally, a commenter suggested that we consider disclosing to 
all applicants the range of fees charged by bond underwriters and the 
customary spread over the Treasury curve.
    We advised in the ANPRM that, to seek further clarification of the 
written issues raised in response to the ANPRM, we may subsequently 
hold a public meeting if we believe that such a meeting would be 
helpful. Following a review of the detailed and specific comments 
received in response to the ANPRM, we have determined that such a 
public meeting is not necessary.
    Whenever reference is made in these regulations to forms prescribed 
by us for applications or other filing requirements, the format of such 
forms in effect prior to the effective date of these regulations may be 
used pending revision and issuance of new forms, which must be approved 
by the Office of Management and Budget. To the extent necessary to 
reflect statutory requirements, any form submitted may be modified or 
supplemented to facilitate processing, but until new forms have been 
approved, these regulations do not require more extensive paperwork or 
reporting requirements than exist under the present Title XI 
regulations.

Discussion of Rulemaking Text

    The discussion that follows notes where changes are proposed to be 
made to the Title XI regulations and the rationale therefor, and, where 
relevant, states why particular recommendations/suggestions have not 
been adopted.
    We are proposing to amend our Obligation Guarantees regulations at 
46 CFR Part 298. The proposed amendments are summarized as follows:

Section 298.2 Definitions

    Section 298.2 is intended to provide convenient reference to the 
meaning of significant terminology used in Part 298. The definitions 
are based principally on statutory derivation and reflect the letter 
designation of the paragraphs respectively, contained in the final rule 
published on May 9, 1996, as amended on September 8, 1997, or as 
proposed to be redesignated in this rulemaking. As proposed:
    Paragraph (c), ``Advanced Shipbuilding Technology'' is changed in 
order to include other modernization elements which are not previously 
listed in the definition and which contribute to a shipyard's 
efficiency or productivity.

[[Page 44156]]

    Paragraph (n), ``Guarantee Fee'' is changed to delete the 
references to an annual fee and continuing Guarantees. The regulations 
now require that the guarantee fee for the entire term of the financing 
be paid in advance at the initial funding of the transaction, with no 
refund in the event the Obligations are retired early.
    Paragraph (o), ``Indenture Trustee'' is changed to increase the 
amount of combined capital and surplus an indenture trustee must have 
to at least $25,000,000 as the current amount of $3,000,000 is not 
adequate.

Section 298.3 Applications

    Paragraph (b) is amended to reflect that only two sets of 
documentation must be submitted to the Secretary for review.
    Paragraph (d) is amended to delete the provision that, if an 
applicant does not claim a Freedom of Information Act (FOIA) exemption 
at the time an application or amendment is filed, MARAD will not oppose 
any subsequent request for disclosure pursuant to FOIA. Deletion of 
this provision reflects actual agency practice, which is to allow a 
request for exemption under FOIA at any time.
    Paragraph (e) is amended to clarify that priority will be given for 
processing applications for vessels capable of serving as United States 
naval and military auxiliary in time of war or national emergency. In 
addition, the priority 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 is 
being eliminated due to the fact that all the funds previously 
appropriated to the Department of Defense and transferred to the 
Department of Transportation for the Title XI program have been 
expended.

Section 298.11 Vessel Requirements

    Paragraph (a) of this section is being amended to clarify that the 
vessel must be constructed in the United States.
    Paragraph (b) of this section is revised to provide that the 
Secretary may contact the shipyard to request that it submit additional 
technical data, backup cost details, and other evidence if the 
Secretary has insufficient data.
    Paragraph (c) of this section is being amended to delete the last 
sentence which is redundant with the last sentence of paragraph (a) of 
this section and to conform the regulations to our present practices 
which permit a U.S.-flag constructed vessel to meet the highest 
classification standard of a classification society other than the 
American Bureau of Shipping so long as the society meets the inspection 
standards of the United States Coast Guard.

Section 298.12 Applicant and Operator's Qualifications

    MARAD concurs that too much information is requested in this 
section particularly with respect to the applicant's existing vessels, 
and certain background data, and the section has been modified to 
reduce the information required. With respect to the suggestion that 
the endorsement of industry associations be utilized by MARAD, the 
regulations do not preclude MARAD's consideration of such an 
endorsement when evaluating the applicant's and/or operator's 
qualifications.
    A paragraph is being added to this section to reflect the MAO 520-1 
provision requiring that an operator's historical performance record be 
considered in evaluating operating ability.

Section 298.13 Financial Requirements

    MARAD is not proposing an amendment to paragraph (a)(2) of this 
section to eliminate the requirement for a waiver in order for foreign 
items to be included in Actual Cost. MARAD's interest is in promoting a 
shipbuilding industry including both shipyards and suppliers. 
Therefore, it would be inappropriate to permit wholesale use of foreign 
items in Title XI financings when comparable items are available from 
U.S. suppliers. MARAD believes such a practice would have an adverse 
impact on the U.S. shipbuilding industry as a whole. However, requests 
for waivers to include foreign items have not been unreasonably 
withheld by MARAD, so that the no-foreign-content-requirement without a 
waiver has not had a negative impact on the shipyards or shipowners. 
Therefore, MARAD will continue to review inclusion of foreign items on 
a case-by-case basis.
    MARAD believes that the current inclusion in paragraph (a)(2) of 
the illustration of how the cost of foreign components of the hull and 
superstructure may be used to satisfy an applicant's equity 
requirements is unnecessary. Therefore, MARAD is deleting the 
illustration from the paragraph and the one sentence which refers to 
the illustration in the paragraph of the regulation.
    The reference to guarantee fees in paragraph (a)(2)(iv) is being 
deleted as guarantee fees are eligible for inclusion in Actual Cost.
    MARAD is proposing to amend paragraph (a)(4) to permit, in the case 
of Eligible Export Vessels, the acceptance of financial statements that 
are not reconciled to U.S. GAAP if a satisfactory justification is 
provided concerning the inability to reconcile. MARAD proposes to 
further amend the paragraph to eliminate the requirement for a debt 
amortization schedule and sources and uses statement, and to 
incorporate current financial definitions.
    MARAD does not believe a change in financial requirements at 
Closing as set forth in paragraph (d) is necessary because applications 
are analyzed on a case-by-case basis and, where MARAD deems the 
existing qualifying financial requirements to be inappropriate, Section 
298.13(h) authorizes the waiver of or modifications to the financial 
requirements if there is adequate security for the Guarantees. This 
authority allows MARAD to consider coverage ratios as appropriate.
    MARAD believes that the 90 percent equity test in paragraph 
(d)(1)(ii)(B) of this section is useful and is not proposing an 
amendment to this paragraph. While the working capital and leverage 
tests are essential in analyzing the financial condition of the 
company, they do not necessarily identify reductions in net worth which 
are often an important element in determining a company's financial 
condition. Moreover, as the net worth amount is established only once, 
at the initial funding of the transaction, companies that are meeting 
their projected revenues and expenses should be able to continue to 
meet this requirement. Therefore, elimination of the 90 percent net 
worth requirement is not warranted.
    MARAD is proposing elimination of the special financial 
requirements set forth in paragraph (e) due to the restrictive nature 
of the covenants that accompany these requirements and the fact that 
companies have not elected this alternative in the recent past. 
Therefore, in order to make clear that there is only one set of 
financial requirements, the word ``primary'' is being deleted from 
paragraph (d) and, later in the regulation, paragraphs 298.35(b), 
298.35(e), and 298.35(e)(5).
    MARAD is not proposing to change paragraph (g) of this section 
which allows the applicant to fund the 12\1/2\ percent equity 
requirement with subordinated debt. If MARAD allows greater flexibility 
with regard to the subordination requirements, the repayment of the 
Title XI debt portion of the transaction could be jeopardized.
Section 298.14 Economic Soundness
    MARAD recognizes that much of the information requested under 
section 298.14 (a)(2)(iii) and (iv) was developed

[[Page 44157]]

for applications from companies involved in a liner service. MARAD has 
taken steps to simplify the regulations by reducing or eliminating 
requested information. Specifically, sections 46 CFR 298.14(a)(2)(iii), 
(iv), and (v), requesting information on expenses, have been deleted 
and are replaced by a new paragraph (iii) which will encompass all 
three parts. The new paragraph differentiates between applications for 
vessel financing and shipyard modernization projects.
    MARAD does not propose to add a requirement to the economic 
soundness section concerning the applicant's financial strength because 
the existing requirements of Section 298.13, Financial Requirements, 
already require MARAD to make certain determinations concerning the 
financial position of the ultimate transaction credit.
    In order to clarify the criteria used for economic soundness 
findings, MARAD proposes to include in this section the provisions of 
MAO 520-1 relating to economic soundness. Specifically, section (b) is 
being amended to include requirements concerning the ability to service 
debt at the time of delivery which will be based on market conditions 
at that time, and that primary consideration shall be given to 
operating cash flow. To enable MARAD to analyze cash flow, the 
applicant is requested to provide a five-year forecast of operating 
cash flow.

Section 298.15 Investigation Fee

    Paragraph (b) of this section is being revised by correcting the 
reference to the filing fee to $5,000.

Section 298.16 Substitution of Participants

    Paragraph (a) of this section is being amended to delete the last 
sentence which references an annual guarantee fee.

Section 298.18 Financing Advanced or Modern Shipbuilding Technology

    Paragraph (a) of this section is being amended to eliminate from 
the initial criteria for Guarantee approval consideration of whether 
Guarantees will aid in the transition of a shipyard from naval to 
commercial shipbuilding. MARAD believes that giving weight to this 
factor could discourage otherwise desirable modernization projects from 
shipyards that have not engaged in naval vessel construction.

Section 298.19 Financing Eligible Export Vessels

    Paragraph (b)(3) of this section is being modified by deleting the 
reference to the Export-Import Bank of the United States since the 
Export-Import Bank's risk assessments are reflected in the Inter-Agency 
Country Risk Assessment System.

Section 298.20 Term, Redemptions and Interest Rate

    Paragraph (a)(2) of this section is being amended to clarify that 
for multiple vessels the maturity date of the Guarantees may be less 
than but in no event more than twenty-five years from the date of 
delivery from the shipyard of the last of multiple vessels but that the 
amount of the Guarantees shall relate to the depreciated actual cost of 
the multiple vessels as of the date of the Closing.

Section 298.21 Limits

    This section is being amended to specify that no foreign, federal, 
state or local taxes, user fees, or other governmental charges shall be 
included in actual cost.

Section 298.22 Amortization of Obligations

    The parenthetical phrase ``straight line basis'' is to be replaced 
with the phrase ``level principal'' to reflect current GAAP 
terminology.

Section 298.23 Refinancing

    This section has been amended to clarify MARAD's position regarding 
the refinancing of debt on Advanced or Modern Shipbuilding Technology. 
Refinancing of non-Title XI debt on Advanced or Modern Shipbuilding 
Technology is not permitted.

Section 298.24 Financing Facilities and Equipment Related to Marine 
Operations

    This section is deleted in its entirety as there is no current 
authority for MARAD to finance facilities and equipment related to 
marine operations.

Section 298.30 Nature and Content of Obligations

    This section is amended to clarify that an indenture trustee is not 
required under MARAD's documents.

Section 298.31 Mortgage

    This section has been amended to correct that a mortgage shall be 
filed with the United States Coast Guard's National Vessel 
Documentation Center.

Section 298.32 Required Provisions in Documentation

    Section 298.32 (a)(1) remains unchanged. Under the current Title XI 
regulations, the Secretary may waive or modify the performance bond 
requirement, upon determining that the shipyard or manufacturer of 
Advanced or Modern Shipbuilding Technology has sufficient financial 
resources and operational capacity to complete the project. In 
instances where sufficient resources cannot be demonstrated, MARAD's 
interests as a guarantor must be fully protected. Furthermore, inasmuch 
as Section 298.21 of this part provides for performance bond premiums 
to be included as an item of actual cost and therefore financeable up 
to a maximum of 87\1/2\ percent, MARAD finds that the bonding 
requirement does not constitute an inordinate out of pocket expense.
    MARAD proposes to modify Section 298.32 to delete the word 
``annual'' in paragraph (b)(4) in reference to citizenship filing 
requirements. The citizenship requirements for the Title XI program 
were modified by a final rule which was published in the Federal 
Register and became effective on September 8, 1997, which no longer 
required the filing of annual citizenship affidavits for Title XI 
obligors.

Section 298.33 Escrow Fund

    This section has been modified to conform to the documentation in 
the general provisions of the new security agreement.

Section 298.34 Construction Fund

    This section has been modified to clarify the requirements 
regarding the construction fund and to eliminate the current 
redundancies in paragraphs (b) and (c) of this section regarding 
withdrawals and deposits, the procedure for which is described in 
Section 298.33 of this Part. MARAD requires that the items and amounts 
for which reimbursement is requested have been satisfactorily 
completed. To require otherwise, i.e., to issue interim payments prior 
to completion of work, would increase MARAD's overall project risk. 
MARAD must insure that adequate security exists for guarantees entered 
into during construction.
    In response to requests by commenters to terminate the construction 
fund, legislation has been submitted to broaden our authority to hold 
bond proceeds in the escrow fund and to eliminate the need for a 
construction fund--see section 3 of H.R. 1557 introduced on April 26, 
1999.

Section 298.35 Reserve Fund and Financial Agreement

    This section has been modified in its entirety. Paragraph (c) of 
this section regarding financial covenants for companies meeting the 
special financial requirements has been deleted in its entirety 
pursuant to the discussion

[[Page 44158]]

above in section 298.13(e). The references to a Title XI company 
qualifying as either a section 12 or section 13 company are deleted and 
two sets of covenants for all Title XI companies are provided. One set 
of covenants will be imposed regardless of the company's financial 
condition (primary covenants) and the second set of covenants will only 
apply if the company does not meet the specific financial conditions 
(supplemental covenants).

Section 298.38 Partnership Agreements

    MARAD proposes to modify this section to cover limited liability 
companies as well as partnership agreements.

Section 298.41 Remedies After Default

    As all guarantee fees are to be paid up-front, it is proposed that 
paragraph (c)(1) of this section be deleted.

Rulemaking Analyses and Notices

Executive Order 12866 (Regulatory Planning and Review)

    This rulemaking has been reviewed under Executive Order 12866, and 
it has been determined that this is not a significant regulatory 
action. The rule is not likely to result in an annual effect on the 
economy of $100 million or more. Also, it has been determined to be a 
nonsignificant rule under the Department's Regulatory Policies and 
Procedures. 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 export markets and to 
modernize and improve general shipyard facilities in the United States.
    MARAD is publishing these amendments as a notice of proposed 
rulemaking, as necessary to carry out the Secretary's responsibilities 
under Title XI and to improve the efficient administration of the Title 
XI program.
    This rulemaking document has been reviewed by the Office of 
Management and Budget under Executive Order 12866, ``Regulatory 
Planning and Review.''

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 because 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.

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, the Maritime Administration proposes to amend 46 CFR 
part 298 as follows:

PART 298--OBLIGATION GUARANTEES

    1. The authority citation for part 298 continues to read as 
follows:

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

    2. Section 298.2 is amended as follows:
    a. By adding at the end of paragraph (2) of the definition of 
``Advanced Shipbuilding Technology'' a semi-colon and the word, ``and'' 
and a new paragraph (3) to read as set forth below.
    b. By revising the definition of Guarantee Fee, to read as set 
forth below.
    c. By amending the definition of Indenture Trustee, by removing the 
number ``$3,000,000'' and adding in its place the number 
``$25,000,000''.
    d. By revising paragraph (2)(iv) of the definition of Preferred 
Mortgage, to read as set forth below.


Sec. 298.2  Definitions.

* * * * *
    Advanced shipbuilding technology * * *
    (3) Other elements contributing to a shipyard's efficiency or 
productivity assisting it to more effectively operate in the 
shipbuilding industry.
* * * * *
    Guarantee fee means the fee payable to the Secretary in 
consideration for the issuance of the Guarantee.
* * * * *
    Preferred Mortgage * * *
    (2) * * *
    (iv) Is otherwise in compliance with the provisions of Chapter 313 
of Title 46 of the U.S. Code.
* * * * *


Sec. 298.3  [Amended]

    3. Section 298.3 is amended as follows:
    a. By removing the words ``exhibit and schedule'' in the fourth 
sentence of paragraph (a), and adding in their place the words 
``exhibits, schedules and attachments''.
    b. By removing the number ``four'' in the first sentence of 
paragraph (b)(2) and adding in its place the number ``two''.
    c. By removing the third sentence in paragraph (d).
    d. By amending the first sentence of paragraph (e) by adding before 
the word ``naval'', the words ``United States'' and removing the third 
sentence of this paragraph.


Sec. 298.11  [Amended]

    4. Section 298.11 is amended as follows:
    a. By adding in the first sentence of paragraph (a), between the 
words ``Guarantee'' and ``is'', the phrase ``must be constructed in the 
United States. It shall be'' and removing the word ``is''.
    b. By adding in the second sentence of paragraph (b), between the 
words ``Secretary'' and ``may'', the phrase ``may directly contact the 
shipyard and''.
    c. By revising the first sentence of paragraph (c), to read as 
follows: ``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 another classification society 
that also meets the inspection standards of the United States Coast 
Guard with respect to the documentation of U.S.-flag vessels, 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

[[Page 44159]]

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 the IACS member accords equal reciprocity, as 
determined by the Secretary, to United States classification 
societies.''
    d. By removing the last sentence of paragraph (c).
    5. Section 298.12 is revised to read as follows:


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 or Advanced or Modern Shipbuilding 
Technology, possesses the necessary experience, ability and other 
qualifications to properly operate and maintain the Vessel(s) or 
Advanced and Modern Shipbuilding Technology 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 or any bareboat 
charterer is an incorporated company, it shall submit the following 
identifying information:
    (i) Name of company, place and date of incorporation, and tax 
identification number, or if appropriate, international identification 
number of the company;
    (ii) Address of principal place of business; and
    (iii) Certified copy of certificate of incorporation and bylaws.
    (2) Partnerships, limited partnerships, limited liability 
companies, joint ventures, associations, unincorporated companies. If 
the applicant or any bareboat charterer is a partnership, limited 
partnership, limited liability company, joint venture, association, or 
unincorporated company, it shall submit the following identifying 
information:
    (i) Name of entity, place and date of formation, and tax 
identification number, or if appropriate, international identification 
number of entity;
    (ii) Address of principal place of business; and
    (iii) Certified copy of certificate of formation, partnership 
agreement or other documentation forming the entity.
    (3) Other entities. For any entity that does not fit the 
descriptions in paragraphs (b)(1) and (b)(2) of this section, MARAD 
will specify the information that the entity shall submit regarding its 
identity and ownership.
    (4) The Applicant and any bareboat charterer shall provide a brief 
statement of the general effect of each voting agreement, voting trust 
or other arrangement whereby the voting rights of any interest in the 
Applicant or bareboat charterer are controlled or exercised by any 
person who is not the holder of legal title to such interest.
    (5) The Applicant and any bareboat charterer shall provide the 
following information regarding the entity's officers, directors, 
partners or members:
    (i) Name and address;
    (ii) Office or position; and
    (iii) Nationality and interest owned (e.g. shares owned and whether 
voting or non-voting).
    (c) Applicants: Business and affiliations. The applicant shall 
include:
    (1) A brief description of the principal business activities during 
the past five years of applicant;
    (2) A list of all business entities 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 entity and the relationship between 
these entities. This information may be presented in the form of a 
chart. Indicate whether any of the affiliated entities have previously 
applied for or received Title XI assistance;
    (3) A statement indicating whether the applicant, any predecessor 
or affiliated entity has been in bankruptcy or reorganization under any 
insolvency or reorganization proceeding and if so, give details; and
    (4) A statement indicating whether the applicant or any predecessor 
or affiliated entity is now, or during the past five years has been, in 
default under any agreement or undertaking with others or with the 
United States of America, or is currently delinquent on any Federal 
debt, and if so, provide explanatory information.
    (5) A list of the applicant's banking references:
    (i) Principal bank(s) or lending institutions(s)--name and address
    (ii) Nature of relationship
    (iii) Individual references. Name(s), telephone and fax number of 
banking officer(s).
    (d) Management of applicant. The applicant shall include:
    (1) A brief description of the principal business activities during 
the past five years of each officer, director, partner or member of the 
applicant listed in paragraph (b)(5) of this section and if these 
persons (have) act(ed) as executive officers in other entities, 
indicate the names of these entities and whether such entities have 
defaulted on any U.S. Government debt, and
    (2) The name and address of each organization engaged in business 
activities which have a direct financial relationship to those carried 
on or to be carried on by the applicant with which any person listed in 
paragraph (d)(2) 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 assets employed in the business of the applicant, other 
than vessels. Describe financial encumbrances, if any;
    (2) Provide a general description of the vessels currently owned 
and/or operated by the applicant or its affiliates and a description of 
the areas of operation; and,
    (3) In the case of an Eligible Shipyard which is an applicant for a 
guarantee for Advanced or Modern Shipbuilding Technology, a brief 
description of the general character (i.e., number of building ways, 
launch method, drydocks and size) and location (i.e., water depth, 
length of riverfront) of the principal properties of the applicant 
employed in its business. Describe financial encumbrances, if any.
    (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). If a company 
other than the applicant will operate the Vessel(s), then this 
information shall be provided for the operating company together with a 
copy of the operating agreement.
    (2) The applicant shall submit a copy of any management 
agreement(s) between the applicant and any related or unrelated 
organization(s) which will affect the management of the Title XI vessel 
or shipyard.
    (3) 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 showing the ability of the

[[Page 44160]]

applicant to successfully operate the shipbuilding technology, 
including name, education, background of, and licenses held by, all 
senior supervisory personnel concerned with the physical operation of 
the shipbuilding technology.
    (4) Where an operator has an historical performance record, this 
record shall be considered in evaluating the operating ability of the 
applicant. For newly formed entities, the performance of affiliates 
and/or companies associated with the principals (where the principals 
have a significant degree of control) shall be evaluated in determining 
the operating ability of the applicant. However, unless the affiliates 
or principals have an obligation with respect to the debt, historical 
performance shall not be considered in evaluating the creditworthiness 
of the application.
    6. Section 298.13 is amended as follows:
    a. By removing the sixth sentence in paragraph (a)(2)(i) and the 
illustration entitled ``Illustration-Cost of Foreign Components 
Satisfying Equity Requirements.'' in their entirety.
    b. By removing the words, ``guarantee fees,'' in paragraph 
(a)(2)(iv).
    c. By removing all references to the word, ``primary'', in 
paragraph (d).
    d. By revising paragraph (a)(4)to read as set forth below.
    e. By revising paragraphs (b)(2) through (b)(4), to read as set 
forth below.
    f. By removing existing paragraph (e), and redesignating paragraphs 
(f), (g) and (h) as paragraphs (e), (f) and (g).
    g. By removing ``paragraphs (d) and (e)'' in newly designated 
paragraph (e) and adding ``paragraph (d)'' in its place.
    h. By removing ``paragraphs (a)(3), (d) and (e)'' in newly 
designated paragraph (f) and adding ``paragraphs (a)(3) and (d)'' in 
its place.


Sec. 298.13  Financial requirements.

* * * * *
    (a) * * *
    (4) Financial information. The applicant shall provide the 
following financial statements, footnoted to explain the basis for 
arriving at the figures:
    (i) The most recent financial statement of the applicant, its 
parent and other significant participants, as applicable (year end or 
intermediate), and the three most recent audited statements with 
details of all existing debt. If the applicant is a new entity and is 
to be funded from or guaranteed by external source(s), it shall provide 
the above mentioned statements for such source(s) (for eligible export 
vessels, the applicant's financial statements shall be in accordance 
with U.S. generally accepted accounting principles (GAAP) if formed in 
the U.S. or reconciled to GAAP if formed in a foreign country unless a 
satisfactory justification is provided explaining the inability to 
reconcile);
    (ii) A pro forma balance sheet of the applicant and guarantor (if 
applicable) as of the estimated date of execution of the Guarantees 
reflecting the assumption of the Title XI Obligations, including the 
current liability (for eligible export vessels, the applicant's 
financial statements shall be in accordance with GAAP if formed in the 
U.S. or reconciled to GAAP if formed in a foreign country unless a 
satisfactory justification is provided explaining the inability to 
reconcile); and,
    (iii) Pro forma balance sheets of the applicant and guarantor (if 
applicable) for five years subsequent to the Closing.
    (b) * * *
    (2) Working Capital shall mean the excess of current assets over 
current liabilities, both determined in accordance with GAAP and 
adjusted as follows:
    (i) In determining current assets there shall be deducted:
    (A) Any securities, obligations or evidence of indebtedness of a 
Related Party or of any stockholder, director, officer or employee (or 
any member of his family) of the Company or of such Related Party, 
except advances to agents required for the normal current operation of 
the Company's vessels and current receivables arising out of the 
ordinary course of business and not outstanding for more than 60 days; 
and
    (B) An amount equal to any excess of unterminated voyage revenue 
over unterminated voyage expenses.
    (ii) In determining current liabilities there shall be deducted any 
excess of unterminated voyage expenses over unterminated voyage 
revenue.
    (iii) In determining current liabilities there shall be added one 
half of all annual charter hire and other lease obligations (having a 
term of more than six months) due and payable within the succeeding 
fiscal year, other than charter hire and such other lease obligations 
already included and reported as a current liability on the Company's 
balance sheet.
    (3) Equity (net worth) means, as of any date, the total of paid-in 
capital stock, paid-in surplus, earned surplus and appropriated 
surplus, and all other amounts that would be included in net worth in 
accordance with GAAP, but exclusive of:
    (i) Any receivables from any stockholder, director, Officer or 
employee of the Company or from any 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 means, as of any date, the total notes, bonds, 
debentures, equipment obligations and other evidence of indebtedness 
that would be included in long term debt in accordance with GAAP. There 
shall also be included any guarantee or other liability for the debt of 
any other Person not otherwise included on the balance sheet.
    7. Section 298.14 is amended as follows:
    a. By adding after the first sentence in paragraph (a) the 
following two sentences: ``The economic soundness and the applicant's 
ability to repay the Obligations shall be the primary basis for the 
Secretary's approval of a Letter Commitment. The collateral value of 
the asset for which Obligations are to be issued shall be only a 
secondary consideration in determining the applicant's ability to repay 
the Obligations.''
    b. By amending paragraph (a)(2)(ii) to add the following sentence 
after the first sentence and before the second sentence: ``Vessel 
revenue projections shall include shipping/hire rates for current 
market conditions or market conditions expected to exist at the time of 
vessel delivery, taking into account seasonal or temporary 
fluctuations.''
    c. By revising paragraph (a)(2)(iii) to read as set forth below.
    d. By revising paragraph (a)(2)(iv) to read as set forth below.
    e. By removing paragraph (a)(2)(v).
    f. By adding to paragraph (b)(1)(i) the words ``or for'' after the 
word ``by''.
    g. By adding new paragraphs (b)(2) and (b)(3) to read as set forth 
below.


Sec. 298.14  Economic soundness.

    (a) Economic Evaluation. * * *
    (2) Project Feasibility. * * *
    (iii) Expenses. (A) For applications for vessel financing, a 
statement of estimated vessel expenses including the following (where 
applicable):
    (1) A detailed breakdown of estimated vessel daily operating 
expenses, including wages, insurance, maintenance and repair, fuel, 
etc. and a detailed projection of anticipated costs associated with 
long term maintenance of the vessel(s) such as drydocking and major 
mid-life overhauls, with a time frame for these events over the period 
of the Guarantee;
    (2) If applicable, a detailed breakdown of those expenses 
associated with the vessel(s) voyage, such as port fees,

[[Page 44161]]

agency fees and canal fees that are assessed as a result of the voyage; 
and
    (3) A detailed breakdown of annual capital costs and administrative 
expenses, segregated as to:
    (i) Interest on debt;
    (ii) Principal amortization; and
    (iii) Salaries and other administrative expenses (indicate basis of 
allocation).
    (B) For applications for Advanced or Modern Shipbuilding 
Technology, a statement of estimated expenses related to the Advanced 
or Modern Shipbuilding Technology, including the following (where 
applicable):
    (1) A detailed breakdown of estimated daily operating expenses for 
the shipyard, such as wages, including staffing, and aggregated to a 
straight-line, overtime and fringe benefits; utility costs; costs of 
stores, supplies, and equipment; maintenance and repair cost; insurance 
costs; and, other expenses (indicate items included); and
    (2) A detailed breakdown of annual capital costs and administrative 
expenses, segregated as to: interest on debt; principal amortization; 
and salaries and other administrative expenses (indicate basis of 
allocation).
    (iv) Forecast of Operations. Utilizing the revenues and expenses 
provided in paragraphs (a)(2)(ii) and (iii) of this section, the 
applicant shall provide a forecast of operating cash flow, as defined 
in paragraph (b)(3) of this section, for the Title XI project for the 
first full year of operations and the next four years. The cash flow 
statements should be footnoted to explain the assumptions used.
    (b) * * *
    (2) In cases where market conditions are inadequate for the 
applicant to service the Obligation indebtedness at the time of vessel 
delivery, or shipyard modernization completion, applications may be 
approved only if there are sufficient outside sources of cash flow to 
service such indebtedness.
    (3) With respect to the asset for which Obligations are to be 
issued, the operating cash flow to Obligation debt service ratio over 
the term of the Guarantee shall be in excess of 1:1. Operating cash 
flow is defined as revenues less operating and capital expenses 
including taxes paid but exclusive of interest, accrued taxes, 
depreciation and amortization for the Title XI asset. Debt service is 
defined as interest plus principal.


Sec. 298.15  [Amended]

    8. Section 298.15 is amended by removing the figure ``$1,000'' in 
the second sentence of paragraph (b), and adding in its place the 
figure ``$5,000''.


Sec. 298.16  [Amended]

    9. Section 298.16 is amended by removing the last sentence of 
paragraph (a).


Sec. 298.18  [Amended]

    10. Section 298.18 is amended by removing the words, ``will aid in 
the transition from naval shipbuilding to commercial ship construction 
for domestic and export sales'', from the second sentence of paragraph 
(a).


Sec. 298.19  [Amended]

    11. Section 298.19 is amended by removing the words ``by the 
Export-Import Bank of the United States and country risk analyses'' 
from the last sentence of paragraph (b)(3).


Sec. 298.20  [Amended]

    12. Section 298.20, paragraph (a)(2) is amended by adding after the 
word ``Guarantees'' and before the semi-colon, the words ``but that the 
amount of the Guarantees shall relate to the amount of the depreciated 
actual cost of the multiple Vessels as of the Closing''.
    13. Section 298.21 is amended by revising paragraph (c)(7) to read 
as follows:


Sec. 298.21  Limits.

* * * * *
    (c) * * *
    (7) Foreign, federal, state or local taxes, user fees, or other 
governmental charges.
* * * * *


Sec. 298.22  [Amended]

    14. Section 298.22 is amended by removing from the second sentence 
of the introductory text the parenthetical phrase ``straight line 
basis'' and adding in its place the phrase ``level principal''.
    15. Section 298.23 is revised to read as follows:


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 Title XI debt only for 
Advanced or Modern Shipbuilding Technology, and existing debt for 
Vessels, whether or not covered by Title XI 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. 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.


Sec. 298.24  [Removed and Reserved]

    16. Section 298.24 is removed and reserved.


Sec. 298.30  [Amended]

    17. Section 298.30 is amended by adding in the first sentence after 
the word ``Trustee'', before the period, the words ``if any''.
    18. Section 298.31 is amended by revising paragraph (a)(5) to read 
as follows:


Sec. 298.31  Mortgage.

    (a) * * *
    (5) The Mortgage shall be filed with the United States Coast 
Guard's National Vessel Documentation Center, 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.
* * * * *


Sec. 298.32  [Amended]

    19. Section 298.32, is amended by removing the word ``annual'' in 
the first sentence of paragraph (b)(4).
    20. Section 298.33 is revised to read as follows:


Sec. 298.33  Escrow fund.

    (a) Escrow Fund Deposits. At the time of the sale of the 
Obligations, the Obligor shall deposit with the Secretary in an escrow 
fund (the ``Escrow Fund'') all of the proceeds of that sale unless the 
Obligor is entitled to withdraw funds under paragraph (b) of this 
section. The Obligor shall also deposit into the Escrow Fund on the 
Closing date an amount equal to six months interest at the rate borne 
by the Obligations, unless the Secretary shall find the existence of 
adequate consideration or accept other consideration in lieu of the 
interest deposit.
    (b) Escrow Fund Withdrawals. (1) The Secretary shall, within a 
reasonable time after written request from the Obligor,

[[Page 44162]]

disburse from the Escrow Fund directly to the Indenture Trustee, any 
Paying Agent for such Obligations, or any other Person entitled 
thereto, any amount which the Obligor is obligated to pay, or to the 
Obligor for any amounts it has paid, on account of the items and 
amounts or any other items approved by the Secretary, provided that, 
the Secretary is satisfied with the accuracy and completeness of the 
information contained in the following submissions:
    (i) A responsible officer of the Obligor shall deliver an officer's 
certificate, in form and substance satisfactory to the Secretary, 
stating that:
    (A) There is neither a default under the construction contract nor 
the Security Agreement;
    (B) There have been no occurrences which have or would adversely 
and materially affect the condition of the Vessel, its hull or any of 
its component parts, or the Technologies;
    (C) The amounts of the request is in accordance with the 
construction contract including the approved disbursement schedule and 
each item in these amounts is properly included in the Secretary's 
approved estimate of Actual Cost;
    (D) With respect to the request, once the contractor is paid there 
will be no liens or encumbrances on the applicable Vessel, its hull or 
component parts, or the Technologies for which the withdrawal is being 
requested except for those already approved by the Secretary; and
    (E) If the Vessel or Technologies has already been delivered, it is 
in class and is being maintained in the highest and best condition. The 
Obligor shall also attach an officer's certificate of the shipyard and 
other general contractors, in form and substance satisfactory to the 
Secretary, stating that there are no liens or encumbrances as provided 
in paragraph (d) of this section and attaching the invoices and 
receipts supporting each proposed withdrawal to the satisfaction of the 
Secretary.
    (ii) No payment or reimbursement under this Section shall be made:
    (A) To any Person until the Construction Fund, if any, has been 
exhausted,
    (B) To any Person until the total amount paid by or for the account 
of the Obligor from sources other than the proceeds of such Obligations 
equals at least 12\1/2\% of the Actual Cost of the Vessel or 
Technologies is made;
    (C) To the Obligor which would have the effect of reducing the 
total amounts paid by the Obligor pursuant to paragraph (B) of this 
section; or
    (D) To any Person on account of items, amounts or increases 
representing changes and extras or owner furnished equipment, if any, 
unless such items, amounts and increases shall have been previously 
approved by the Secretary; provided, however, that when the amount 
guaranteed by the Secretary equals 75% or less of the Actual Cost and 
the Obligor demonstrates to the Secretary's satisfaction the ability to 
pay in the remaining 25%, then after the initial 12\1/2\% of Actual 
Cost has been paid by or on behalf of the Obligor for such Vessel or 
Technologies and up to 37\1/2\% of Actual Cost has been withdrawn from 
the Escrow Fund for such Vessel or Technologies, the Obligor shall pay 
the remaining Obligor's equity of at least 12\1/2\% (as determined by 
the Secretary) before additional monies can be withdrawn from the 
Escrow Fund relating to such Vessel or Technologies.
    (2) The Secretary shall not be required to make any disbursement 
except out of the cash available in the Escrow Fund. If any sale or 
payment on maturity shall result in a loss in the principal amount of 
the Escrow Fund invested in securities so sold or matured, the 
requested disbursement from the Escrow Fund shall be reduced by an 
amount equal to such loss, and the Obligor shall pay to any Person 
entitled thereto, the balance of the requested disbursement from the 
Obligor's funds other than the proceeds of such Obligations.
    (3) If the Secretary assumes the Obligor's rights and duties under 
the Obligations or the Secretary pays the Guarantees, all amounts in 
the Escrow Fund (including realized income which has not yet been paid 
to the Obligor), shall be paid to the Secretary and be credited against 
any amounts due or to become due to the Secretary under the Security 
Agreement and the Secretary's Note.
    (4) Other rights and duties with respect to withdrawals from the 
Escrow Fund shall be set out in the closing documentation in form and 
substance satisfactory to the Secretary.
    (c) Investment and liquidation of the Escrow Fund. The Secretary 
may invest the Escrow Fund in obligations of the United States. The 
Secretary shall deposit the Escrow Fund into an account with the U.S. 
Treasury Department and upon agreement with the Obligor, shall deliver 
to the U.S. Treasury Department instructions for the investment, 
reinvestment and liquidation of the Escrow Fund. The Secretary shall 
have no liability to the Obligor for acting in accordance with such 
instructions.
    (d) Income on the Escrow Fund. Unless there is an existing default, 
any income realized on the Escrow Fund shall be paid to the Obligor 
upon receipt by the Secretary of such income.
    (e) Termination date of the Escrow Fund. The Escrow Fund will 
terminate 90 days after the delivery date of the last Vessel or 
Technologies covered by the Security Agreement (the ``Termination 
Date''). In the event that on such date the payment of the full amount 
of the aggregate Actual Cost of all of the Vessels or Technologies has 
not been made or the amounts with respect to such Actual Cost are not 
then due and payable, then the Obligor and the Secretary by written 
agreement shall extend the Termination Date for such period as they 
shall determine is sufficient to allow for such contingencies. Any 
amounts remaining in the Escrow Fund on the Termination Date which are 
in excess of 87\1/2\% or 75% of Actual Cost, as the case may be, shall 
be applied to retire a pro rata portion of the Obligations.
    21. Section 298.34 is revised to read as follows:


Sec. 298.34  Construction fund.

    (a) Circumstances requiring deposits. When the Security Agreement 
provides for an Escrow Fund and the Obligor submits a claim to the 
agency that it has previously paid for items of Actual Cost and is 
seeking reimbursement at the Closing, the Obligor shall also make 
Construction Fund deposits as follows. At the time of the sale of the 
Obligations, the Obligor shall deposit with the Depository 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)) which the Secretary determines has been paid by or for 
the account of the Obligor. The Secretary shall have a security 
interest in and control over the Construction Fund and its proceeds. 
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 and redeposits. The Secretary shall, subject to the 
satisfaction of any applicable conditions contained in the Security 
Agreement, periodically approve disbursements from the Construction 
Fund under the same procedures and conditions as from the Escrow Fund 
in Sec. 298.33(e), except the request for withdrawal will not be 
subject to Sec. 298.33(e)(1) and (h)(1). The administration of the 
Construction Fund

[[Page 44163]]

shall also be subject to the terms and conditions of Sec. 298.33(i), 
(j), and (k).
    22. Section 298.35 is amended as follows:
    a. By revising paragraph (b) to read as set forth below.
    b. By removing paragraph (c) and redesignating paragraphs (d) 
through (g) as paragraphs (c) through (f).


Sec. 298.35  Reserve Fund and Financial Agreement.

* * * * *
    (b) Financial covenants. There will be two sets of covenants. One 
set is covenants that will be imposed regardless of the Company's 
financial condition (primary covenants). The other set of covenants 
will be imposed only if the Company does not meet specific financial 
conditions (supplemental covenants). The primary and supplemental 
covenants are to be set forth in the Agreement. Covenants shall be 
imposed on the Company as follows:
    (1) Primary covenants. So long as Guarantees are in effect the 
Company shall not, without the prior written consent of the Secretary:
    (i) Except as hereinafter provided, make any distribution of 
earnings, except as may be permitted by paragraphs (b)(1)(i)(A) or (B) 
of this section:
    (A) From retained earnings in an amount specified in paragraph 
(b)(1)(i)(C) of this section, provided that, in the fiscal year in 
which the distribution of earnings is made there is no operating loss 
to the date of such payment of such distribution of earnings, and there 
was no operating loss in the immediately preceding three fiscal years, 
or there was a one-year operating loss during the immediately preceding 
three fiscal years, but such loss was not in the immediately preceding 
fiscal year, and there was positive net income for the three year 
period;
    (B) If distributions of earnings may not be made under paragraph 
(b)(1)(i)(A) of this section, a distribution can be made in an amount 
equal to the total operating net income for the immediately preceding 
three fiscal year period, provided that, there were no two successive 
years of operating losses, in the fiscal year in which such 
distribution is made, there is no operating loss to the date of such 
distribution, and the distribution of earnings made would not exceed an 
amount specified in paragraph (b)(1)(i)(C) of this section;
    (C) Distributions of earnings may be made from earnings of prior 
years in an aggregate amount equal to 40 percent of the Company's total 
net income after tax for each of the prior years, less any 
distributions that were made in such years; or the aggregate of the 
Company's total net income after tax for such prior years, provided 
that, after making such distribution, the Company's Long Term Debt does 
not exceed its Net Worth. In computing net income for purposes of this 
paragraph (b)(1)(i)(C), extraordinary gains, such as gains from the 
sale of assets, shall be excluded;
    (ii) Enter into any service, management or operating agreement for 
the operation of the Vessel or the Technologies (excluding husbanding 
type agreements), or appoint or designate a managing or operating agent 
for the operation of the Vessel or the Technologies (excluding 
husbanding agents) unless approved by the Secretary;
    (iii) Sell, mortgage, transfer, or demise charter the Vessel or the 
Technologies or any assets to any non-Related Party except as permitted 
in paragraph (b)(1)(vii) of this section or sell, mortgage, transfer, 
or demise charter the Vessel or any assets to a Related Party, unless 
such transaction is at a fair market value as determined by an 
independent appraiser acceptable to the Secretary, and a total cash 
transaction or, in the case of demise charter, the charter payments are 
cash payments;
    (iv) Enter into any agreement for both sale and leaseback of the 
same assets so sold unless the proceeds from such sale are at least 
equal to the fair market value of the property sold;
    (v) Guarantee, or otherwise become liable for the obligations of 
any other Person, except in respect of any undertakings as to the fees 
and expenses of the Indenture Trustee, except endorsement for deposit 
of checks and other negotiable instruments acquired in the ordinary 
course of business and except as otherwise permitted in this section;
    (vi) Directly or indirectly embark on any new enterprise or 
business activity not directly connected with the business of shipping 
or other activity in which the Company is actively engaged;
    (vii) Enter into any merger or consolidation or convey, sell, 
demise charter, or otherwise transfer, or dispose of any portion of its 
properties or assets (any and all of which acts are encompassed within 
the words ``sale'' or ``sold'' as used herein), provided that, the 
Company shall not be deemed to have sold such properties or assets if 
the net book value of the aggregate of all the assets sold by the 
Company during any period of 12 consecutive calendar months does not 
exceed ten percent of the total net book value of all of the Company's 
assets; the Company retains the proceeds of the sale of assets for use 
in accordance with the Company's regular business activities; and the 
sale is not otherwise prohibited by paragraph (b)(1)(iii) of this 
section. Notwithstanding any other provision of this paragraph 
(b)(1)(vii), the Company may not consummate such sale without the prior 
written consent of the Secretary if the Company has not, prior to the 
time of such sale, submitted to the Secretary the financial statement 
referred to in paragraph (a) of this section, and any attempt to 
consummate a sale absent such approval shall be null and void ab 
initio.
    (2) Supplemental Covenants which may become applicable. Unless, 
after giving effect to such transaction or transactions, during any 
fiscal year of the Company, the Company's Working Capital is equal to 
at least one dollar, the Company's Long-Term Debt does not exceed two 
times the Company's Net Worth and the Company's Net Worth is at least 
the amount specified by the Secretary, the Company shall not, without 
Secretary's prior written consent:
    (i) Withdraw any capital;
    (ii) Redeem any share capital or convert any of the same into debt;
    (iii) Pay any dividend (except dividends payable in capital stock 
of the Company);
    (iv) Make any loan or advance (except advances to cover current 
expenses of the Company), either directly or indirectly, to any 
stockholder, director, officer, or employee of the Company, or to any 
other Related Party;
    (v) Make any investments in the securities of any Related Party;
    (vi) Prepay in whole or in part any indebtedness to any 
stockholder, director, officer, or employee of the Company, or to any 
Related Party, which has a stated maturity of more than one year from 
such date;
    (vii) Increase any direct employee compensation (as hereafter 
defined) paid to any employee in excess of $100,000 per annum; nor 
increase any direct employee compensation which is already in excess of 
$100,000 per annum; nor initially employ or re-employ any person at a 
direct employee compensation rate in excess of $100,000 per annum; 
provided, however, that beginning with January 20, 1999, the $100,000 
limit may be increased annually based on the previous years'' closing 
Consumer Price Index for All Urban Consumers published by the Bureau of 
Labor Statistics. For the purpose of this subsection, the term ``direct 
employee compensation'' is the total amount of any wage, salary, bonus

[[Page 44164]]

commission, or other form of direct payment to any employee from all 
companies with guarantees under the Act as reported to the Internal 
Revenue Service for any fiscal year.
    (viii) Acquire any fixed assets other than those required for the 
maintenance of the Company's existing assets, including normal 
maintenance and operation of any vessel or vessels owned or chartered 
by the Company;
    (ix) Either enter into or become liable (directly or indirectly) 
under charters and leases (having a term of six months or more) for the 
payment of charter hire and rent on all such charters and leases which 
have annual payments aggregating in excess of an amount specified by 
the Secretary;
    (x) Pay any indebtedness subordinated to the Obligations or to any 
other Title XI obligations;
    (xi) Create, assume, incur, or in any manner become liable for any 
indebtedness, except current liabilities, or short term loans, incurred 
or assumed in the ordinary course of business as such business 
presently exists;
    (xii) Make any investment whether by acquisition of stock or 
indebtedness, or by loan, advance, transfer of property, capital 
contribution, guarantee of indebtedness or otherwise, in any Person, 
other than obligations of the United States, bank deposits or 
investments in securities of the character permitted for monies in the 
Title XI Reserve Fund; and,
    (xiii) Create, assume, permit or suffer to exist or continue any 
mortgage, lien, charge or encumbrance upon, or pledge of, or subject to 
the prior payment of any indebtedness, any of its property or assets, 
real or personal, tangible or intangible, whether now owned or 
thereafter acquired, or own or acquire, or agree to acquire, title to 
any property of any kind subject to or upon a chattel mortgage or 
conditional sales agreement or other title retention agreement, except 
loans, mortgages and indebtedness guaranteed by the Secretary under 
Title XI of the Act or related to the construction of a vessel approved 
for Title XI by the Secretary, and liens incurred in the ordinary 
course of business as such business presently exists.


Sec. 298.36  [Amended]

    23. Section 298.36 is amended as follows:
    a. By removing the word ``Annual'' from the heading of the section.
    b. By amending paragraph (a) by removing the words in the first 
sentence ``Secretary shall charge the Obligor an annual fee (Guarantee 
Fee)'' and adding in their place the words ``the Guarantee Fee rate 
shall be set''.
    c. By removing the third and fourth sentences of paragraph (e) and 
adding one sentence in their place to read as follows: ``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 
annual rates.''
    24. Section 298.38 is revised to read as follows:


Sec. 298.38  Partnership and limited liability company agreements.

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


Sec. 298.41  [Amended]

    25. Section 298.41 is amended by removing paragraph (c)(1) and 
redesignating existing paragraphs (c)(2) through (c)(6) as new 
paragraphs (c)(1) through (c)(5).

    Dated: August 6, 1999.

    By Order of the Maritime Administrator.
Joel C. Richard,
Secretary, Maritime Administration.
[FR Doc. 99-20757 Filed 8-12-99; 8:45 am]
BILLING CODE 4910-81-P