[Federal Register Volume 65, Number 140 (Thursday, July 20, 2000)]
[Rules and Regulations]
[Pages 45146-45171]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-17496]



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Part II





Department of Transportation





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Maritime Administration



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46 CFR Part 298



Putting Customers First in the Title XI Program; Final Rule

  Federal Register / Vol. 65, No. 140 / Thursday, July 20, 2000 / Rules 
and Regulations  

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DEPARTMENT OF TRANSPORTATION

Maritime Administration

46 CFR Part 298

[Docket No. MARAD-98-3468]
RIN 2133-AB32


Putting Customers First in the Title XI Program

AGENCY: Maritime Administration, 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 amends existing regulations by simplifying 
existing administrative practices governing the following areas: the 
ship financing guarantee process; and standards for evaluation and 
approval of applications. These changes will make the entire process 
easier for applicants.

EFFECTIVE DATE: This final rule is effective on August 21, 2000.

FOR FURTHER INFORMATION CONTACT: Linda W. Reaves, Financial Analyst, 
Office of Ship Financing, Maritime Administration, Room 8122, 400 
Seventh Street SW., Washington, DC 20590. Telephone 202 366-1899.

SUPPLEMENTARY INFORMATION: 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. 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. The Title XI program enables applicants to obtain 
long-term financing on terms and conditions that may not otherwise be 
available. Applications for obligation guarantees are made to the 
Maritime Administration (we, us, or our), acting under authority 
delegated by the Secretary, to the Maritime Administrator. Once an 
applicant submits a Title XI application to us and prior to execution 
of a guarantee, we must, among other things, make determinations of 
economic soundness of the project, and the applicant's financial and 
operating capability.

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 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.''

Plain Language

    Executive Order 12866 and the President's memorandum on plain 
language in government writing of June 1, 1998, require each agency to 
write all rules in plain language. The Department of Transportation and 
MARAD are committed to plain language in government writing; therefore, 
this final rule is written in plain language. This final rule is 
written in plain language for easier understanding and does not change 
the substance of the proposed rule published at 64 FR 44152 (August 13, 
1999), except as explained in the Discussion of Public Comments and the 
Rulemaking Text Section. Our goal is to improve the clarity of the 
regulation.

Advance Notice of Proposed Rulemaking

    An advance notice of proposed rulemaking (ANPRM), published on 
February 17, 1998 (63 FR 7744), solicited comments on ten sets of 
questions which were grouped into the following categories:
--The standard application Form MA-163, including the requirement for 
vessel plans and specifications.
--The requirements for information on the applicant's and/or 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.

    Our consideration of comments received in response to the 
categories above concerning the application form and closing documents 
were published separately in a Federal Register Notice dated July 30, 
1998 (63 FR 40690). The other comments received from nine commenters on 
the ANPRM were reviewed and taken into consideration in preparation of 
a notice of proposed rulemaking discussed below. These comments, in 
general, dealt with applicant and operator qualifications, financial 
requirements, and economic soundness.

Notice of Proposed Rulemaking

    In response to customer feedback on the ANPRM, we published a 
notice of proposed rulemaking (NPRM) on August 13, 1999, in the Federal 
Register (64 FR 44152). The NPRM reflected all comments received in 
response to the ANPRM. MARAD is now issuing this final rule concerning 
Title XI program administration which reflects consideration of all 
comments received in response to the NPRM.

Discussion of Public Comments and Rulemaking Text

    The discussion that follows summarizes the comments submitted to 
MARAD by six commenters on the NPRM, states why particular 
recommendations/suggestions have or have not been adopted and the 
rationale therefore. Note that where the first letter of one or more 
words is capitalized, that term is defined in Sec. 298.2 Definitions. 
The discussion also notes where

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proposed changes have been adopted to the Title XI regulations and the 
rationale therefore, and where relevant, states why particular 
recommendations/suggestions have not been adopted. Additionally, we 
have made clarifications throughout 46 CFR Part 298 for easier 
understanding and to more fully express implications. Such 
clarifications do not change the substance of the regulations. We have 
rewritten the entire part 298 in plain language. The following sections 
have only plain language and no substantive changes from the existing 
part 298: Secs. 298.10 Citizenship; 298.17 Evaluation of applications; 
298.26 Lease Payments; 298.27 Advances; 298.37 Examination and audit; 
298.39 Exemptions; 298.40 Defaults; and 298.42 Reporting Requirements-
financial statements.
    We have adopted the following changes to Obligation Guarantees 
regulations at 46 CFR Part 298. The amendments are summarized as 
follows:

Section 298.1  Purpose

    This section has been modified to advise that ``you'' and ``we'' 
have been used throughout in writing this part in plain language. You 
and your refer to the applicant for Title XI assistance unless we note 
or imply otherwise. We, us, and our refer to the Maritime 
Administration, the Secretary of the Maritime Administration, or the 
Secretary of Transportation.

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, 
as follows, are based principally on statutory derivations:
    ``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.
    ``Guarantee Fee'' is changed to delete the reference to an annual 
fee and continuing Guarantees. In accordance with the Act, 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.
    ``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.
    ``Shipyard Project'' is a defined term added to this section which 
was not previously proposed in the NPRM. Shipyard Project refers to 
either Advanced Shipbuilding Technology or Modern Shipbuilding 
Technology.

Section 298.3  Applications

    In Sec. 298.3 of the NPRM, we proposed to modify certain provisions 
to reflect current practices and procedures and to clarify certain 
provisions. Additionally, we proposed to delete the priority given to 
applications from general shipyard facilities formerly in 298.3(e) that 
have engaged in naval vessel construction and that have pilot projects 
for shipyard modernization and vessel construction because 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.
    One commenter recommended that MARAD not eliminate the provision 
that gives priority for processing applications from General Shipyard 
Facilities that have engaged in naval vessel construction. The 
commenter stated that Congress adopted this element when it enacted the 
National Shipyard Initiative in recognition of the need to sustain the 
defense shipbuilding industrial base and the basis for the priority and 
the procedure are just as valid today as they were when Congress 
enacted the National Shipbuilding Initiative. Additionally, the 
commenter stated that the mere fact that all existing funds that the 
Department of Defense (DOD) transferred to MARAD has been expended does 
not justify the elimination of the procedure.
    MARAD Response: We believe that the President's plan for the 
National Shipbuilding Initiative (NSI) is to assist the shipbuilding 
industry to compete internationally. The NSI was also planned as a 
transitional program structured to assist in the transition from naval 
to commercial markets. The NSI regulations provide that in making loan 
guarantee commitments using funds provided under the NSI, priority 
shall be given to applications from shipyards that have engaged in 
naval vessel construction. This provision does not apply to other funds 
appropriated to the Title XI program. Funds appropriated for the NSI 
from DOD for this transitional period did not extend beyond 1998, and 
all such funds have been expended.
    Therefore, this priority provision has no application. MARAD's 
elimination of priority given to applications from shipyards that have 
engaged in naval vessel construction is consistent with the plans of 
the NSI to facilitate the transition period, permitting funds 
appropriated to expire in five years, and therefore not intended as an 
ongoing priority. Because Title XI financing continues to be available 
for shipyard modernization and export vessels, Title XI assistance to 
the shipbuilding industry to compete internationally continues. If 
Congress elects to appropriate additional funds or DOD transfers funds, 
if required, a priority processing procedure could be reimplemented 
without an inordinate undertaking by us. Therefore, we have adopted our 
proposal to eliminate the priority provision to General Shipyard 
Facilities of this section.
    We have adopted, as proposed in the NPRM, under this section a 
change to reflect that only two sets of documentation must be submitted 
to us for review.
    This section is also changed 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, we 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.
    Also, this section is changed 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.
    Finally, this section was modified to change the word ``financing'' 
to ``refinancing'' to clarify the provision that states that we will 
give priority processing for applications that request financing 
construction of equipment or vessels less than one year old as opposed 
to the ``refinancing'' of existing equipment or vessels that are one 
year old or older.

Section 298.11  Vessel Requirements

    Under Sec. 298.11 of the NPRM, we proposed to: (1) Clarify that the 
vessel must be constructed in the United States; (2) provide that we 
may contact the shipyard to request that it submit additional technical 
data, backup cost details, and other evidence if we have insufficient 
data; (3) delete the last sentence of paragraph (c) which is redundant 
with the last sentence of paragraph (a) of this section, and (4) 
conform the regulations to our present practices which permit a U.S.-
flag constructed vessel to meet the highest classification standard of 
the American Bureau of Shipping or 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.

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    In response to the NPRM, one commenter requested that MARAD not 
modify the provision of paragraph (c) of Sec. 298.11 to conform to 
MARAD's present practice which permit a U.S.-flag constructed vessel to 
meet the highest classification standard of the American Bureau of 
Shipping or of a classification society other than the American Bureau 
of Shipping (ABS) so long as the society meets the inspection standards 
of the United States Coast Guard. The commenter stated that statute and 
the Title XI regulations require A-1, ABS classification and that these 
provisions refer to another standard, not another society.
    MARAD Response: We disagree with the commenter's interpretation 
that the existing provision provides that ABS is the only acceptable 
classification society for U.S.-flag vessels. We had previously made a 
review of this provision and based on the results of our review 
interpreted the provision to permit a U.S.-flag constructed vessel to 
meet the highest classification standard of a classification society 
other than the ABS so long as the society meets the inspection 
standards of the United States Coast Guard. Hence, we adopted the 
practice of permitting other classification societies. We have 
considered the commenter's position; yet, we affirm our position to 
permit other classification societies. Because the phrase ``or other 
such standards as may be approved by the United States Coast Guard'' 
does not specify ``ABS'' standards, we do not believe another society 
is precluded. Therefore, as proposed in the NPRM, the regulations are 
being modified to clearly permit a U.S.-flag constructed vessel to meet 
the highest classification standard of a classification society of ABS 
or other classification society so long as the society meets the 
inspection standards of the United States Coast Guard.
    Section 298.11 is changed, as proposed in the NPRM, to clarify that 
the vessel must be constructed in the United States. This section is 
also revised to provide that we may contact the shipyard to request 
that it submit additional technical data, backup cost details, and 
other evidence if we have insufficient data.
    Additionally, this section is changed to clarify that all Vessels 
other than Eligible Export Vessels must be documented under U.S. 
registry.

Section 298.12  Applicant and Operator's Qualifications

    We concur with comments that too much information is requested in 
this section, particularly with respect to the applicant's existing 
vessels, and certain background data. Therefore, this section has been 
modified to reduce the information required. With respect to the 
suggestion that we utilize the endorsement of industry associations, 
the regulations do not preclude our consideration of such an 
endorsement when evaluating the applicant's and/or operator's 
qualifications.
    A paragraph is 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

    In the NPRM, we did not propose any changes to this section, as 
suggested by a commenter to the ANPRM, to eliminate the requirement for 
a waiver in order for foreign items to be included in Actual Cost. Our 
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. We believe such a practice 
would have an adverse impact on the U.S. shipbuilding industry as a 
whole. However, request for waivers to include foreign items have not 
been unreasonably withheld, so that the no-foreign content requirement 
without a waiver has not had a negative impact on the shipyards or 
shipowners. Therefore, we will continue to review inclusion of foreign 
items on a case-by-case basis. A correction was made in this section to 
state that in deciding whether to grant a waiver for foreign components 
and services you must submit a certification that the ``domestic'' item 
is not of sufficient quality. The existing regulations inadvertently 
refer to the ``foreign'' item.
    We believe that the current inclusion of the illustration in this 
section of how the cost of foreign components of the hull and 
superstructure may be used to satisfy an applicant's equity 
requirements is unnecessary and confusing. Therefore, we are deleting 
the illustration and the one sentence which refers to the illustration 
in existing Sec. 298.13(a)(2)(i).
    The reference to guarantee fees in existing paragraph (a)(2)(iv) is 
deleted as guarantee fees are eligible for inclusion in Actual Cost.
    We have adopted our proposal to permit, in the case of Eligible 
Export Vessels, financial statements that are not reconciled to U.S. 
generally accepted accounting principles (GAAP) if a satisfactory 
justification is provided concerning the inability to reconcile. We 
further adopted the proposed change to eliminate the requirement for a 
debt amortization schedule and sources and uses statement, and to 
incorporate current financial definitions.
    We have adopted the proposal to eliminate the special financial 
requirements set forth in this section 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. In 
order to make clear that there is only one set of financial 
requirements, the word ``primary'' before financial requirements is 
deleted here and later in the regulation under Sec. 298.35.

Section 298.14  Economic Soundness

    Under Sec. 298.14 of the NPRM, we proposed to reduce or eliminate 
information required under this section. We proposed to add a new 
paragraph which differentiates between applications for vessel 
financing and shipyard modernization projects.
    We proposed to clarify the criteria used for economic soundness 
finding by including provisions of MAO 520-1 relating to economic 
soundness.
    We also proposed requirements concerning the ability of the project 
to service its 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.
    One commenter stated that the requirement for a detailed breakdown 
of estimated daily operating expenses needs to be clarified and that it 
would be inappropriate to require a detailed breakdown of individual 
salaries and wages as this would be unduly cumbersome and cover 
proprietary information that would need to be protected from Freedom of 
Information Act (FOIA) requests. The commenter further stated that all 
that should be required is an aggregate cost of salary for the 
shipyard.
    MARAD Response: The daily operating expense information requested 
for a Title XI application is information that is necessary for us to 
make an assessment of cash flow for the project. The application does 
not request individual wages and salaries but an item of expense for 
wages. With respect to disclosure of proprietary information, the 
applicant can assert a claim of exemption from disclosure under a FOIA 
request of any proprietary information submitted in connection with the 
company's application. We do not believe that providing a breakdown of 
estimated daily operating expenses

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would be unduly cumbersome as this type of information is typically 
prepared for the company's own projections in the initial planning 
stages of its proposed project. Therefore, we have not eliminated the 
requirement to provide us with a detailed breakdown of daily operating 
expenses.
    We have adopted the NPRM's proposed changes to Sec. 298.14. We 
recognize that much of the information requested under Sec. 298.14 was 
developed for applications from companies involved in a liner service. 
We have taken steps to simplify the regulations by reducing or 
eliminating requested information. Specifically, certain paragraphs 
under this section requesting information on expenses, have been 
deleted and are replaced by a new paragraph which will encompass all 
expenses. The new paragraph differentiates between applications for 
vessel financing and shipyard modernization projects.
    We have not added a requirement to the economic soundness section 
concerning the applicant's financial strength because the existing 
requirements of Sec. 298.13, Financial Requirements, already require us 
to make certain determinations concerning the financial position of the 
ultimate transaction credit.
    In order to clarify the criteria used for economic soundness 
findings, we adopted the NPRM's proposal to include in this section the 
provisions of MAR 520-1 relating to economic soundness. Specifically, 
we have modified this section 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 us to analyze cash flow, the 
applicant is requested to provide a five-year forecast of operating 
cash flow.

Section 298.15  Investigation Fee

    As proposed in the NPRM, this section is revised by correcting the 
reference to the filing fee to $5,000.

Section 298.16  Substitution of Participants

    As proposed, this section is revised to delete the last sentence 
which references an annual guarantee fee.

Section 298.18  Financing Shipyard Projects

    Under Sec. 298.18, we proposed 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.
    One commenter stated that the proposed elimination of the weighted 
consideration given for transitioning from naval to commercial 
shipbuilding is totally inconsistent with the goals of the National 
Shipbuilding Initiative and is inconsistent with the emphasis that DOD 
and the Navy have placed on major shipbuilders to transition back to 
commercial shipbuilding.
    MARAD Response: We proposed to eliminate one of the factors in 
considering Guarantees for financing Advanced or Modern Shipbuilding 
Technology. We disagree with the commenter that our proposal to 
eliminate the initial criteria to financing Advanced or Modern 
Shipbuilding Technology projects to aid in transitioning from naval to 
commercial shipbuilding is inconsistent with the goals of the National 
Shipbuilding Initiative (NSI). It is our position that promoting the 
growth and modernization of the U.S. merchant marine and U.S. shipyards 
in general also assists in sustaining the defense shipbuilding base as 
the workforce and facilities for defense and commercial shipbuilding 
are to some extent interchangeable. Therefore, we do not believe that 
elimination of the initial criteria provision of whether the Guarantee 
will aid in the transition from naval shipbuilding to commercial ship 
construction would have an adverse effect on the defense shipbuilding 
base. Therefore, as proposed, we are eliminating the provision in our 
regulations requiring applications for Advanced or Modern Shipbuilding 
Technology projects to aid in transitioning from naval to commercial 
shipbuilding.

Section 298.19  Financing Eligible Export Vessels

    We have made a conforming change not previously proposed under this 
section to eliminate the entire paragraph referencing use of funds 
transferred form DOD to the Title XI program. As discussed under 
Sec. 298.3, funds transferred from DOD to the Title XI program have 
been expended and therefore regulations regarding such funds have no 
application.
    We have adopted, as proposed, under this section to make a 
modification by deleting the reference to the Export-Import Bank of the 
United States to now refer to the Inter-agency Country Risk Assessment 
System 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

    We have adopted, as proposed, under this section, 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

    We have adopted, as proposed, under this section, to specify that 
no foreign, federal, state or local taxes, user fees, or other 
governmental charges shall be included in Actual Cost. Additionally, we 
have changed the reference to the Federal Ship Financing Account to the 
Credit Reform Financing Account to reflect the current account title 
for deposits held by us with respect to moneys received in connection 
with construction contracts.

Section 298.22  Amortization of Obligations

    We have adopted, as proposed, to replace the parenthetical phrase 
``straight line basis'' with the phrase ``level principal'' to reflect 
our current terminology. Additionally, other references to ``straight 
line basis'' in this section have been changed to ``level principal''. 
Reference to ``level debt'' amortization in this section have been 
changed to ``level payment'' to reflect current finance terminology.

Section 298.23  Refinancing

    We have adopted, as proposed, under this section to clarify our 
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. Additionally, we 
have eliminated the reference to ``mortgage insurance'' or ``contracts 
of insurance'' in this section and throughout this part, including 
Sec. 298.43 as we no longer issue mortgage insurance and all loans 
financed with mortgage insurance have expired.

Section 298.24  Financing a Vessel More Than a Year After Delivery

    We proposed to delete Sec. 298.24 because we believed there is no 
current authority for us to finance facilities and equipment related to 
marine operations.
    Two commenters objected to the proposed deletion of Sec. 298.24. 
The commenters believed that deletion of this section is not warranted 
and our

[[Page 45150]]

reasoning is an incorrect statement of our authority.
    MARAD Response: We have reconsidered our proposal to delete 
Sec. 298.24 and have determined that we may finance facilities and 
equipment related to marine operations under limited circumstances. 
Based on our interpretation of the Act, we have revised this section to 
clarify the provisions for issuing Guarantees to finance older vessels 
and using Title XI debt proceeds to finance vessels or facilities and 
equipment related to marine operations.

Section 298.30  Nature and Content of Obligations

    We have adopted, as proposed, under this section, to clarify that 
an indenture trustee is not required under our documents.

Section 298.31  Mortgage

    We have adopted, as proposed, to correct that, except for Eligible 
Export Vessels, a mortgage must be filed with the United States Coast 
Guard's National Vessel Documentation Center. The existing regulations 
require, except for Eligible Export Vessels, that the mortgage be filed 
with the United States Coast Guard at the Vessel's port of record.

Section 298.32  Required Provisions in Documentation

    Proposed Sec. 298.32 regarding the furnishing of insurance and a 
performance bond remain 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, our 
interests as a guarantor must be fully protected. Furthermore, inasmuch 
as Sec. 298.21 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, we find that the bonding requirement does not 
constitute an inordinate out of pocket expense.
    We have adopted as proposed to modify Sec. 298.32 to delete the 
word ``annual'' in this section 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 the Title XI 
Obligors. Additionally, we have clarified that with respect to Shipyard 
Projects, the contract must contain provisions for making periodic 
payments for the work in accordance with an agreed schedule, submitted 
by the ``contractor''. The existing regulations only make reference to 
a ``shipyard'' containing this provision in its contract for 
construction of a vessel.

Section 298.33  Escrow Fund

    We have adopted, as proposed, to modify this section to conform to 
the documentation in the general provisions of the new security 
agreement.

Section 298.34  Construction Fund

    Under Sec. 298.34, we proposed to clarify the requirements 
regarding the construction fund and to eliminate the current 
redundancies of this section regarding withdrawals and deposits, the 
procedure for which is described in Sec. 298.33.
    One commenter believes that we should eliminate the requirement for 
a construction fund and disburse to the Obligor the bond proceeds 
applicable to cost already paid equaling 87.5% or 75%, as applicable. 
Basically, the commenter stated that there is no statutory authority 
for the construction fund set out in the proposed Sec. 298.34 and that 
in Section 1108 of the Merchant Marine Act, 1936, (the Act) Congress 
intended for all payments for eligible costs to be shared 12.5% or 25% 
by the Obligor through payment of equity and 87.5% or 75% out of the 
Title XI guaranteed bond proceeds. The commenter further stated that 
MARAD has consistently misinterpreted Section 1108 of the Act and 
required payment by the Obligor of 12.5% or 25% of the entire cost of 
the project up front before any payment out of the bond proceeds 
thereby increasing the cost of the project to the Obligor because the 
cost of equity is indisputably greater than the cost of debt. The 
commenter stated that because this interpretation does not comport with 
the Act, MARAD had to create a device called the Construction Fund in 
order to deposit bond proceeds that could not be deposited in the 
escrow fund due to the explicit language of Section 1108 but also could 
not be paid to the shipbuilder or to reimburse the Obligor because of 
MARAD's incorrect requirement for payment of 12.5% or 25% of the entire 
cost of the project prior to any disbursement of the escrow fund.
    MARAD Response: We disagree with the commenter's assertion that we 
have no statutory authority for creation of the Construction Fund. 
Section 1104A(c)(1) of the Act provides that ``The security for the 
guarantee of an obligation by the Secretary under this title may relate 
to more than one vessel and may consist of any combination of types of 
security.'' Section 1103(c) of the Act requires the Obligor to provide 
12.5% or 25% equity in the project. It is entirely consistent with the 
statutory requirement that the applicant have all of its equity raised 
before the issuance of a commitment to guarantee. To provide us with 
the assurance that this equity is available for the project and not 
diminished, we require that the Obligor expend its 12.5% or 25% on the 
project before our collateral is at risk. This is analogous to a 
downpayment requirement when purchasing a significant asset. In 
addition, with the applicant funding the equity up front, the applicant 
has the greatest incentive to make the project a financial success.
    The commenter also indicated that our funding requirements result 
in a higher cost to the applicant as the cost of equity is greater than 
the cost of debt. If we were to adopt the funding mechanism proposed by 
the commenter, we would require that any unused equity funds be placed 
in non-risk type of investment similar to those utilized by the Escrow 
and Construction Funds. In this case the earnings on the equity would 
approximate the earnings on the debt and therefore there would not be a 
greater cost by utilizing the full amount of the equity funds before 
utilizing the Title XI proceeds. We believe that requiring the Obligor 
to provide the initial expenditures for the project is in the 
Government's best interest and the Construction Fund accomplishes this 
goal.
    We believe that it is in the best interest of the Government to 
require the initial expenditures for the project to be provided by the 
Obligor and therefore would need a mechanism such as the Construction 
Fund to accomplish this goal. Therefore, we are not accepting the 
commenters proposal to eliminate the Construction Fund.

Section 298.35  Title XI Reserve Fund and Financial Agreement and 
Financial Agreement

    We proposed to modify Sec. 298.35 entirely. We proposed to delete 
the provision regarding financial covenants for companies meeting the 
special financial requirements because this provision had not been 
elected by applicants in the recent past. The references to an 
applicant being governed by either the section 12 or section 13 
requirements are deleted and all companies will be subject to the same 
two sets of covenants. The first set

[[Page 45151]]

of covenants, the primary covenants, is to apply to all companies 
regardless of their financial condition and the second set of 
covenants, referred to as supplemental covenants, is to apply to only 
those companies that do not meet the specific financial conditions.
    One commenter stated that the covenant regarding restriction on 
mergers or sales (a primary covenant) is unduly restrictive and needs 
to be clarified to ensure that we do not consent only when the 
integrity of a loan would be jeopardized by the sale or merger.
    MARAD Response: The Title XI Reserve Fund and Financial Agreement 
requires our consent prior to the Obligor entering into a merger or 
sale. The purpose of requiring our consent prior to a merger or sale is 
to allow us the opportunity to do a due diligence review of the 
transaction to determine whether or not the transaction would have an 
adverse effect or impose unacceptable risk to the Government. To 
accomplish this review, each merger or sale must be analyzed on a case-
by-case basis prior to effectuating the transaction. Therefore, we 
believe that our review and prior consent are warranted, and we have 
not modified this provision.
    One commenter provided comments on a proposed provision of the 
Title XI Reserve Fund and Financial Agreement dealing with the 
restriction the Agreement places on the Obligor with respect to payment 
of dividends. The commenter believes that the dividend restrictions are 
excessively restrictive to well capitalized Sub-Chapter S corporations 
or Limited Liability Companies (LLCs) who qualify as ``strong'' 
companies (positive working capital and debt to equity ratio less than 
2 to 1), whose tax liabilities flow through to their owners and thus 
may require ``tax dividends'' to those owners to reimburse them for 
payment of said liabilities.
    MARAD Response: The purpose of the dividend restriction is to 
provide further assurance that funds are available for payment of 
principal and interest due on the Obligations. We recognize the unique 
tax situation of sub-chapter S corporations and LLCs and, when we deem 
appropriate, we consent to dividend payments for tax purposes. We do 
not believe an amendment to the dividend provision is necessary as 
special provisions are negotiated in the Title XI Reserve Fund and 
Financial Agreement to address these situations on a case-by-case 
basis. Therefore, we have not modified this section to reduce the 
restrictions with respect to the payment of dividends.
    Additionally, we have adopted, as proposed, to modify this section 
in its entirety. The section regarding financial covenants for 
companies meeting the special financial requirements has been deleted 
in its entirety pursuant to the discussion above in Sec. 298.13. The 
references to a Title XI company being governed by either section 12 or 
section 13 company are deleted and all Title XI companies will be 
subject to the same two sets of covenants. One set of covenants will be 
imposed regardless of the company's financial conditions (primary 
covenants) and the second set of covenants will only apply if the 
company does not meet the specific financial conditions (supplemental 
covenants). Also, we have deleted the paragraph in the existing 
regulations referring to dividend restrictions applicable to companies 
who are parties to an operating-differential subsidy contract because 
we no longer issue operating-differential subsidy contracts and have no 
plans to resume.

Section 298.36  Guarantee Fee

    We have adopted, as proposed, to delete the word ``annual'' in 
describing the Guarantee fee. The Guarantee is no longer required 
annually but is now a one-time fee due upon issuance of our guarantee. 
In the NPRM we inadvertently proposed to delete in paragraph (e) of 
this section, the provision stating that the Guarantee fee is non-
refundable. Section 1104 A(e)(4) of the Act provides that the Guarantee 
fee is not refundable. Accordingly, we have included a statement the 
Guarantee fee is non-refundable.
    We proposed to include in this section, a statement that ``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''. In order to reflect the current source 
for the discount rate, we have changed this statement to provide that 
``In calculating the present value used in determining the amount of 
the Guarantee Fee to be paid, we will use a discount rate based on 
information contained in the ``President's annual Budget''.

Section 298.41  Remedies After Default

    We have adopted, as proposed, to delete that Security proceeds to 
us will be applied to guarantee fees as there will be no guarantee fees 
due because all guarantee fees are now paid concurrently with the 
issuance of Obligations.

Section 298.43  Applicability of the Regulations

    We have deleted the reference to ``contracts of insurance'' and 
``mortgage contracts'' because we no longer issue ``contracts of 
insurance'' or ``mortgage contracts'' and all such loans previously 
insured have expired.

Rulemaking Analyses and Notices

Executive Order 12866 and DOT Regulatory Policies and Procedures

    We have reviewed this final rule under Executive Order 12866 and 
have determined that it is not a significant regulatory action under 
section 3(f). It is also not significant under DOT Regulatory Policies 
and Procedures (44 FR 11034; February 26, 1979). Due to the limited 
economic impact of this final rule, no further analysis is necessary. 
These amendments are intended only to simplify and clarify the 
procedural requirements for obtaining Guarantees, principally to 
expedite the process for our review of applications. The intended 
effect 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 by 
improving Title XI program administration.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires 
MARAD to determine whether this final rule will have a significant 
economic impact on a substantial number of small entities. Although a 
substantial number of Title XI applicants may meet the United States 
Small Business Administration's criteria for small entity, these 
amendments to part 298 simplify and clarify the procedural requirements 
for obtaining loan Guarantees under the Title XI ship financing 
program. These simplifications and clarifications will merely expedite 
our application review process. While the simplified procedures will 
enhance customer service, these procedures will not result in a 
significant economic impact. Therefore, we certify that this final rule 
will not have a significant economic impact on a substantial number of 
small entities.

Executive Order 13132

    We have analyzed this rulemaking in accordance with the principles 
and criteria contained in Executive Order 13132 (``Federalism'') and 
have determined that it does not have sufficient federalism 
implications to warrant the preparation of a federalism summary impact 
statement. The

[[Page 45152]]

regulations have no substantial effects on the States, or on the 
current Federal-State relationship, or on the current distribution of 
power and responsibilities among the various local officials. 
Therefore, consultation with State and local officials was not 
necessary.

Executive Order 13084

    We do not believe the revised regulations evolving from this final 
rule will significantly or uniquely affect the communities of Indian 
tribal governments when analyzed under the principles and criteria 
contained in Executive Order 13084 (``Consultation and Coordination 
with Indian Tribal Governments''). Therefore, the funding and 
consultation requirements of this Executive Order would not apply.

Paperwork Reduction Act

    This rulemaking contains requirements that have been approved 
previously by the Office of Management and Budget (Approval No. 2133-
0005, 2133-0012, and 2133-0018).

Unfunded Mandates Reform Act

    This final rule does not impose unfunded mandates under the 
Unfunded Mandates Reform Act of 1995. It does not result in costs of 
$100 million or more to either State, local, or tribal governments, in 
the aggregate, or to the private sector, and is the least burdensome 
alternative that achieves the objectives of the rule.

Regulation Identifier Number (RIN)

    The Department of Transportation assigns a regulation identifier 
number (RIN) to each regulatory action listed in the Unified Agenda of 
Federal Regulations. The Regulatory Information Service Center 
publishes the Unified Agenda in April and October of each year. You may 
use the RIN contained in the heading of this document to cross-
reference this action with the Unified Agenda.

List of Subjects in 46 CFR Part 298

    Loan programs-Transportation, Maritime carriers, Mortgages, 
Reporting and recordkeeping requirements, Vessels.

    Accordingly, 46 CFR part 298 is revised to read 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 Shipyard Projects.
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 a Vessel more than a year after delivery.
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   Title XI Reserve Fund and Financial Agreement.
298.36   Guarantee Fee.
298.37   Examination and audit.
298.38   Partnership agreements and limited liability company 
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 Title XI of the 
Merchant Marine Act, 1936, as amended, governing Federal ship financing 
assistance (46 App. U.S.C. 1271 et seq.). This part uses ``you'' and 
``we'' throughout. You and your refer to the applicant for Title XI 
financing assistance unless we note or imply otherwise. We, us, and our 
refer to the Maritime Administration, the Secretary of the Maritime 
Administration, or the Secretary of Transportation, as applicable.


Sec. 298.2  Definitions.

    For the purpose of this part:
    Act means the Merchant Marine Act, 1936, as amended (46 App. U.S.C. 
1101 through 1294).
    Actual Cost of a Vessel or Shipyard Project means, as of any 
specified date, the aggregate, as determined by us, 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 Shipyard Project.
    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; and
    (3) Other elements contributing to a shipyard's efficiency or 
productivity assisting it to more effectively operate in the 
shipbuilding industry.
    Citizen of the United States means a person who, if an individual, 
is a Citizen of the United States by birth, naturalization or as 
otherwise authorized by law or, if other than an individual, meets the 
requirements of Section 2 of the Shipping Act, 1916, as amended (46 
App. U.S.C. 802), as further described at 46 CFR 221.3(c).
    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 us or a Shipyard 
Project is completed and a Mortgage or other security is executed to 
us.
    Commitment Closing means a meeting of various participants or their 
representatives in a Title XI financing at which a commitment to issue 
Guarantees is executed and the forms of the Obligations and the related 
Title XI

[[Page 45153]]

documents are also either agreed upon or executed.
    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 our specific approval of foreign 
branches, but not the foreign subsidiaries, of such United States 
financial institutions.
    Depreciated Actual Cost of a Vessel or Shipyard Project means the 
Actual Cost of the Vessel or Shipyard Project, as defined in this 
section (less a residual value of 2\1/2\ percent of United States 
shipyard construction cost or, in the case of Shipyard Project, a 
residual value as appropriate), depreciated on a straightline basis 
over the useful life of the Vessel or Shipyard Project as determined by 
us, not to exceed twenty-five years from the date the Vessel or 
Shipyard Project was delivered by the shipbuilder or manufacturer or, 
if the Vessel or Shipyard Project has been reconstructed or 
reconditioned, the Actual Cost of the Vessel or Shipyard Project 
depreciated on a straightline basis from the date the Vessel or 
Shipyard Project was 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 Shipyard Project, 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 Shipyard Project 
determined by us, 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 Shipyard Project 
determined by us.
    Documentation means all or part of the agreements relating to an 
entire Title XI financing which must be furnished to us, irrespective 
of whether we are a party to each agreement.
    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.
    Eligible Shipyard means a private shipyard located in the United 
States.
    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 definition; and
    (2) For operations other than on land, any Vessel, floating 
drydock, or barge constructed 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 (1) of this definition.
    Guarantee means the contractual commitment of the United States of 
America, represented by us, 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 and the date of 
payment.
    Guarantee Fee means the fee payable to us in consideration for the 
issuance of the Guarantees.
    Indenture Trustee means a bank with corporate trust powers, or a 
trust company, with a capital and surplus of at least $25,000,000, 
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 our specific 
authorization, the Indenture Trustee may also authenticate the 
Guarantees.
    Letter Commitment means a letter from us to you, setting forth 
specific determinations made by us with respect to your proposed 
project, as required by the Act and regulations of this part, and 
stating our commitment to execute Guarantees, subject to compliance by 
you with any conditions specified therein.
    Maritime Administration means the 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 Public Law 91-469 (84 Stat. 1036).
    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.
    Mortgage means a first Preferred Mortgage on any Vessel or a first 
mortgage with respect to a Shipyard Project.
    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.
    Obligee means the holder of an Obligation.
    Obligor means any party primarily liable for payment of principal 
of or interest on any Obligation.
    Paying Agent means any Person appointed by the Obligor to pay the 
principal of or interest on the Obligations on behalf of the Obligor.
    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.
    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) Is otherwise in compliance with the provisions of Chapter 313 
of Title 46 of the U.S. Code.; 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;

[[Page 45154]]

    (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 us as the mortgagee, or such other mortgagee as is 
permitted by the applicable foreign law and approved by us.
    Related Party means as that term is defined by generally accepted 
accounting principles outlined in paragraph 24 of Statement of 
Financial Accounting Standards No. 57, Related Party Disclosures.
    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.
    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.
    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.
    Shipyard Project means Advanced Shipbuilding Technology and Modern 
Shipbuilding Technology or both unless otherwise specified.
    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 
will not be documented under the laws of the United States.


Sec. 298.3  Applications

    (a) Process and certification. When you apply for a commitment to 
execute Guarantees, you must:
    (1) Complete Form MA 163 and send it to the Secretary, Maritime 
Administration, U.S. Department of Transportation, 400 Seventh Street, 
SW., Washington, DC 20590.
    (2) Certify the application in the manner that Form MA 163 
prescribes.
    (b) Required information. You must include all required information 
on Form MA 163 or in attached exhibits and schedules submitted with the 
application. You must also include the following regarding the Vessel 
or Vessels, if applicable:
    (1) Any demise charters,
    (2) Time charters in excess of six months,
    (3) Contracts of affreightment,
    (4) Drilling contracts, and/or
    (5) Other contractual arrangements.
    (c) Declaration of Lobbying form. You must also file the 
Declaration of Lobbying form as required by 31 U.S.C. 1352 with the 
initial application as part of the formal submission.
    (d) Attachments. Each exhibit, schedule, and attachment must 
contain a statement, on the first page clearly identifying the document 
as an attachment to the application. You must state on each attachment 
the:
    (1) Name of the applicant; and
    (2) Date of the application.
    (e) Amendment. You must mark ``Amendment,'' on any amendment of 
data contained in the application. Each first page must contain a 
statement clearly identifying the document as an amendment to your 
application and must include the:
    (1) Name of the applicant;
    (2) Date of application; and
    (3) Certification required on Form MA 163.
    (f) Application time schedule. You must submit each application to 
us at least four (4) months prior to the anticipated date by which you 
require a Letter Commitment.
    (1) We may consider applications with less than four (4) months 
notice, prior to the anticipated date by which you require a Letter 
Commitment, if you submit written documentation to us that extenuating 
circumstances exist.
    (2) During the first fifteen (15) calendar days after you submit 
your application, we will preliminarily review your application for 
adequacy and completeness.
    (i) If we find that your application is incomplete, or if we 
require additional data, we will notify you promptly in writing, and 
you will have fifteen (15) calendar days, from the date of each request 
for additional information, to correct deficiencies.
    (ii) If you have not corrected the deficiencies or have not made 
substantial progress toward correcting them, within the 15 calendar 
days, then we may terminate the processing of your application without 
prejudice.
    (3) Once we consider your Title XI application complete, we will 
act on the application within a period of 60 calendar days, unless for 
good cause, we find it necessary to extend the 60 day period.
    (4) If you do not complete your application and we do not act upon 
your application within four (4) months from the submission date, 
unless we extend the time period, we will notify you in writing that 
processing of the application is terminated and that you may reapply at 
a later date.
    (i) If we terminate your application without prejudice, we will not 
require you to pay a new filing fee for a later application for a 
similar project that you file within one year of the termination date.
    (ii) If you submit an application for a substantially different 
project, you must pay a new filing fee. We will determine whether the 
application is substantially different on a case-by-case basis.
    (5) If we issue you a Letter Commitment, you must submit two (2) 
sets of the Closing documentation to us for review at least six (6) 
weeks prior to the anticipated Closing. The six weeks time period will 
give us time to complete an adequate review of the documentation. You 
must use our standard form of documentation.
    (g) Degrees of risk. When processing applications, we will consider 
the different degrees of risk involved with different applications.
    (h) Additional assurances. Before we approve your application, we 
may require additional assurances if you are not a well established 
firm 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 additional 
assurances may include:
    (1) Firm charter commitments;
    (2) Parent company guarantees;
    (3) Greater equity participation;
    (4) Private financing participation;
    (5) Security interest on other property; and
    (6) Similar arrangements to any of these additional assurances.
    (i) Filing Fee. When you submit your application, you must include 
a $5,000 filing fee, which will be non-refundable, irrespective of 
whether we issue a Letter Commitment. However, the $5,000

[[Page 45155]]

filing fee is credited toward the investigation fee described in 
Sec. 298.15(b).
    (j) Confidential Information. (1) If we receive a request for 
release of your information, we will notify you. If you believe that 
your application, including attachments, contains information you 
consider 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), you may assert a 
claim of confidentiality. When submitting your application, you should 
mark ``Confidential'' on the pages that you consider confidential. The 
same requirement applies to any amendment to the application.
    (2) FOIA requests. We will apply the procedures contained in the 
Department of Transportation's regulations at 49 CFR 7.17 regarding 
FOIA requests for information that the submitter has designated as 
confidential. We will consider your claim of confidentiality at the 
time someone requests the information under FOIA.
    (3) Statement of objections. If we receive a request for release of 
your information, we will notify you. We will give you a reasonable 
period of time to give us a written, detailed statement explaining your 
objections to our release of the information. We will not give you 
notice if:
    (i) We determine that we should not disclose the information;
    (ii) The information has been lawfully published or made available 
to the public; or
    (iii) Law (other than 5 U.S.C. 552) requires us to disclose the 
information.
    (4) Our notification of intent to disclose. If your objections to 
release of the information do not persuade us, we will notify you of 
our intent to disclose in a reasonable number of days before we intend 
to disclose the information. The written notice will include:
    (i) A statement explaining our reasons for not accepting the 
submitter's disclosure objections;
    (ii) A description of the business information that we will 
disclose; and
    (iii) A specific disclosure date.
    (k) Priority. We will give priority for processing applications to:
    (1) Vessels capable of serving as a United States naval and 
military auxiliary in time of war or national emergency,
    (2) Requests for financing construction of equipment or vessels 
less than one year old as opposed to the refinancing of existing 
equipment or vessels that are one year old or older,
    (3) Any applications involving the purchase of vessels currently 
financed under Title XI if the purpose is to process the assumption of 
the obligations,
    (4) Applications from those willing to take guarantees for less 
than the normal term for that class of vessel.
    (5) Eligible Export Vessels. We may issue a commitment to guarantee 
Obligations for an Eligible Export Vessel if we determine, in our sole 
discretion, that the issuance of a commitment to guarantee Obligations 
for an Eligible Export Vessel will not cause us to deny 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:
    (i) 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;
    (ii) The economic soundness of the applications referred to in 
paragraph (k)(5)(i) of this section; and
    (iii) The amount of guarantee authority available.

(Unless indicated otherwise in this part 298, information collection 
requirements have been approved by the Office of Management and Budget 
under control number 2133-0018.)

Subpart B--Eligibility


Sec. 298.10  Citizenship.

    (a) Applicability. Before you receive a legal or beneficial 
interest in a Vessel financed under Title XI of the Act which is 
operating in or will be operated in the U.S. coastwise trade, you and 
any other Person, (including the shipowner and any bareboat charterer), 
must establish your United States citizenship, within the definition of 
``Citizen of the United States'' in Sec. 298.2.
    (b) Prior to Letter Commitment. Before we issue the Letter 
Commitment, you and any Person identified in paragraph (a) of this 
section, who is required to establish United States citizenship must 
establish United States citizenship in the form and manner stated in 46 
CFR part 355.
    (c) Commitment Closing. (1) Within 10 days before every Commitment 
Closing, unless we waive this requirement for good cause, you and all 
Persons identified with the project who have previously established 
United States citizenship in accordance with paragraphs (a) and (b) of 
this section, must submit pro forma Supplemental Affidavits of 
Citizenship which we have approved for Closing as to form and 
substance, and
    (2) On the date of the Closing, three (3) executed copies of 
Supplemental Affidavits of Citizenship that:
    (i) Show evidence of the continuing United States citizenship of 
the Persons in paragraph (a) of this section; and
    (ii) Bear the date of the Closing.
    (d) Additional information. If we request additional material 
essential to clarify or support evidence of U.S. citizenship, you, the 
Obligor, or any Person identified in paragraph (a) of this section must 
submit the additional information.

(Approved by the Office of Management and Budget under control number 
2133-0012.)


Sec. 298.11  Vessel requirements.

    When you apply for a Guarantee, the Vessel for which you intend to 
receive financing for construction, reconstruction, or reconditioning 
must meet the following criteria:
    (a) United States Construction. A Vessel, including an Eligible 
Export Vessel, financed by an Obligation Guarantee must be constructed 
in the United States. United States construction means that the Vessel 
is assembled in a shipyard geographically located within the United 
States.
    (1) A U.S.-flag Vessel must meet the applicable United States Coast 
Guard requirements.
    (2) An Eligible Export Vessel must be constructed in accordance 
with the requirements of the International Maritime Organization and 
must meet the applicable:
    (i) Laws, rules, and regulations of its country of documentation,
    (ii) Treaties, conventions on international agreements to which 
that country is a signatory, and
    (iii) Laws of the ports it serves.
    (b) Actual Cost. We must approve your estimated Actual Cost for the 
construction, reconstruction, or reconditioning of a Vessel as a 
condition for issuance of the Letter Commitment. The estimated cost of 
the Vessel may include escalation for the anticipated construction 
period of the Vessel. We may contact the shipyard directly and may 
require you to have the shipyard that has contracted to build the 
Vessel to submit additional technical data, backup cost details, and 
other evidence if we have insufficient data.
    (c) Class, condition, and operation. The Vessel must be 
constructed, maintained, and operated so as to meet the highest 
classification, certification,

[[Page 45156]]

rating, and inspection standards for vessels of the same age and type 
imposed by:
    (1) The American Bureau of Shipping (ABS), or
    (2) 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
    (3) 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 the IACS member accords equal reciprocity, as 
determined by us, to United States classification societies.
    (4) Except in the case of an Eligible Export Vessel, the Vessel 
must be in compliance with all applicable laws, rules, and regulations 
as to condition and operation, including, but not limited to, those 
administered by the:
    (i) United States Coast Guard,
    (ii) Environmental Protection Agency,
    (iii) Federal Communications Commission,
    (iv) Public Health Service, or
    (v) Their respective successor agencies, and
    (vi) 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.
    (d) Documentation. (1) An Eligible Export Vessel must 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 must 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.
    (2) All other Eligible Vessels must be documented under U.S. 
registry.
    (e) Reconstruction or reconditioning. Repairs necessary for the 
Vessel to meet the classification standards approved by us, or any 
regulatory body, or for previous inadequate maintenance and repair, 
will not constitute reconstruction or reconditioning within the meaning 
of this paragraph.
    (f) Condition survey. If your application involves a reconstructed 
or reconditioned Vessel, you must make the Vessel available at a time 
and place acceptable to us so that we may conduct a condition survey. 
You must:
    (1) Pay the cost of the condition survey.
    (2) Ensure that the scope and extent of the condition survey will 
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.
    (3) Ensure that the Vessel meets the standard of the survey 
necessary for retention of class (if the Vessel is classified), and
    (4) Ensure that the operating records of the Vessel reflect normal 
operation of the Vessel's main propulsion and other machinery and 
equipment, consistent with accepted commercial experience and practice.
    (g) Metric Usage. Our preferred system of measurement and weights 
for Vessels and Shipyard Projects is the metric system.


Sec. 298.12  Applicant and operator's qualifications.

    (a) Operator's qualifications. We will not issue a Letter 
Commitment without a prior determination that you, the bareboat 
charterer, or other Person identified in the application as the 
operator of the Vessel(s) or Shipyard Project, possesses the necessary 
experience, ability and other qualifications to properly operate and 
maintain the Vessel(s) or Shipyard Project which serve as security for 
the Guarantees. You must also comply with all requirements of this 
part.
    (b) Identity and ownership of applicant. In order for us to assess 
the likelihood that the project will be successful, we need information 
about you and the proposed project. To permit this assessment, you must 
provide the following information in your application for Title XI 
guarantees:
    (1) Incorporated companies. If you or any bareboat charterer is an 
incorporated company, you must 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 
you or any bareboat charterer is a partnership, limited partnership, 
limited liability company, joint venture, association, or 
unincorporated company, you must 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, we will 
specify the information that the entity must submit regarding its 
identity and ownership.
    (4) You and any bareboat charterer must 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 you or the 
bareboat charterer are controlled or exercised by any person who is not 
the holder of legal title to such interest.
    (5) You and any bareboat charterer must 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 (for example, shares owned and 
whether voting or non-voting).
    (c) Business and affiliations of applicants. You must include:
    (1) A brief description of your principal business activities 
during the past five years.
    (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 you.
    (3) The nature of the business transacted by each listed entity and 
the relationship between these entities. This information may be 
presented in the form of a chart.
    (4) Whether any of the affiliated entities have previously applied 
for or received Title XI assistance.
    (5) 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.
    (6) A statement indicating whether the applicant or any predecessor 
or affiliated entity is now, or during the past five years has been, in 
default

[[Page 45157]]

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.
    (7) A list of your banking references:
    (i) Principal bank(s) or lending institutions(s)--name and address;
    (ii) Nature of relationship; and
    (iii) Individual references--name(s), telephone and fax number of 
banking officer(s).
    (d) Management of applicant. You must include:
    (1) A brief description of the principal business activities during 
the past five years of each officer, director, partner or member you 
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 you with which any person listed in 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. You must provide:
    (1) A brief description of the general character and location of 
the principal assets employed in your business and those of your 
affiliate, other than vessels. Describe financial encumbrances, if any;
    (2) A general description of the vessels currently owned and/or 
operated by you or your 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 a Shipyard Project, a brief description of the general 
character (that is, the number of building ways, launch method, 
drydocks and size) and location (that is, water depth, length of 
riverfront) of the principal properties of the applicant employed in 
its business. You must also describe any financial encumbrances.
    (f) Operating ability. (1) You must submit a detailed statement 
showing your ability to successfully operate the financed Vessel(s).
    (2) If a company other than you will operate the Vessel(s), then 
the information in paragraph (f)(1) of this section must be provided 
for the operating company together with a copy of the operating 
agreement.
    (3) You must submit a copy of any management agreement(s) between 
you and any related or unrelated organization(s) which will affect the 
management of the Title XI Vessel or shipyard.
    (4) In the case of an Eligible Shipyard, which is an applicant for 
a guarantee for a Shipyard Project, a detailed statement must be 
submitted showing your ability to successfully operate the Shipyard 
Project and construct/reconstruct Vessels, including name, education, 
background of, and licenses held by, all senior supervisory personnel 
concerned with the physical operation of the Shipyard Project.
    (5) Where an operator has an historical performance record, we will 
consider this record in evaluating your operating ability. For newly 
formed entities, we will evaluate the performance of affiliates and/or 
companies associated with the principals (where the principals have a 
significant degree of control) in determining your operating ability. 
However, unless the affiliates or principals have an obligation with 
respect to the debt, we will not consider historical performance in 
evaluating your creditworthiness.


Sec. 298.13  Financial requirements.

    (a) In general. To be eligible for guarantees, you and/or your 
parent organization (when applicable), and any other participants in 
the project having a significant financial or contractual relationship 
with you must submit information, respectively, on their financial 
condition. You must submit this information at the time of the 
application. You must supplement this information if we require it in 
subsequent requests. You must submit information satisfactory to us to 
show that financial resources are available to support the Title XI 
project.
    (b) Cost of the project. You must submit the following cost 
information with respect to the project:
    (1) 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.
    (2) Foreign components. (i) You must exclude each item of foreign 
components and services from Actual Cost, unless we specifically grant 
a waiver for the item. We will not grant a waiver for major foreign 
components of the hull and superstructure.
    (ii) In deciding whether to grant a waiver for foreign components 
and services, we will consider your certification, to be reviewed by 
us, stating that:
    (A) A foreign item or service is not available in the United States 
on a timely or price-competitive basis, or
    (B) The domestic item or service is not of sufficient quality.
    (iii) 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 your equity requirements imposed by 
paragraph (f) of this section.
    (3) Costs incurred by written contracts. If any of the costs have 
been incurred by written contracts such as shipyard contract, 
management or operating agreement, you should forward signed copies 
with the application. We may require you to have the contracting 
shipyard submit back-up cost details and technical data. You must 
submit this information in the format given in the Title XI application 
procedures.
    (4) Shipyard Project. In the case of Shipyard Project, a detailed 
statement of the actual cost of such technology, including those items 
which would normally be capitalizable. If you incurred any of the costs 
through written contracts, you should forward signed copies of the 
contract with the application. We may require you to have manufacturers 
submit back-up cost details and technical data. You must submit this 
information in the format given in the Title XI application procedures.
    (5) Shore facilities, cargo containers, etc. A detailed statement 
showing the actual cost of any shore facilities, cargo containers, 
etc., required to be purchased in conjunction with the project.
    (6) Additional project costs. A detailed statement showing any 
other costs associated with the project which were not included in 
paragraphs (b)(1) through (5) of this section, such as:
    (i) Legal and accounting fees;
    (ii) Printing costs;
    (iii) Vessel insurance;
    (iv) Underwriting fees;
    (v) Fee to a Related Party; and
    (vi) Other fees.
    (7) Request for Actual Cost Approval and Reimbursement. If the 
project involves refinancing, you must also submit the exhibit entitled 
Request for Actual Cost Approval and Reimbursement, its summary sheet 
and

[[Page 45158]]

supplemental schedules at the time of filing the application.
    (c) Financing. (1) You must:
    (i) Describe, in detail, how the costs of the project (sums 
referred to in paragraph (b) of this section) will be funded and the 
timing of such funding.
    (ii) Include any vessel trade-ins, related or third party 
financings, etc.
    (iii) Provide the proposed terms and conditions of all private 
funding, from both equity and debt sources and clearly identify all 
parties involved.
    (iv) Obtain our approval of the terms and conditions for co-
financing (involving a blend of Title XI and private financing for the 
debt portion), including the ability of the co-financiers to exercise 
their rights against collateral shared with us for any transaction.
    (v) Demonstrate with financial statements that at least 12\1/2\ 
percent, or 25 percent as applicable, of the construction or 
reconstruction costs of the Vessel(s) or the cost of the Shipyard 
Project will be in the form of equity and not additional debt, except 
to the extent allowed by paragraph (h) of this section.
    (vi) Disclose all of the Vessel(s), Shipyard Project financing in 
the format given in the Title XI application procedures.
    (2) Financial Information. You must provide us with financial 
statements, prepared in accordance with U.S. generally accepted 
accounting principles (GAAP), and include notes that explain the basis 
for arriving at the figures except that for Eligible Export Vessels, 
your financial statements must 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. The financial statements must include the following:
    (i) The most recent financial statements for you, your parent 
company and other significant participants, as applicable (year end or 
intermediate), and the three most recent audited statements with 
details of all existing debt. If you are a new entity and are to be 
funded from or guaranteed by external source(s), you must provide such 
statements for such source(s);
    (ii) Your pro forma balance sheet and that of any 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; and
    (iii) Your pro forma balance sheets and that of the guarantor (if 
applicable) for five years after the Closing.

(Approved by the Office of Management and Budget under control number 
2133-0005.)
    (d) 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 paragraph (f) of this section and in Sec. 298.35, as well 
as the reporting requirements imposed by Sec. 298.42.
    (2) ``Working Capital'' means the excess, if any, of current assets 
over current liabilities, both determined in accordance with GAAP and 
adjusted as follows:
    (i) In determining current assets you must exclude:
    (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, you must deduct any excess 
of unterminated voyage expenses over unterminated voyage revenue and 
add 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'' or ``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 does not include:
    (i) Any receivables from any stockholder, director, Officer or 
employee (or their family) 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. You must include any guarantee or other liability for the 
debt of any other Person not otherwise included on the balance sheet.
    (5) ``Capitalizable Cost'' means the aggregate of the Actual Cost 
of the Vessel or Shipyard Project and those other items which 
customarily would be capitalized as Vessel costs or Shipyard Project 
costs under GAAP.
    (6) ``Depreciated Capitalizable Cost'' means the Capitalizable Cost 
of a Vessel or Shipyard Project, depreciated on a straightline basis 
over the same useful life as determined by us for Actual Cost, and 
depreciated as required by Sec. 298.21(g).
    (e) Applicability. The financial resources must be adequate to meet 
the Equity requirements in the project and Working Capital 
requirements, as set forth in paragraph (f) of this section.
    (1) The various financial requirements shall be met by the owner of 
the Vessel or Vessels or Shipyard Project to be security to us for the 
Guarantees, except that if the owner is not the operator, the overall 
financial requirements will be allocated among the owner, the operator 
and other parties as determined by us.
    (2) The Company must 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 Shipyard Project 
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, you must submit:
    (i) A pro forma balance sheet at the time of the application, 
reflecting any adjustment made pursuant to paragraph (f)(1)(i) of this 
section, and
    (ii) A revised pro forma balance sheet, reflecting the completion 
of the projected financing, at least five business days before the 
first Closing at which the Obligations are issued.
    (f) Financial requirements at Closing. 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, we may adjust the 
requirement as appropriate. Also, if we determine that the Company's

[[Page 45159]]

Working Capital includes amounts receivable that it reasonably could 
not expect to collect within one year, we may make adjustments to the 
Working Capital requirements.
    (ii) Long-Term Debt. The Company's Long-Term Debt must not be 
greater than twice its Equity.
    (iii) Equity (net worth). The Company's Equity must be:
    (A) The greater of:
    (1) 50 percent of its Long-Term Debt; or
    (2) 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; or
    (B) Such other amount as may be specied by us.
    (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 
will be the same as that which would have otherwise been imposed on the 
owner as operator under paragraph (f)(1)(i) of this section and based 
on the same premise stated in that paragraph.
    (ii) Long-Term Debt. The operator's Long-Term Debt will be the same 
as that which would have otherwise been imposed on the owner as 
operator under paragraph (f)(1)(ii) of this section.
    (iii) Equity (net worth). The operator's equity requirement will be 
the same as that which would have otherwise been imposed on the owner 
as operator under paragraph (f)(1)(iii) of this section.
    (iv) 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.
    (3) Owner as General Shipyard Facility. Where the owner of Shipyard 
Project is a General Shipyard Facility, minimum requirements at Closing 
will be the same as those set forth in paragraph (f)(1) of this section 
for an owner as operator.
    (g) Adjustments to financial requirements at Closing. If the owner, 
although not operating a Vessel, assumes any of the operating 
responsibilities, we may adjust the respective Working Capital and 
Equity requirements of the owner and operator, otherwise applicable 
under paragraph (f) of this section, by increasing the requirements of 
the owner and decreasing those of the operator by the same amount.
    (h) Subordinated debt considered to be Equity. With our consent, 
part of the Equity requirements applicable under paragraphs (c) and (f) 
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 Title XI Reserve Fund and Financial 
Agreement (described in Sec. 298.35). Such subordinated debt shall not 
be secured by any interest in property that is security for Guarantees 
under Title XI, unless the Obligor and the lender enter into a written 
agreement, satisfactory to us, providing, among other things, that if 
any Title XI financing or advance by us to the Obligor shall occur in 
the future, such security interest of the lender shall become 
subordinated to any indebtedness to us incurred by the Obligor and to 
any security interest obtained by us in that property or other 
property, with respect to the subsequent indebtedness.
    (i) Modified requirements. We may waive or modify the financial 
terms or requirements otherwise applicable under this section and 
Secs. 298.35 and 298.42, upon determining that there is adequate 
security for the Guarantees. We may impose similar financial 
requirements on any Person providing other security for the Guarantees.


Sec. 298.14  Economic soundness.

    (a) Economic Evaluation. We shall not issue a Letter Commitment for 
guarantees unless we find that the proposed project, regarding the 
Vessel(s) or Shipyard Project for which you seek Title XI financing or 
refinancing, will be economically sound. The economic soundness and 
your ability to repay the Obligations will be the primary basis for our 
approval of a Letter Commitment. We will consider the value of the 
collateral for which we will issue the Obligations as only a secondary 
consideration in determining your ability to repay the Obligations.
    (b) Basic feasibility factors. In making the economic soundness 
findings, we shall consider all relevant factors, including, but not 
limited to:
    (1) 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;
    (2) The market potential for the employment of the Vessel or 
utilization of the Shipyard Project of a General Shipyard Facility over 
the life of the guarantee;
    (3) Projected revenues and expenses associated with employment of 
the Vessel or utilization of the Shipyard Project of a General Shipyard 
Facility;
    (4) Any charters, contracts of affreightment, transportation 
agreements, or similar agreements or undertakings relevant to the 
employment of the Vessel or utilization of the Shipyard Project of a 
General Shipyard Facility;
    (5) For inland waterways, the need for technical improvements 
including but not limited to increased fuel efficiency, or improved 
safety; and
    (6) Other relevant criteria.
    (c) Project Feasibility. To demonstrate the economic feasibility of 
the project over the Guarantee period, you must submit the following 
information:
    (1) Purpose. A detailed purpose for the obligations to be 
guaranteed.
    (2) Necessary exhibits. Necessary exhibits to support your project 
feasibility as supplements to the application.
    (3) Relevant market information. Information regarding the relevant 
market including a written narrative of the market (or potential 
market) for the project including full details on the following, as 
applicable:
    (i) Nature and amount of cargo/passengers available for carriage 
and your projected share (provide also the number of units; that is 
containers, trailers, etc.);
    (ii) 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 Shipyard Project, how the equipment will be employed;
    (iii) Suitability of the Vessel(s) or Shipyard Project for their 
anticipated use;
    (iv) Significant factors influencing your expectations for the 
future market for the Vessel(s) or Shipyard Project, for example, 
competition, government regulations, alternative uses, and charter 
rates; and
    (v) Particulars of any charters, contracts of affreightment, 
transportation agreements, etc. You should supplement the narrative 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).
    (vi) The potential for purchasing existing equipment of a 
reasonable

[[Page 45160]]

condition and age from another source, including information regarding:
    (A) Market assessment concerning the availability and cost of 
existing equipment that may be an alternative to new construction or 
the new Shipyard Project;
    (B) The cost of modification, reconditioning, or reconstruction of 
existing equipment to make it suitable for intended use; and
    (C) Descriptions of any bids or offers which you 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.
    (4) Revenues. A detailed statement of the revenues expected to be 
earned from the project based upon the information in paragraph (c) of 
this section. 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. The revenues shall be based on a realistic 
estimate of the Vessel(s) or the new Shipyard Project utilization rate 
and 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.
    (5) Expenses for Vessel financing. For applications for Vessel 
financing, a detailed statement of estimated Vessel expenses including 
the following (where applicable):
    (i) 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;
    (ii) If applicable, a detailed breakdown of those expenses 
associated with the Vessel(s) voyage, such as port fees, agency fees 
and canal fees that are assessed as a result of the voyage; and
    (iii) A detailed breakdown of annual capital costs and 
administrative expenses, segregated as to:
    (A) Interest on debt;
    (B) Principal amortization; and
    (C) Salaries and other administrative expenses (indicate basis of 
allocation).
    (6) Expenses for a Shipyard Project. For applications for a 
Shipyard Project, a statement of estimated expenses related to the 
Shipyard Project, including the following (where applicable):
    (i) A detailed breakdown of estimated daily operating expenses for 
the shipyard, such as wages, including staffing, and segregated as to 
straight-time, 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
    (ii) A detailed breakdown of annual capital costs and 
administrative expenses, segregated as to:
    (A) Interest on debt;
    (B) Principal amortization; and
    (C) Salaries and other administrative expenses (indicate basis of 
allocation).
    (7) Forecast of Operations. Utilizing the revenues and expenses 
provided in paragraphs (c)(4),(5) and (6) of this section, you shall 
provide a forecast of operating cash flow, as defined in paragraph 
(d)(4) 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.
    (d) Objective Criteria. We must make a finding of economic 
soundness as to each project based on an assessment of the entire 
project. In order for the project to receive approval, we must 
determine that a project meets the following criteria:
    (1) The projected long-term demand (equal to length of time that 
you request financing) for the particular Vessel(s) or new Shipyard 
Project to be financed must exceed the supply of similar vessels or new 
shipyard project in the applicable markets. We will determine the 
supply of similar vessels and similar shipyard projects based on:
    (i) Existing equipment,
    (ii) Similar vessels or new shipyard project under construction, 
and
    (iii) The projected need for new equipment in that particular 
segment of the maritime industry.
    (2) We will base our determination of the project's economic 
soundness on the following:
    (i) Conformity of your projections with our supply and demand 
analyses;
    (ii) Availability of charters, letters of intent, outstanding 
contractual commitments, contracts of affreightment, transportation 
agreements or similar agreements or undertakings; and
    (iii) Your existing market share compared with the market share 
necessary to meet projected revenues.
    (3) In cases where market conditions are temporarily inadequate for 
you to service the Obligation indebtedness at the time of Vessel 
delivery, or completion of the Shipyard Project, we may approve your 
application only if you have sufficient outside sources of cash flow to 
service your indebtedness during this temporary period.
    (4) 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 must be in excess of 1:1. Operating cash flow 
means 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 means interest plus principal.


Sec. 298.15  Investigation fee.

    (a) In general. Before we issue a Letter Commitment, you shall pay 
us an investigation fee. The Letter Commitment will state the fee which 
is based on the formula in paragraph (b) of this section.
    (1) The investigation fee covers the cost of 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.
    (2) If, for any reason, we disapprove the application, you shall 
pay one-half of the investigation fees.
    (b) Base Fee. (1) The investigation fee shall be one-half (\1/2\) 
of one percent on Obligations to be issued up to and including 
$10,000,000, plus
    (2) One-eighth (\1/8\) of one percent on all Obligations to be 
issued in excess of $10,000,000.
    (c) Credit for filing fee. You will receive credit for the $5,000 
filing fee that you paid upon filing the original application 
(described in Sec. 298.3) towards the investigation fee.


Sec. 298.16  Substitution of participants.

    (a) You may request our 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.
    (b) A non-refundable fee of $3,000 is due, payable at the time of 
the request. The fee defrays all costs of processing and reviewing a 
joint application by a mortgagor and/or Obligor and a proposed 
transferee of a Vessel or Shipyard Project, 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, we shall also consider 
whether the application provides for:

[[Page 45161]]

    (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 Shipyard Project, the Guarantees extend for less 
than the technological life of the asset.
    (b) In determining the amount of equity which you must provide, we 
will consider, among other things, the following:
    (1) Your financial strength;
    (2) Adequacy of collateral; and
    (3) The term of the Guarantees.


Sec. 298.18  Financing Shipyard Projects.

    (a) Initial criteria. We may issue Guarantees to finance a Shipyard 
Project at a General Shipyard Facility. We may approve such Guarantees 
after we consider whether the Guarantees will result in shipyard 
modernization and support increased productivity.
    (b) Detailed statement. You must provide a detailed statement, with 
the Guarantee application, which will provide the basis for our 
consideration.
    (c) Required conditions. We shall approve your application for loan 
guarantees under this section if we determine the following:
    (1) The term for such Guarantees will not exceed the reasonable 
economic useful life of the collective assets which comprise this 
Shipyard Project;
    (2) There is sufficient collateral to secure the Guarantee; and
    (3) Your application will not prevent us from guaranteeing debt for 
a Shipyard Project that, in our sole opinion, will serve a more 
desirable use of appropriated funds. In making this determination, we 
will consider:
    (i) The types of vessels which will be built by the shipyard,
    (ii) The productivity increases which will be achieved,
    (iii) The geographic location of the shipyard,
    (iv) The long-term viability of the shipyard,
    (v) The soundness of the financial transaction,
     (vi) Any financial impact on other Title XI transactions, and
    (vii) The furtherance of the goals of the Shipbuilding Act.


Sec. 298.19  Financing Eligible Export Vessels.

    (a) Notification to Secretary of Defense. (1) We will provide 
prompt notice of our receipt of an application for a loan Guarantee for 
an Eligible Export Vessel to the Secretary of Defense.
    (2) 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 if the Secretary of Defense makes an 
assessment that the Vessel's potential use may cause harm to United 
States national security interests.
    (3) 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. We will not approve a loan guarantee 
disapproved by the Secretary of Defense.
    (b) Vessel eligibility. We may not approve a Guarantee for an 
Eligible Export Vessel unless:
    (1) We find 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;
    (2) The owner of the Vessel agrees with us 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; and
    (3) We determine 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 our collateral interests. Our determination will be 
based on confidential risk assessments provided by the Inter-Agency 
Country Risk Assessment System and will take into account any other 
factors related to the loan guarantee transaction that we deem 
pertinent.

Subpart C--Guarantees


Sec. 298.20  Term, redemptions, and interest rate.

    (a) In general. The maturity date of the Obligations must be 
satisfactory to us and must not exceed the anticipated physical and 
economic life of the Vessel or Vessels or Shipyard Project, and may be 
less than but no 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 but that the amount of the Guarantees will relate to the 
amount of the depreciated actual cost of the multiple Vessels as of the 
Closing;
    (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 we determine; or
    (4) The technological life of the Shipyard Project.
    (b) Required redemptions. Where multiple Vessels or multiple 
Shipyard Project assets are to be used as security for the Guarantees, 
as set forth in paragraph (a) of this section, we may require payments 
of principal prior to maturity (redemptions) regarding all related 
Obligations, as we may deem necessary to maintain adequate security for 
the Guarantees.
    (c) Interest rate. We will make a determination as to the 
reasonableness of the interest rate of each Obligation, taking into 
account the range of interest rates prevailing in the private market 
for similar loans and the risks that we assume.


Sec. 298.21  Limits.

    (a) Actual Cost basis. We will issue a guarantee on an amount of 
the Obligation satisfactory to us based on the economic soundness of 
the transaction. The Obligation amount may be less than but not 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 Shipyard Project asset(s).
    (1) If minimum horsepower of the main engine is a requirement for 
Guarantees up to 87\1/2\ percent of the Actual Cost, the standard for 
the horsepower will be continuous rated horsepower.
    (2) Where we refinance existing debt, the amount of new Obligations 
we issue for the existing debt may not exceed the lesser of:
    (i) The amount of outstanding debt being refinanced (whether or not 
receiving assistance under Title XI); or

[[Page 45162]]

    (ii) Seventy-five or 87\1/2\ percent, whichever is applicable, of 
the Depreciated Actual Cost of the Vessel or Shipyard Project 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 
Shipyard Project construction costs such as designing, engineering, 
constructing (including performance bond premiums that we approve), 
inspecting, outfitting and equipping.
    (1) Cost items include those items usually specified in Vessel or 
Shipyard Project 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 incurred during the 
construction period (excluding interest paid on subordinated debt 
considered to be Equity), and less income realized from investment of 
Escrow Fund deposits during the construction period.
    (2) 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:
    (i) A majority of the work done by the parties receiving the 
commissions is in the form of design and engineering work, and
    (ii) The commissions represent a small amount of the total contract 
price.
    (3) You may include Guarantee Fees determined in accordance with 
the provisions of section 1104(e) of the Act as an item of Actual Cost.
    (4) In approving an item of Actual Cost, we 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) Foreign, federal, state or local taxes, user fees, or other 
governmental charges;
    (8) Investigation fee determined in accordance with section 1104(f) 
of the Act and Sec. 298.15;
    (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 GAAP;
    (10) The cost of the condition survey required by Sec. 298.11(f) 
and all work necessary to meet the standards set forth in that 
paragraph;
    (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, any amount payable to the shipyard for early 
delivery of the Vessel;
    (13) Generally, any amount payable to the manufacturer of the 
Shipyard Project for early delivery of the equipment to the General 
Shipyard Facility;
    (14) Predelivery Shipyard Project expenses which may not be 
properly capitalized by the General Shipyard Facility as costs of the 
Shipyard Project under GAAP; 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. (1) Before we make distribution 
from the Escrow Fund or Construction Fund (described in Secs. 298.33 
and 298.34), and prior to our final Actual Cost determination for each 
Vessel or Shipyard Project, you must submit to us documents 
substantiating all claimed costs eligible under paragraph (b) of this 
section or, alternatively, appropriate certification of such costs by 
an agent who has received our approval.
    (2) These documents may include, but need not be limited to, copies 
of invoices, change orders, subcontracts, and where we require, 
statements from independent certified or independent licensed public 
accountants that the costs for which you seek payment or reimbursement 
were actually paid or are payable for the construction of a Vessel or 
Shipyard Project.
    (3) You must summarize, index and arrange these documents according 
to cost categories by following the directions contained in our forms.
    (e) Escalation as part of Actual Cost. Escalation clauses in 
construction contracts shall be subject to our approval. After a review 
of the base contract price and the escalation clauses, we 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 us. We must subsequently approve 
the amount of escalation cost you claimed as a component of Actual 
Cost.
    (f) Monies received in respect of construction. (1) If you or any 
Person acting on your behalf, from time to time receives moneys due for 
construction of a Vessel or Shipyard Project (described in the Security 
Agreement) from the shipbuilder, guarantors, sureties or other Persons, 
you shall give us written notice of such fact.
    (2) As long as we have not paid the Guarantees, you or other 
recipient shall promptly deposit these moneys in a Depository with a 
written notice that the Depository shall hold such moneys on deposit 
until it receives written instructions from us as to their disposition.
    (3) We will determine the extent to which Actual Cost is to be 
reduced by these moneys.
    (4) In no event shall Actual Cost be reduced with respect to 
payments by the shipyard to a Vessel or Shipyard Project owner of 
liquidated damages for late delivery of the Vessel or Shipyard Project 
.
    (5) If we have paid the Guarantees, you or other recipient must 
promptly pay these moneys, including any liquidated damages, to us for 
deposit into the Maritime Guaranteed Loans account.
    (g) Depreciated Actual Cost. After a Vessel or Shipyard Project has 
been delivered or redelivered (in the case of reconstruction or 
reconditioning), the limitation on the amount of Guarantees will be 75 
or 87\1/2\ percent, whichever is applicable, of the Depreciated Actual 
Cost of the Vessel or Shipyard Project.


Sec. 298.22  Amortization of Obligations.

    (a) Generally, after delivery or completion of Shipyard Project, 
and until maturity of the Obligations, provisions of the Trust 
Indenture or other part of the Documentation require you to make 
periodic payment of principal and interest on the Obligations.
    (b) 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 the amortization shall be in equal payments 
of principal (level principal), unless we consent to the periodic 
payment of a constant aggregate amount, comprised of both interest and 
principal components which are variable in amount (level payment). No 
other proposed method of amortization will be allowed which would 
reduce the amount of periodic amortization below that determined under 
the level principal or level

[[Page 45163]]

payment basis at any time prior to maturity of the Obligations, except 
where:
    (1) You can demonstrate to our satisfaction that there will be 
adequate funds to discharge the Obligations at maturity;
    (2)You establish a fund acceptable to us in which you deposit an 
equal annual amount necessary to redeem the outstanding Obligations at 
maturity; or
    (3) With regard to Eligible Export Vessels, in accordance with such 
other terms as we determine 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.

    (a) We may approve guarantees of Obligations to be secured by one 
or more Vessels or a Shipyard Project issued to refinance existing 
Title XI debt for either Vessels or for Shipyard Project and existing 
non-Title XI debt, so long as the existing debt has been previously 
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 Shipyard Project, the 
proceeds of such Obligations will be applied to the construction, 
reconstruction or reconditioning of other Vessels or Shipyard Project 
or as provided in Sec. 298.24.
    (b) We shall require any security lien on the Vessel(s) or Shipyard 
Project to be discharged immediately before we place a Mortgage or 
other security interest on any of the above assets. You must satisfy 
all necessary eligibility requirements as set forth in subpart B of 
this part, including economic soundness.


Sec. 298.24  Financing a Vessel more than a year after delivery.

    (a) We may approve Guarantees for a Vessel which has been delivered 
(or redelivered in the case of reconstruction or reconditioning of a 
Vessel) more than one year prior to the issuance of the Guarantees only 
if:
    (1) The issuance of the Guarantees would otherwise satisfy the 
requirements of the Act and the regulations in this part, and
    (2) The proceeds of the Obligation financing such existing Vessel 
are used to finance:
    (i) The construction, reconstruction, or reconditioning of a 
different Vessel within one year of that Vessel's delivery or 
redelivery, as the case may be, or
    (ii) Facilities or equipment pertaining to marine operations. Such 
facilities or equipment must 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, as well as new or less than 
one year old.
    (b) At the Closing of Guarantees covered by this section, you must 
deposit the proceeds of the Obligation into an Escrow Fund established 
to pay for the cost unless you demonstrate to our satisfaction that all 
such costs have been paid.


Sec. 298.25  Excess interest or other consideration.

    We 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 us; or
    (b) Grants of security to an Obligee in addition to the Guarantees.


Sec. 298.26  Lease payments.

    You must obtain our approval of the amount and conditions of lease 
or charter hire payments if the payment of principal and interest on 
Obligations would be dependent, in any way, upon the lease or charter 
hire payments for a Vessel or Shipyard Project.


Sec. 298.27  Advances.

    (a) In general. (1) In accordance with section 207 and Title XI of 
the Act, we 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:
    (i) Principal,
    (ii) Interest,
    (iii) Insurance, and
    (iv) Other vessel-related expenses or fees.
    (2) We will make advances or payments only to protect, preserve or 
improve the collateral held as our security for Title XI debt.
    (3) When requesting an advance, you must demonstrate that:
    (i) Your problems are short term (less than two years) by using 
market and cash flow analysis and other projections.
    (ii) An advance(s), would assist you over temporary difficulties; 
and
    (iii) There is adequate collateral for the advance.
    (b) Filing requirements. (1) You shall apply for an advance or 
other payment as early as is reasonably possible.
    (2) Principal and interest payments. We must receive a request for 
an advance for principal and interest payments at least 30 days before 
the initial payment date.
    (3) Insurance payments. We must receive a request for an advance of 
insurance payments at least 30 days before a renewal or termination 
date.
    (4) Extenuating circumstances. We may consider requests for 
assistance with less notice, upon written documentation of extenuating 
circumstances.
    (5) Supporting data. Any requests for assistance must be 
accompanied by supporting data regarding:
    (i) Need for the advance,
    (ii) Financial assistance you sought from other sources,
    (iii) The measures that you are taking and have taken to alleviate 
the situation,
    (iv) Financial projections,
    (v) Proposed term of the repayment,
    (vi) Current and projected market conditions,
    (vii) Information on other available collateral,
    (viii) Liens and other creditor information, and
    (ix) Any other information which we may request.

Subpart D--Documentation


Sec. 298.30  Nature and content of Obligations.

    (a) Single page. An Obligation, 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 must include on its face the:
    (1) Name of the Obligor,
    (2) Principal sum,
    (3) Rate of interest,
    (4) Date of maturity, and
    (5) Guarantee of the United States, authenticated by the Indenture 
Trustee, if any.
    (b) Several pages. 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, if any, may appear at the end of the typewritten Obligation.
    (c) Rights and responsibilities. The instrument which is evidence 
of indebtedness shall also contain all information necessary to apprise 
the Obligees of their rights and responsibilities including, but not 
limited to:
    (1) Time and manner for payment of principal and interest,

[[Page 45164]]

    (2) Redemptions,
    (3) Default procedure, and
    (4) Notification (in case of registered Obligations) of sale or 
other transfer of the instruments.


Sec. 298.31  Mortgage.

    (a) In general. Under normal circumstances, a Guarantee shall not 
be endorsed on any Obligation until we receive satisfactory evidence 
that we hold a Mortgage in one or more Vessels or a Mortgage or other 
security interest in the Shipyard Project. During construction of a new 
Vessel or any Shipyard Project, a security interest may be perfected by 
a filing under the Uniform Commercial Code.
    (b) Ensuring validity of security interest. In order to ensure that 
our Mortgages or other security interests are valid and enforceable, we 
shall require that the Obligor obtain legal opinions, in form and 
substance satisfactory to us, from independent, outside legal counsel 
satisfactory to us, including foreign independent outside legal Counsel 
for Eligible Export Vessels, which opinions shall state, among other 
things, that the Mortgage or other security interest(s) are valid and 
enforceable:
    (1) In the country in which the Vessel is documented (or, in the 
case of a security interest, in jurisdictions acceptable to us);
    (2) In the United States; and
    (3) For vessels operating on specified trade routes, in the country 
or countries involved in this service, unless we determine that those 
destinations are too numerous, in which case, we will instead require 
an opinion of foreign validity and enforceability in the Vessel's 
primary port of operation.
    (c) Alternative forms of security. In the case where a Mortgage or 
security interest on the financed assets may not be available or 
enforceable, we will require alternative forms of security.
    (d) Mortgage in our favor. The Security Agreement shall provide 
that upon delivery of a new Vessel or upon final completion of the 
Shipyard Project, or at the time Guarantees are issued with respect to 
an existing Vessel or the Shipyard Project, a Mortgage on the Vessel 
and a Mortgage or other security interest on the Shipyard Project will 
be executed in our favor, unless we determine that a Mortgage or a 
security interest is not available or enforceable in accordance with 
paragraph (c) of this section.
    (e) Filing. You must file the Mortgage with the United States Coast 
Guard's National Vessel Documentation Center. You must file the 
Mortgage for an Eligible Export Vessel with the proper foreign 
authorities. For assets of a General Shipyard Facility, you must file a 
Mortgage and security interest with the proper authorities within the 
appropriate state for recording. After you have recorded the Mortgage, 
you must deliver to us the Mortgage and evidence of the filing of the 
security interest.
    (f) Mortgage secured by multiple Vessels. (1) 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 us by the Obligor.
    (2) If the Fleet Mortgage relates to undelivered Vessels, the Fleet 
Mortgage will 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 our 
Mortgage lien.
    (3) 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.
    (4) The discharge date of the Fleet Mortgage shall be the maturity 
date of the Secretary's Note. We may require, as authorized by section 
1104(c)(2) of the Act, such payments of principal prior to maturity 
(redemptions), regarding all related Obligations, as deemed necessary 
to maintain adequate security for the Guarantees.
    (5) 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 we otherwise determine that there 
remains adequate security for the Guarantees, and the Vessel shall be 
discharged from the Mortgage lien.
    (g) Adequacy of collateral. (1) Under normal circumstances, a First 
Preferred Mortgage on the Vessel(s) or Shipyard Project will be 
adequate security for the Guarantees.
    (2) If, however, we determine that the Mortgage on the Vessel(s) or 
Shipyard Project is not sufficient to provide adequate security, as a 
condition to approving the Letter Commitment or processing the 
application, we may require additional collateral, such as a 
mortgage(s) on other vessel(s) or Shipyard Project 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 must contain provisions for:
    (1) Furnishing by the shipyard or contractor of the Shipyard 
Project of satisfactory insurance and a satisfactory performance bond 
where Obligations are issued during the construction period, except 
that if the shipyard or contractor of the Shipyard Project demonstrates 
to our satisfaction 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 Shipyard Project, as well as 
all related work projects being performed by the contractor and 
subcontractors, to our representative, 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 Shipyard Project is 
being constructed, reconstructed, or reconditioned in accordance with 
contract plans and specifications approved by us;
    (3) Submitting to us, upon request, one set of shipyard plans, in 
form and substance satisfactory to us, for the Vessel or Shipyard 
Project as built;
    (4) Making periodic payments for the work in accordance with an 
agreed schedule, submitted by the shipyard or contractor, as 
appropriate, in a form acceptable to us, based on percentage of 
completion, after such percentage and satisfactory performance are 
certified by the Obligor, shipyard or contractor, as appropriate, and 
our representative 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 we 
consent 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.
    (7) If Obligation will not be issued during the construction period 
of the Vessel and Shipyard Project, requiring that shipyard-related 
contracts shall generally include the provisions specified in 
paragraphs (a)(2), (a)(3) and (a)(6) of this section.
    (b) Assignments and general covenants from Obligor to us. The 
Obligor shall assign rights and shall covenant with us, as we require,

[[Page 45165]]

including, but not limited to, the following:
    (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 regarding Vessel or Shipyard Project 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 Shipyard Project and all hire 
payable to the Obligor, and delivery to us of required consents by 
appropriate parties to any such assignments;
    (4) Covenants relating to the 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 
Shipyard Projects; warranty of Vessel or Shipyard Project 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 us 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 us; 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 us as authorized by Title XII of the Act; and such 
additional insurance as may be required by us. 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 us by 
prior written notice) insurance companies, underwriters' associations 
or underwriting funds approved by us through marine insurance brokers 
and/or underwriting agents approved by us. 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 
us and/or under such other forms of policies which we may approve in 
writing and/or policies issued by or for us insuring the Vessel or 
Eligible Export Vessel against the usual risks provided for under such 
forms, including such amounts of increase value or other forms of 
``that total loss only'' insurance permitted by the Hull and Machinery 
insurance policies;
    (7) Collateralize other debt due to us under other Title XI 
financings;
    (8) Covenants to maintain shipyard insurance on the Shipyard 
Project in an amount equal to 110% of the outstanding Obligations or up 
to the full commercial value of the Shipyard Project, whichever is 
greater, and such additional insurance as may be required by us; and
    (9) Covenants to maintain additional types of insurance as may be 
required by us 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) Escrow Fund Deposits. At the time of the sale of the 
Obligations, the Obligor shall deposit with us 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 must 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 we find the existence of adequate consideration or 
accept other consideration in lieu of the interest deposit.
    (b) Escrow Fund Withdrawals. You, as Obligor, may make a written 
request for us to disburse funds from the Escrow Fund. Within a 
reasonable time thereafter, we shall disburse directly to the Indenture 
Trustee, any Paying Agent for such Obligations, or any other Person 
entitled to payment any amount which you are obligated to pay or have 
paid, on account of the items and amounts or any other item approved by 
us, provided that we are satisfied with the accuracy and completeness 
of the information contained in the following submissions:
    (1) A responsible officer of the Obligor shall deliver an officer's 
certificate, in form and substance satisfactory to us, stating that:
    (i) There is no default under the construction contract or the 
Security Agreement;
    (ii) 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 Shipyard Project;
    (iii) The amounts of the request are in accordance with the 
construction contract including the approved disbursement schedule and 
each item in these amounts is properly included in our approved 
estimate of Actual Cost;
    (iv) 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 Shipyard Project for which the withdrawal is 
being requested except for those already approved by us; and
    (v) If the Vessel or Shipyard Project has already been delivered or 
completed, it is in class, if required, and is being maintained in the 
highest and best condition. The Obligor must also attach an officer's 
certificate of the shipyard and other general contractors, in form and 
substance satisfactory to us, stating that there are no liens or 
encumbrances as provided in paragraph (b)(1)(iv) of this section and 
attaching the invoices and receipts supporting each proposed withdrawal 
to our satisfaction.
    (2) No payment or reimbursement under this section shall be made:
    (i) To any Person until the Construction Fund, if any, has been 
exhausted,
    (ii) 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\ percent or 25 percent as 
applicable, of the Actual Cost of the Vessel or Shipyard Project is 
made;
    (iii) To the Obligor which would have the effect of reducing the 
total amounts paid by the Obligor pursuant to paragraph (b)(2)(ii) of 
this section; or
    (iv) To any Person on account of items, amounts or increases

[[Page 45166]]

representing changes and extras or owner furnished equipment, if any, 
unless such items, amounts and increases shall have been previously 
approved by us; provided, however, that when the amount guaranteed by 
us equals 75 percent or less of the Actual Cost and the Obligor 
demonstrates to our satisfaction the ability to pay in the remaining 25 
percent, or more, then after the initial 12\1/2\ percent of Actual Cost 
has been paid by or on behalf of the Obligor for such Vessel or 
completed Shipyard Project and up to 37\1/2\ percent of Actual Cost has 
been withdrawn from the Escrow Fund for such Vessel or Shipyard 
Project, the Obligor must pay the remaining Obligor's equity of at 
least 12\1/2\ percent (as determined by us) before additional monies 
can be withdrawn from the Escrow Fund relating to such Vessel or 
Shipyard Project.
    (3) We will not be required to make any disbursement except out of 
the cash available in the Escrow Fund. If any sale or payment on 
maturity results 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 must pay to any Person entitled thereto, the balance of 
the requested disbursement from the Obligor's funds other than the 
proceeds of such Obligations.
    (4) If we assume the Obligor's rights and duties under the 
Obligations or we pay the Guarantees, all amounts in the Escrow Fund 
(including realized income which has not yet been paid to the Obligor), 
shall be paid to us and be credited against any amounts due or to 
become due to us under the Security Agreement and the Secretary's Note.
    (5) 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 us.
    (c) Investment and liquidation of the Escrow Fund. We may invest 
the Escrow Fund in obligations of the United States. We will deposit 
amounts in 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. We will 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 our receipt of such income.
    (e) Termination date of the Escrow Fund. The Escrow Fund shall 
terminate 90 days after the delivery date of the last Vessel or 
Shipyard Project 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 Shipyard Project 
has not been made or the amounts with respect to such Actual Cost are 
not then due and payable, then we and the Obligor by written agreement 
shall extend the Termination Date for such period as we and the Obligor 
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\ percent or 75 percent of Actual Cost, as the case 
may be, shall be applied to retire a pro rata portion of the 
Obligations.


Sec. 298.34  Construction fund.

    (a) Circumstances requiring deposits. (1) When the Security 
Agreement provides for the establishment of an Escrow Fund, the Obligor 
shall also make Construction Fund deposits when the Obligor:
    (i) Submits a claim to the agency that it has previously paid for 
items of Actual Cost and
    (ii) Is seeking reimbursement at the Closing.
    (2) The Obligor shall make the Construction Fund deposits as 
follows:
    (i) 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
    (ii) 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(b) which we determine has been paid by or for the account 
of the Obligor.
    (b) Security interest and control. We must have a security interest 
in and control over the Construction Fund and its proceeds.
    (c) Balance of the proceeds. The Obligor will retain the balance of 
the proceeds, if any, from the sale of the Obligations, after 
depositing the amounts required to be deposited in the Escrow Fund and/
or the Construction Fund.
    (d) Withdrawals and redeposits. We 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(b), except the request for withdrawal will not be 
subject to Sec. 298.33(b)(2)(i) and (e). The administration of the 
Construction Fund shall also be subject to the terms and conditions of 
Sec. 298.33.


Sec. 298.35  Title XI Reserve Fund and Financial Agreement.

    (a) Purpose. In order to provide us with further security and to 
ensure payment of the interest and principal due on the Obligations, we 
will require the Company to enter into a Title XI Reserve Fund and 
Financial Agreement (Agreement) at the first Closing at which the 
Company issues Obligations. We may waive or modify provisions of the 
Agreement based on our evaluation of the aggregate security for the 
Guarantees.
    (b) Financial covenants. There will be two sets of covenants. One 
set of covenants 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 our prior written consent:
    (i) Make any distribution of earnings, except as may be permitted 
as follows:
    (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:
    (1) There were no two successive years of operating losses;
    (2) There is no operating loss to the date of such distribution in 
the fiscal year in which such distribution is made; and

[[Page 45167]]

    (3) 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, will be excluded;
    (ii) Enter into any service, management or operating agreement for 
the operation of the Vessel or the Shipyard Project (excluding 
husbanding type agreements), or appoint or designate a managing or 
operating agent for the operation of the Vessel or the Shipyard Project 
(excluding husbanding agents) unless approved by us;
    (iii) Sell, mortgage, transfer, or demise charter the Vessel or the 
Shipyard Project 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 us, and is a total cash 
transaction;
    (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 with respect to 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 in this section), provided that, 
the Company will 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. The Company may not consummate such sale without our prior 
written consent if the Company has not, prior to the time of such sale, 
submitted to us, as required, its most recently audited financial 
statements referred to in Sec. 298.42(a) and any attempt to consummate 
a sale absent such approval will 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 us, the Company shall not, without our 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 defined in this 
paragraph) 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 1, 2000 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 paragraph, the term ``direct 
employee compensation'' is the total amount of any wage, salary, bonus 
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 
us;
    (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 us under Title XI of 
the Act or related to the construction of a vessel approved for Title 
XI by us, and liens incurred in the ordinary course of business as such 
business presently exists.
    (c) Title XI Reserve Fund Net Income. The Agreement shall provide 
that within 105 days after the end of its accounting year, the Company 
will compute its net income attributable to the operation of the 
Vessel(s) 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

[[Page 45168]]

percentage, and applies this percentage to the Company's total net 
income after taxes. The numerator of the ratio is 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 
Shipyard Project, 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 us, in lieu of any other computation of Reserve Fund Net 
Income specified in this section for Vessels. The net income after 
taxes, computed in accordance with GAAP, will 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.
    (d) Deposits. Unless the Company, as of the close of its accounting 
year, was subject to and in compliance with the financial requirements 
set forth in paragraph (b)(2) of this section, the Company shall make 
one or more deposits to a special joint depository account with us (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, will be determined as follows:
    (1) Fifty percent of the Title XI Reserve Fund Net Income, less an 
amount equal to 10% of the Company's total original equity investment 
in the Vessel or Vessels, (if the Company is the owner of the assets), 
will be deposited into the Title XI Reserve Fund.
    (2) In the case of Shipyard Project, 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.
    (3) Any additional amounts that may be required pursuant to the 
Security Agreement or any other agreement in the documentation to which 
the Company is a party.
    (4) 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.
    (5) Irrespective of the Company's deposit requirement, as stated in 
paragraphs (d) (1) through (4) of this section, the Company will not be 
required to make any deposits into the Title XI Reserve Fund if any of 
the following events will have occurred:
    (i) The Company will have discharged the Obligations and related 
Secretary's Note and will have paid other sums secured under the 
Security Agreement and Preferred Mortgage;
    (ii) All Guarantees with respect to outstanding Obligations will 
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.
    (e) 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 
must enter into an agreement, satisfactory to us, providing that all 
such deposits of assets therein will 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 will 
be deemed satisfied by deposits of equal amounts in the CCF, and 
withdrawal of the CCF Security Amount will be subject to our 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 will be deposited or redeposited in the Title XI 
Reserve Fund.


Sec. 298.36  Guarantee Fee.

    (a) Rates in general. (1) For annual periods, beginning with the 
date of the Security Agreement and prior to the delivery date of a 
Vessel or Shipyard Project, we shall charge a Guarantee Fee set 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 periods 
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).
    (2) For annual periods beginning with the delivery date of a Vessel 
or Shipyard Project, the Guarantee Fee shall be set 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 
periods covered by the Guarantee Fee. You will be responsible for 
payment of the Guarantee Fee.
    (b) Rate calculation. (1) The Guarantee Fee rate generally shall 
vary inversely with the ratio of Equity to Long-Term Debt (Variable 
Rate) of the Person who we consider to be the primary source of credit 
in the transaction (Credit Source), for example,
    (i) The long term time charterer (where the charter hire represents 
the source of payment of interest and principal with respect to the 
Obligations),
    (ii) The guarantor of the Obligations,
    (iii) The Obligor, or
    (iv) The bareboat charterer.
    (2) Where the Variable Rate is used, we 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.
    (3) We shall base our determination of Equity and Long-Term Debt on 
information contained in forms or statements on file with us prior to 
the date on which the Guarantee Fee is to be paid.
    (4) With our consent, you may include in Equity and exclude from 
Long-Term Debt, any subordinated indebtedness representing loans from 
any credit source.
    (5) We 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 Shipyard Project. For annual 
periods beginning prior to the delivery date of a Vessel or Shipyard 
Project 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 Guarantee Fee rate shall be \1/2\ of 1 percent of the Average 
Principal Amount of Obligations Outstanding during the

[[Page 45169]]

annual period covered by the Guarantee Fee.
    (2) If the Equity is at least 15 percent of the Long-Term Debt, but 
less than the Long-Term Debt, the 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 
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 Shipyard Project delivery or 
completion. For annual periods beginning on or after the Vessel or 
Shipyard Project 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 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 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 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 is equal to or exceeds 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. (1) 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 us concurrently 
with the execution and delivery of said Agreement. The project's entire 
Guarantee Fee payment shall be made by you to us in an amount equal to 
the sum of the present value of the separate products obtained by 
applying the pertinent pre or post delivery Guarantee Fee rate or rates 
to the projected amount of the Average Principal Amount of 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, we shall use a discount rate based on 
information contained in the President's most recently submitted 
budget.
    (2) The Guarantee Fee may be included in Actual Cost, is eligible 
to be financed, and is non-refundable.
    (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 will 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. The Guarantee Fee shall be 
the aggregate of the amounts calculated for each Vessel.


Sec. 298.37  Examination and audit.

    (a)(1) We 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 
an agreement with respect to control of, or a financial interest in, a 
Vessel or Shipyard Project, as well as records of a Related Party and 
domestic agents connected with such Persons, and shall have full, free 
and complete access to these items at all reasonable times.
    (2) We shall have the right to full, free and complete access, at 
all reasonable times, to each Vessel or Shipyard Project for which 
Guarantees are in force.
    (3) When a Vessel is in port or undergoing repairs, we may make 
photostatic or other copies of any books, records and other relevant 
documents or papers being examined or audited.
    (b) The Person in control of the premises where we conduct the 
examination or audit must furnish, without charge, adequate office 
space and other facilities that we reasonably require in performing the 
examination, audit or inspection.


Sec. 298.38  Partnership agreements and limited liability company 
agreements.

    Partnership and limited liability company agreements must be in 
form and substance satisfactory to us prior to any Guarantee Closing, 
especially relating, but not limited to:
    (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;
    (d) The termination, amendment, or other modification of the entity 
without our prior written consent; and
    (e) Distribution of funds or ownership interest.


Sec. 298.39  Exemptions.

    We may exempt an applicant from any requirement of this part, 
unless required by statute or other regulations, 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 exemption will substantially relieve the financial 
liability of the United States;
    (c) The exemption will not substantially impact effective 
regulation of the Title XI program, consistent with the objectives of 
this part;
    (d) The exemption will not be unjustly discriminatory; and
    (e) For Eligible Export Vessels, 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) Principal and interest Payment Default. Unless we have assumed 
the Obligor's rights and duties under the Obligation and agreements and 
have made any payments in default under terms in the Obligation or 
related agreements, the following procedures regarding principal and 
interest payment default shall apply:
    (1) No demand shall be made for payment under the Guarantees unless

[[Page 45170]]

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 afterward.
    (3) After demand for payment is made by or on behalf of the 
Obligees, we shall make payment under the Guarantees, except if we 
determine 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), 
section 1105(b) of the Act allows us, in our sole discretion, to 
declare such default a Security Default, and we 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 we receive notice of demand for 
payment of the Guarantees, we shall, no later than 30 days after the 
date of such demand (provided that we 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. The Security Agreement or other parts of the 
Documentation shall include provisions governing remedies after a 
default, which relate to our rights and duties, the rights and duties 
of the Obligor, and other appropriate Persons.
    (b) Action by the Secretary. (1) We may take the Vessel or Shipyard 
Project and hold, lease, charter, operate or use the Vessel or Shipyard 
Project, accounting only for the net profits to the Obligor after a 
default has occurred and is continuing and before making payment 
required under the Guarantees.
    (2) After making payment required under the Guarantees, we 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 us under:
    (i) Sections 1105(c), 1105(e) and 1108(b) of the Act,
    (ii) The Security Agreement,
    (iii) Other applicable provisions of law, and
    (iv) The Documentation.
    (c) Security proceeds to Secretary. Our interest in proceeds 
realized from the disposition of or collection regarding the security 
granted to us in consideration for the Guarantees (except all proceeds 
from the sale, requisition, charter or other disposition of property 
purchased by us at a foreclosure or other public sale, which proceeds 
shall belong to and vest exclusively in us ), shall be an amount equal 
to, but not in excess of, the sum of (in order of priority of 
application of the proceeds):
    (1) All moneys due and unpaid and secured by the Mortgage or 
Security Agreement;
    (2) All advances, including interest thereon, by us, under the 
Security Agreement and all our reasonable charges and expenses;
    (3) The accrued and unpaid interest on the Secretary's Note;
    (4) The accrued and unpaid balance of the principal of the 
Secretary's Note; and
    (5) To the extent of any collaterization by the Obligor of other 
debt due to us from the Obligor under other Title XI financings, such 
other Title XI debt.
    (d) Security proceeds to Obligor. You 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 (5) of this section.


Sec. 298.42  Reporting requirements--financial statements.

    (a) In general. 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.
    (b) Eligible Export Vessels. In the case of Eligible Export 
Vessels, the accounts of the Company shall be audited at least 
annually, and unless otherwise agreed to by us, we shall require that 
the financial statements be in accordance with generally accepted 
accounting principles, by accountants as described in paragraph (a) 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 us. The 
accountants performing such audits may be the regular auditors of the 
Company.
    (c) Reports of Company and other Persons. Except as we require 
otherwise, the Company must file a semiannual financial report and an 
annual financial report, prepared in accordance with generally accepted 
accounting principles, with us as specified in the Documentation. You 
must include:
    (1) The balance sheet and a statement of paid-in-capital and 
retained earnings at the close of the required reporting period,
    (2) A statement of income for the period, and
    (3) Any other statement that we consider necessary to accurately 
reflect the Company's financial condition and the results of its 
operations.
    (d) Required form. We will specify in a letter to the Company the 
form required for reporting and the number of copies that you must 
submit
    (e) Other Persons. We may after providing the Company notice, 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 our security for the Guarantees.
    (f) Timeliness. The required financial report for the annual period 
will 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 will be due 
within 105 days after each semiannual period, commencing with the first 
semiannual period ending after the date of the Security Agreement.
    (g) Public accountant's report. The annual report will be 
accompanied by the public accountant's report based on an audit of the 
company's financial statements. We may require an audit by the public 
accountants of the financial statements contained in the company's 
semiannual report. We also may require certification of the semiannual 
report by the accountants. Where independent certification is not 
required, a responsible corporate officer will attach a certification 
that such report is based on the accounting records and, to the best of 
that officer's knowledge and belief, is accurate and complete.
    (h) Leveraged lease financing. If the method of financing involved 
is a leveraged lease financing, or a trust is the owner of the Vessels, 
we may modify the requirements for annual and semiannual accounting 
reports of the Obligor accordingly.
    (i) Letter of confirmation. The Company must furnish, along with 
its financial report, a letter of confirmation

[[Page 45171]]

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 must state the 
term for which the insurance is in force.


Sec. 298.43  Applicability of the regulations.

    (a) The regulations in this part are effective August 21, 2000, and 
apply to all applications made, Letter Commitments, Commitments to 
Guarantee Obligations or Guarantees issued or entered into on or after 
August 21, 2000, under section 1104(a) of the Merchant Marine Act, 
1936, as amended.
    (b) The regulations in this part do not apply to any applications 
made, Letter Commitments, Commitments to Guarantee Obligations, or 
Guarantees issued under those regulations in effect before August 21, 
2000. See 46 CFR, parts 200 to 499, edition revised as of October 1, 
1996 and 46 CFR, parts 200 to 499, edition revised as of October 1, 
1999 for regulations that apply to applications made, Letter 
Commitments, Commitments to Guarantee Obligations, or Guarantees issued 
before August 21, 2000.

Subpart F--Administration [Reserved]

    Dated: July 6, 2000.

    By order of the Maritime Administrator.
Joel C. Richard,
Secretary, Maritime Administration.
[FR Doc. 00-17496 Filed 7-19-00; 8:45 am]
BILLING CODE 4910-81-P