[Federal Register Volume 64, Number 156 (Friday, August 13, 1999)]
[Proposed Rules]
[Pages 44152-44164]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20757]
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DEPARTMENT OF TRANSPORTATION
Maritime Administration
46 CFR Part 298
[Docket No. MARAD-98-3468]
RIN 2133-AB14
Putting Customers First in the Title XI Program
AGENCY: Maritime Administration, Department of Transportation.
ACTION: Notice of Proposed Rulemaking.
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SUMMARY: The Maritime Administration (``MARAD'') is seeking public
comment
[[Page 44153]]
on a proposed rule which modifies certain provisions of the existing
regulations which implement Title XI of the Merchant Marine Act, 1936,
as amended (``Act''). This rule intends to improve administration of
the Title XI program. Title XI guarantees are issued for all types of
vessel construction and shipyard modernization and improvement
projects, except for fishing vessels. The part of the Title XI program
related to fishing vessels is administered by the National Oceanic and
Atmospheric Administration of the U.S. Department of Commerce.
DATES: You should submit your comments early enough to ensure that
Docket Management receives them not later than September 13, 1999.
ADDRESSES: You should mention the docket number that appears at the top
of this document and submit your written comments to: Docket
Management, Room PL-401, Department of Transportation, 400 Seventh
Street, S.W., Washington, D.C. 20590. You may call Docket Management at
(202) 366-9324. Comments may also be submitted by electronic means via
the Internet at http://dmses.dot.gov/submit/. You may visit the docket
room to inspect and copy documents at the above address from 10 a.m. to
5 p.m., local time, Monday through Friday, except on Federal holidays.
An electronic version of this document is available on the World Wide
Web at http://dms.dot.gov.
FOR FURTHER INFORMATION CONTACT: You may call Mitchell D. Lax of the
MARAD Office of Ship Financing, at (202) 366-5744, or you may write to
him at the following address: MAR-530, Room 8122, 400 Seventh Street,
S.W., Washington, D.C. 20590.
SUPPLEMETARY INFORMATION:
Comments
How do I prepare and submit comments?
Your comments must be written and in English. To ensure that your
comments are correctly filed in the Docket, please include the docket
number of this document in your comments. We encourage you to write
your primary comments in a concise fashion. However, you may attach
necessary additional documents to your comments. There is no limit on
the length of the attachments.
Please submit two copies of your comments, including the
attachments, to Docket Management at the address given above under
ADDRESSES.
How can I be sure that my comments were received?
If you wish Docket Management to notify you upon its receipt of
your comments, enclose a self-addressed, stamped postcard in the
envelope containing your comments. Upon receiving your comments, Docket
Management will return the postcard by mail.
How do I submit confidential business information?
If you wish to submit any information under a claim of
confidentiality, you should submit three copies of your complete
submission, including the information you claim to be confidential
business information, to the MARAD Chief Counsel at the address given
above under FOR FURTHER INFORMATION CONTACT. In addition, you should
submit two copies, from which you have deleted the claimed confidential
business information, to Docket Management at the address given above
under ADDRESSES. When you send a comment containing information claimed
to be confidential business information, you should include a cover
letter setting forth with specificity the basis for any such claim.
Will the agency consider late comments?
We will consider all comments that Docket Management receives
before the close of business on the comment closing date indicated
above under DATES. To the extent possible, we will also consider
comments that Docket Management receives after that date. If Docket
Management receives a comment too late for us to consider it in
developing a final rule, we will consider that comment as an informal
suggestion for future rulemaking action.
How can I read the comments submitted by other people?
You may read the comments received by Docket Management at the
address given above under ADDRESSES. The hours of the Docket Room are
indicated above in the same location.
You may also see the comments on the Internet. To read the comments
on the Internet, take the following steps:
Go to the Docket Management System (DMS) Web page of the
Department of Transportation (http://dms.dot.gov/).
On that page, click on ``search.''
On the next page (http://dms.dot.gov/search/), type in the
four-digit docket number shown at the beginning of this document.
Example: If the docket number were ``MARAD-1999-1234,'' you would type
``1234.''
After typing the docket number, click on ``search.''
On the next page, which contains docket summary
information for the docket you selected, click on the desire comments.
You may download the comments.
Please note that even after the comment closing date, we will
continue to file relevant information in the Docket as it becomes
available. Further, some people may submit late comments. Accordingly,
we recommend that you periodically check the Docket for new material.
Title XI of the Act authorizes the Secretary of Transportation
(Secretary) to guarantee debt issued for the purpose of financing or
refinancing: (a) the construction, reconstruction or reconditioning of
U.S.-flag vessels or eligible export vessels built in United States
shipyards, and (b) the construction of advanced shipbuilding technology
and modern shipbuilding technology of a general shipyard facility
located in the United States. You should submit Title XI applications
to MARAD acting under authority delegated by the Secretary to the
Maritime Administrator. Prior to execution of a guarantee, we must,
among other things, make determinations of economic soundness of the
project, and your financial and operating capability. The Title XI
program enables you to obtain long-term financing on terms and
conditions that may otherwise not be available.
National Performance Review
In response to a 1993 recommendation from Vice President Gore's
National Performance Review team, President Clinton issued Executive
Order 12862, September 11, 1993, calling for a revolution within the
Federal Government to change the way it does business by putting
customers first and striving for a customer-driven government that
matches or exceeds the best service available in the private sector. In
October 1997, the National Performance Review team reported that
Federal agencies, implementing the Executive Order, had launched a
massive effort to improve governmental service and had made a
noticeable difference.
On December 1, 1997, in a memorandum to heads of Operating
Administrations and Departmental offices at the United States
Department of Transportation, Secretary of Transportation Rodney E.
Slater urged all Departmental offices and heads of Operating
Administrations to ask their customers what is important to them in the
kinds and quality of services they
[[Page 44154]]
want and what is their level of satisfaction with existing services.
Secretary Slater emphasized that it is ``this customer feedback that
will be the basis for improving, revising, adding, or deleting
standards when it makes sense and, ultimately, for helping us become a
more customer focused DOT.''
ANPRM
We published an advanced notice of proposed rulemaking (ANPRM) on
February 17, 1998, in the Federal Register (63 FR 7744) and are now
issuing this notice of proposed rulemaking concerning program
administration and how it can be improved. The ANPRM requested that you
provide us with your views about how the Title XI program is
administered and how it could be improved. Specifically, we solicited
comments on ten sets of questions, which can be grouped into the
following general categories:
The standard application Form MA-163, including the
requirement for vessel plans and specifications.
The requirements for information on your and/or your
operator's qualifications.
The requirements for financial information and certain
financial tests.
The requirements for information on economic soundness and
the economic soundness criteria.
The inclusion in the Title XI regulations of the
provisions of Maritime Administrative Order (MAO) No. 520-1, Amendment
2.
The documentation requirements for a closing on a
commitment to guarantee obligations.
On July 30, 1998, a notice was published in the Federal Register
advising that the Title XI application form and closing documentation
had been modified. The modifications were made after consideration of
your comments received in response to the ANPRM and the notice invited
your further comments on the modifications. Comments on the proposals
were due by the end of August, 1998. Because most of the revisions of
the application form and the closing documentation are not within the
scope of this rulemaking, your comments received on these issues are
not discussed herein, except to the limited extent that certain of the
application and documentation requirements are contained in the Title
XI regulations.
The ANPRM stated that any changes to the existing regulation that
we proposed would be the subject of a future notice of proposed
rulemaking. Our proposed changes are the subject of this rule. The
following is a summary of the comments we received by nine commenters
on the ANPRM which are divided into the above-mentioned categories,
with the omission of the categories concerning the application form and
closing documentation, for the reason previously discussed.
Applicant and Operator Qualifications
We solicited your comments as to whether the requirements for
information on the your and/or your operator's qualifications
referenced in section 298.12 are unnecessary, redundant or not
generally required in commercial transactions of this type.
Additionally, we solicited your comments as to whether the requirements
ask sufficient information to permit us to screen out inexperienced and
inappropriate applicants and operators. Finally, we solicited comments
on what specific changes, if any, you thought should be made to the
Title XI regulations.
As a general matter, you stated that too much information is
required in section 298.12 regarding the applicant's and operator's
qualifications, particularly for established companies and exceeds that
ordinarily requested in commercial transactions. One commenter stated
that this section is largely formatted and phrased for U.S. based firms
and should be rewritten to focus more broadly on the global community.
The commenter suggested that national shipping or shipbuilder's
associations could endorse an applicant's qualifications. Another
commenter stated that listing all vessels owned and operated is
unnecessary as a brief statement for each type of equipment with the
number and average vessel age should suffice. The commenter also
maintained that naming each officer, director, and their principal
business activity for the past five years is unnecessary as operational
proficiency of company personnel is addressed under the economic
soundness section of the regulations.
Regarding the applicant and operator qualification requirements,
one commenter stated that tough requirements should be maintained to
ensure that the Title XI project fosters long term Title XI goals.
Another commenter suggested that the shipowner's operating ability
should be addressed only insofar as it bears on market-share viability
and preserving the ship asset value.
Financial Requirements
We asked whether the financial information requested in section
298.13 is unnecessary or redundant and if it is sufficient to permit us
to make valid determinations. We also solicited comments on whether the
financial requirements pose impractical or excessive tests and on
suggested changes to the regulations.
With regard to the financial information requirements, comments
were received concerning the requirement that, in the case of an
eligible export vessel application, the applicant may provide financial
information in the normal accounting system you are using provided that
it is an accepted accounting system in your country of origin and
provided that you submit a reconciliation of the major differences
between the accounting system employed and U.S. Generally Accepted
Accounting Principles (GAAP). Several commenters believe that the
requirement for reconciliation of financial statements with GAAP is
time-consuming, burdensome, and unnecessary. One commenter stated that
we should either have the ability to analyze the financial statements
as prepared by the applicant or should retain an accounting firm to
handle the reconciliation to GAAP. Other commenters stated that we
should accept statements prepared in accordance with international
accounting standards.
We received several comments on the question of whether the
financial requirements in section 298.13 pose impractical or excessive
tests. One commenter stated that any significant changes to the
financial requirements to make them more lenient would be unfair to
previous applicants who were required to meet, and would still be
subject to, the existing requirements. Another commenter thought that
the existing qualifying requirements were too rigid and not current
with commercial practice which focuses on coverage ratios. A third
commenter stated that MARAD needs to assess an applicant's market share
or its balance sheet but not both.
With respect to specific requirements, one commenter believes that
the requirement for the Owner as Operator to maintain an equity level
of 90 percent of the equity as shown on its most recent audited
financial statement should be eliminated because this requirement is
excessively restrictive to the Owner; the requirement of a 2:1 debt to
equity ratio as well as the working capital requirements should be
sufficient to ensure debt repayment. Another commenter believes that we
should be more flexible with regard to the requirement for
subordination of debt considered as equity.
We received some comments concerning the need for a waiver for the
[[Page 44155]]
inclusion of foreign material in vessel actual cost. One commenter
recommended that all exclusions of foreign components and services in
Title XI financing be waived so that U.S. shipyards have the greatest
opportunity to attract new foreign customers. The commenter stated that
many foreign shipowners specify outfitting, propulsion, bridge
electronics or accommodation items that are original equipment
manufactured in foreign countries in large part because the U.S.
manufacturing industry has stopped producing the items or does not meet
global standards. The commenter stated that ``principles that apply to
automobiles or computers may be considered so that the U.S. steel,
assembly labor and overhead costs are the principal factors required
for Title XI guarantees. When the U.S. share of the global shipbuilding
market approaches five percent, then the existing restrictions could be
reevaluated and reapplied.'' Another commenter believes that the
exclusion of foreign content from actual cost is seen as arrogant in
the international marketplace and adds difficulty to selling for
export. The commenter states that a foreign buyer often has a distinct
main engine preference because of his existing fleet and usually wants
equipment he can resupply or repair locally. The commenter recommended
that we scrap the foreign content waiver or revise it to conform to the
Export-Import Bank's 15 percent foreign content allowance with no
waiver and a higher percentage with a waiver.
Economic Soundness
We requested comments concerning the information requirements for
an economic soundness determination under Section 298.14. We asked if
the information required is unnecessary or redundant and if it is
sufficient to permit us to make valid determinations. We also requested
comments as to whether the requirements pose impracticable or excessive
tests and what specific changes should be made.
Regarding the information required under section 298.14, one
commenter stated that it is excessive. Another commenter said that the
economic soundness criteria should be streamlined. A third commenter
recommended consideration of additional economic factors such as double
hull or safety or environmental requirements.
As to the criteria on which an economic soundness finding is based,
several commenters suggested we should look not only at the cash flow
generated by the project to determine if the borrower will have the
ability to repay the Title XI debt but also at the overall financial
strength of the applicant. Two commenters said that the economic
soundness should be judged not only on the applicant's ability to
ultimately repay the obligations but also upon the ability to
successfully operate the project as a stand-alone project. Another
respondent said that the applicant's demonstrated ability to repay its
debts should be our primary criteria for approval and that we should
place a greater emphasis on the applicant's overall credit and
operational quality as opposed to the economic soundness of a project.
One commenter said that the economic soundness criteria should consider
the overall corporate entity rather than the specific project. Two
respondents stated that the criteria should be tailored to the specific
purpose of the application (vessel financing vs. shipyard
modernization).
MAO 520-1, Amendment 2
We solicited as to whether the provisions of MAO 520-1, Amendment
2, should be included in the regulations. The administrative guidelines
in the MAO were intended to clarify our existing policies and
procedures with respect to economic considerations employed in
evaluating Title XI applications.
Four commenters stated that the MAO provisions should be
incorporated into the Title XI regulations to provide clarification and
additional information as our requirements. Two of these commenters
believe that the inclusion of the MAO will properly place emphasis on
operating cash flow, with one commenter adding that historical
operating experience will be emphasized as well. Another commenter
stated that any changes in core policy should be determined before
determining what policy belongs in the regulations.
Miscellaneous Issues
We received several comments on miscellaneous other requirements of
the Title XI program. Two commenters opposed the lump sum prepayment
feature of the guarantee fee, stating respectively that it is a
disincentive to attracting business to U.S. shipyards and that it
amounts to a prepayment penalty. One commenter stated that the
performance bonding requirement and progress payment feature of
construction period financing makes construction period financing
prohibitive in terms of cost. Another commenter urged that we more
proactively assist U.S. shipbuilders in obtaining business by
expediting the Title XI review process and approving more risky
projects. Finally, a commenter suggested that we consider disclosing to
all applicants the range of fees charged by bond underwriters and the
customary spread over the Treasury curve.
We advised in the ANPRM that, to seek further clarification of the
written issues raised in response to the ANPRM, we may subsequently
hold a public meeting if we believe that such a meeting would be
helpful. Following a review of the detailed and specific comments
received in response to the ANPRM, we have determined that such a
public meeting is not necessary.
Whenever reference is made in these regulations to forms prescribed
by us for applications or other filing requirements, the format of such
forms in effect prior to the effective date of these regulations may be
used pending revision and issuance of new forms, which must be approved
by the Office of Management and Budget. To the extent necessary to
reflect statutory requirements, any form submitted may be modified or
supplemented to facilitate processing, but until new forms have been
approved, these regulations do not require more extensive paperwork or
reporting requirements than exist under the present Title XI
regulations.
Discussion of Rulemaking Text
The discussion that follows notes where changes are proposed to be
made to the Title XI regulations and the rationale therefor, and, where
relevant, states why particular recommendations/suggestions have not
been adopted.
We are proposing to amend our Obligation Guarantees regulations at
46 CFR Part 298. The proposed amendments are summarized as follows:
Section 298.2 Definitions
Section 298.2 is intended to provide convenient reference to the
meaning of significant terminology used in Part 298. The definitions
are based principally on statutory derivation and reflect the letter
designation of the paragraphs respectively, contained in the final rule
published on May 9, 1996, as amended on September 8, 1997, or as
proposed to be redesignated in this rulemaking. As proposed:
Paragraph (c), ``Advanced Shipbuilding Technology'' is changed in
order to include other modernization elements which are not previously
listed in the definition and which contribute to a shipyard's
efficiency or productivity.
[[Page 44156]]
Paragraph (n), ``Guarantee Fee'' is changed to delete the
references to an annual fee and continuing Guarantees. The regulations
now require that the guarantee fee for the entire term of the financing
be paid in advance at the initial funding of the transaction, with no
refund in the event the Obligations are retired early.
Paragraph (o), ``Indenture Trustee'' is changed to increase the
amount of combined capital and surplus an indenture trustee must have
to at least $25,000,000 as the current amount of $3,000,000 is not
adequate.
Section 298.3 Applications
Paragraph (b) is amended to reflect that only two sets of
documentation must be submitted to the Secretary for review.
Paragraph (d) is amended to delete the provision that, if an
applicant does not claim a Freedom of Information Act (FOIA) exemption
at the time an application or amendment is filed, MARAD will not oppose
any subsequent request for disclosure pursuant to FOIA. Deletion of
this provision reflects actual agency practice, which is to allow a
request for exemption under FOIA at any time.
Paragraph (e) is amended to clarify that priority will be given for
processing applications for vessels capable of serving as United States
naval and military auxiliary in time of war or national emergency. In
addition, the priority given to applications from general shipyard
facilities that have engaged in naval vessel construction and that have
pilot projects for shipyard modernization and vessel construction is
being eliminated due to the fact that all the funds previously
appropriated to the Department of Defense and transferred to the
Department of Transportation for the Title XI program have been
expended.
Section 298.11 Vessel Requirements
Paragraph (a) of this section is being amended to clarify that the
vessel must be constructed in the United States.
Paragraph (b) of this section is revised to provide that the
Secretary may contact the shipyard to request that it submit additional
technical data, backup cost details, and other evidence if the
Secretary has insufficient data.
Paragraph (c) of this section is being amended to delete the last
sentence which is redundant with the last sentence of paragraph (a) of
this section and to conform the regulations to our present practices
which permit a U.S.-flag constructed vessel to meet the highest
classification standard of a classification society other than the
American Bureau of Shipping so long as the society meets the inspection
standards of the United States Coast Guard.
Section 298.12 Applicant and Operator's Qualifications
MARAD concurs that too much information is requested in this
section particularly with respect to the applicant's existing vessels,
and certain background data, and the section has been modified to
reduce the information required. With respect to the suggestion that
the endorsement of industry associations be utilized by MARAD, the
regulations do not preclude MARAD's consideration of such an
endorsement when evaluating the applicant's and/or operator's
qualifications.
A paragraph is being added to this section to reflect the MAO 520-1
provision requiring that an operator's historical performance record be
considered in evaluating operating ability.
Section 298.13 Financial Requirements
MARAD is not proposing an amendment to paragraph (a)(2) of this
section to eliminate the requirement for a waiver in order for foreign
items to be included in Actual Cost. MARAD's interest is in promoting a
shipbuilding industry including both shipyards and suppliers.
Therefore, it would be inappropriate to permit wholesale use of foreign
items in Title XI financings when comparable items are available from
U.S. suppliers. MARAD believes such a practice would have an adverse
impact on the U.S. shipbuilding industry as a whole. However, requests
for waivers to include foreign items have not been unreasonably
withheld by MARAD, so that the no-foreign-content-requirement without a
waiver has not had a negative impact on the shipyards or shipowners.
Therefore, MARAD will continue to review inclusion of foreign items on
a case-by-case basis.
MARAD believes that the current inclusion in paragraph (a)(2) of
the illustration of how the cost of foreign components of the hull and
superstructure may be used to satisfy an applicant's equity
requirements is unnecessary. Therefore, MARAD is deleting the
illustration from the paragraph and the one sentence which refers to
the illustration in the paragraph of the regulation.
The reference to guarantee fees in paragraph (a)(2)(iv) is being
deleted as guarantee fees are eligible for inclusion in Actual Cost.
MARAD is proposing to amend paragraph (a)(4) to permit, in the case
of Eligible Export Vessels, the acceptance of financial statements that
are not reconciled to U.S. GAAP if a satisfactory justification is
provided concerning the inability to reconcile. MARAD proposes to
further amend the paragraph to eliminate the requirement for a debt
amortization schedule and sources and uses statement, and to
incorporate current financial definitions.
MARAD does not believe a change in financial requirements at
Closing as set forth in paragraph (d) is necessary because applications
are analyzed on a case-by-case basis and, where MARAD deems the
existing qualifying financial requirements to be inappropriate, Section
298.13(h) authorizes the waiver of or modifications to the financial
requirements if there is adequate security for the Guarantees. This
authority allows MARAD to consider coverage ratios as appropriate.
MARAD believes that the 90 percent equity test in paragraph
(d)(1)(ii)(B) of this section is useful and is not proposing an
amendment to this paragraph. While the working capital and leverage
tests are essential in analyzing the financial condition of the
company, they do not necessarily identify reductions in net worth which
are often an important element in determining a company's financial
condition. Moreover, as the net worth amount is established only once,
at the initial funding of the transaction, companies that are meeting
their projected revenues and expenses should be able to continue to
meet this requirement. Therefore, elimination of the 90 percent net
worth requirement is not warranted.
MARAD is proposing elimination of the special financial
requirements set forth in paragraph (e) due to the restrictive nature
of the covenants that accompany these requirements and the fact that
companies have not elected this alternative in the recent past.
Therefore, in order to make clear that there is only one set of
financial requirements, the word ``primary'' is being deleted from
paragraph (d) and, later in the regulation, paragraphs 298.35(b),
298.35(e), and 298.35(e)(5).
MARAD is not proposing to change paragraph (g) of this section
which allows the applicant to fund the 12\1/2\ percent equity
requirement with subordinated debt. If MARAD allows greater flexibility
with regard to the subordination requirements, the repayment of the
Title XI debt portion of the transaction could be jeopardized.
Section 298.14 Economic Soundness
MARAD recognizes that much of the information requested under
section 298.14 (a)(2)(iii) and (iv) was developed
[[Page 44157]]
for applications from companies involved in a liner service. MARAD has
taken steps to simplify the regulations by reducing or eliminating
requested information. Specifically, sections 46 CFR 298.14(a)(2)(iii),
(iv), and (v), requesting information on expenses, have been deleted
and are replaced by a new paragraph (iii) which will encompass all
three parts. The new paragraph differentiates between applications for
vessel financing and shipyard modernization projects.
MARAD does not propose to add a requirement to the economic
soundness section concerning the applicant's financial strength because
the existing requirements of Section 298.13, Financial Requirements,
already require MARAD to make certain determinations concerning the
financial position of the ultimate transaction credit.
In order to clarify the criteria used for economic soundness
findings, MARAD proposes to include in this section the provisions of
MAO 520-1 relating to economic soundness. Specifically, section (b) is
being amended to include requirements concerning the ability to service
debt at the time of delivery which will be based on market conditions
at that time, and that primary consideration shall be given to
operating cash flow. To enable MARAD to analyze cash flow, the
applicant is requested to provide a five-year forecast of operating
cash flow.
Section 298.15 Investigation Fee
Paragraph (b) of this section is being revised by correcting the
reference to the filing fee to $5,000.
Section 298.16 Substitution of Participants
Paragraph (a) of this section is being amended to delete the last
sentence which references an annual guarantee fee.
Section 298.18 Financing Advanced or Modern Shipbuilding Technology
Paragraph (a) of this section is being amended to eliminate from
the initial criteria for Guarantee approval consideration of whether
Guarantees will aid in the transition of a shipyard from naval to
commercial shipbuilding. MARAD believes that giving weight to this
factor could discourage otherwise desirable modernization projects from
shipyards that have not engaged in naval vessel construction.
Section 298.19 Financing Eligible Export Vessels
Paragraph (b)(3) of this section is being modified by deleting the
reference to the Export-Import Bank of the United States since the
Export-Import Bank's risk assessments are reflected in the Inter-Agency
Country Risk Assessment System.
Section 298.20 Term, Redemptions and Interest Rate
Paragraph (a)(2) of this section is being amended to clarify that
for multiple vessels the maturity date of the Guarantees may be less
than but in no event more than twenty-five years from the date of
delivery from the shipyard of the last of multiple vessels but that the
amount of the Guarantees shall relate to the depreciated actual cost of
the multiple vessels as of the date of the Closing.
Section 298.21 Limits
This section is being amended to specify that no foreign, federal,
state or local taxes, user fees, or other governmental charges shall be
included in actual cost.
Section 298.22 Amortization of Obligations
The parenthetical phrase ``straight line basis'' is to be replaced
with the phrase ``level principal'' to reflect current GAAP
terminology.
Section 298.23 Refinancing
This section has been amended to clarify MARAD's position regarding
the refinancing of debt on Advanced or Modern Shipbuilding Technology.
Refinancing of non-Title XI debt on Advanced or Modern Shipbuilding
Technology is not permitted.
Section 298.24 Financing Facilities and Equipment Related to Marine
Operations
This section is deleted in its entirety as there is no current
authority for MARAD to finance facilities and equipment related to
marine operations.
Section 298.30 Nature and Content of Obligations
This section is amended to clarify that an indenture trustee is not
required under MARAD's documents.
Section 298.31 Mortgage
This section has been amended to correct that a mortgage shall be
filed with the United States Coast Guard's National Vessel
Documentation Center.
Section 298.32 Required Provisions in Documentation
Section 298.32 (a)(1) remains unchanged. Under the current Title XI
regulations, the Secretary may waive or modify the performance bond
requirement, upon determining that the shipyard or manufacturer of
Advanced or Modern Shipbuilding Technology has sufficient financial
resources and operational capacity to complete the project. In
instances where sufficient resources cannot be demonstrated, MARAD's
interests as a guarantor must be fully protected. Furthermore, inasmuch
as Section 298.21 of this part provides for performance bond premiums
to be included as an item of actual cost and therefore financeable up
to a maximum of 87\1/2\ percent, MARAD finds that the bonding
requirement does not constitute an inordinate out of pocket expense.
MARAD proposes to modify Section 298.32 to delete the word
``annual'' in paragraph (b)(4) in reference to citizenship filing
requirements. The citizenship requirements for the Title XI program
were modified by a final rule which was published in the Federal
Register and became effective on September 8, 1997, which no longer
required the filing of annual citizenship affidavits for Title XI
obligors.
Section 298.33 Escrow Fund
This section has been modified to conform to the documentation in
the general provisions of the new security agreement.
Section 298.34 Construction Fund
This section has been modified to clarify the requirements
regarding the construction fund and to eliminate the current
redundancies in paragraphs (b) and (c) of this section regarding
withdrawals and deposits, the procedure for which is described in
Section 298.33 of this Part. MARAD requires that the items and amounts
for which reimbursement is requested have been satisfactorily
completed. To require otherwise, i.e., to issue interim payments prior
to completion of work, would increase MARAD's overall project risk.
MARAD must insure that adequate security exists for guarantees entered
into during construction.
In response to requests by commenters to terminate the construction
fund, legislation has been submitted to broaden our authority to hold
bond proceeds in the escrow fund and to eliminate the need for a
construction fund--see section 3 of H.R. 1557 introduced on April 26,
1999.
Section 298.35 Reserve Fund and Financial Agreement
This section has been modified in its entirety. Paragraph (c) of
this section regarding financial covenants for companies meeting the
special financial requirements has been deleted in its entirety
pursuant to the discussion
[[Page 44158]]
above in section 298.13(e). The references to a Title XI company
qualifying as either a section 12 or section 13 company are deleted and
two sets of covenants for all Title XI companies are provided. One set
of covenants will be imposed regardless of the company's financial
condition (primary covenants) and the second set of covenants will only
apply if the company does not meet the specific financial conditions
(supplemental covenants).
Section 298.38 Partnership Agreements
MARAD proposes to modify this section to cover limited liability
companies as well as partnership agreements.
Section 298.41 Remedies After Default
As all guarantee fees are to be paid up-front, it is proposed that
paragraph (c)(1) of this section be deleted.
Rulemaking Analyses and Notices
Executive Order 12866 (Regulatory Planning and Review)
This rulemaking has been reviewed under Executive Order 12866, and
it has been determined that this is not a significant regulatory
action. The rule is not likely to result in an annual effect on the
economy of $100 million or more. Also, it has been determined to be a
nonsignificant rule under the Department's Regulatory Policies and
Procedures. Because the economic impact should be minimal, further
regulatory evaluation is not necessary. These amendments are intended
only to simplify and clarify the procedural requirements for obtaining
Guarantees, principally to expedite the process for MARAD's review of
applications. Its purpose is to encourage the construction of ships in
U.S. shipyards both for the domestic and the export markets and to
modernize and improve general shipyard facilities in the United States.
MARAD is publishing these amendments as a notice of proposed
rulemaking, as necessary to carry out the Secretary's responsibilities
under Title XI and to improve the efficient administration of the Title
XI program.
This rulemaking document has been reviewed by the Office of
Management and Budget under Executive Order 12866, ``Regulatory
Planning and Review.''
Federalism
MARAD has analyzed this rulemaking in accordance with the
principles and criteria contained in Executive Order 12612 and has
determined that these regulations do not have sufficient federalism
implications to warrant the preparation of a Federalism Assessment.
Regulatory Flexibility Act
MARAD certifies that this regulation will not have a significant
economic impact on a substantial number of small entities because these
amendments are intended only to simplify and clarify the procedural
requirements for obtaining Guarantees, principally to expedite the
process for MARAD's review of applications.
Environmental Assessment
MARAD has considered the environmental impact of this rulemaking
and has concluded that an environmental impact statement is not
required under the National Environmental Policy Act of 1969.
Paperwork Reduction Act
This rulemaking contains reporting requirements that have
previously been approved by the Office of Management and Budget
(Approval No. 2133-0018). Use of the present Maritime Administration
Title XI Obligation Guarantees form will be continued pending revision
and issuance of new forms, which must be approved by the Office of
Management and Budget.
List of Subjects in 46 CFR Part 298
Loan programs-transportation, Maritime carriers, and Mortgages.
Accordingly, the Maritime Administration proposes to amend 46 CFR
part 298 as follows:
PART 298--OBLIGATION GUARANTEES
1. The authority citation for part 298 continues to read as
follows:
Authority: 46 App. U.S.C. 1114 (b), 1271 et seq, 49 CFR 1.66.
2. Section 298.2 is amended as follows:
a. By adding at the end of paragraph (2) of the definition of
``Advanced Shipbuilding Technology'' a semi-colon and the word, ``and''
and a new paragraph (3) to read as set forth below.
b. By revising the definition of Guarantee Fee, to read as set
forth below.
c. By amending the definition of Indenture Trustee, by removing the
number ``$3,000,000'' and adding in its place the number
``$25,000,000''.
d. By revising paragraph (2)(iv) of the definition of Preferred
Mortgage, to read as set forth below.
Sec. 298.2 Definitions.
* * * * *
Advanced shipbuilding technology * * *
(3) Other elements contributing to a shipyard's efficiency or
productivity assisting it to more effectively operate in the
shipbuilding industry.
* * * * *
Guarantee fee means the fee payable to the Secretary in
consideration for the issuance of the Guarantee.
* * * * *
Preferred Mortgage * * *
(2) * * *
(iv) Is otherwise in compliance with the provisions of Chapter 313
of Title 46 of the U.S. Code.
* * * * *
Sec. 298.3 [Amended]
3. Section 298.3 is amended as follows:
a. By removing the words ``exhibit and schedule'' in the fourth
sentence of paragraph (a), and adding in their place the words
``exhibits, schedules and attachments''.
b. By removing the number ``four'' in the first sentence of
paragraph (b)(2) and adding in its place the number ``two''.
c. By removing the third sentence in paragraph (d).
d. By amending the first sentence of paragraph (e) by adding before
the word ``naval'', the words ``United States'' and removing the third
sentence of this paragraph.
Sec. 298.11 [Amended]
4. Section 298.11 is amended as follows:
a. By adding in the first sentence of paragraph (a), between the
words ``Guarantee'' and ``is'', the phrase ``must be constructed in the
United States. It shall be'' and removing the word ``is''.
b. By adding in the second sentence of paragraph (b), between the
words ``Secretary'' and ``may'', the phrase ``may directly contact the
shipyard and''.
c. By revising the first sentence of paragraph (c), to read as
follows: ``The Vessel shall be constructed, maintained, and operated so
as to meet the highest classification, certification, rating, and
inspection standards for Vessels of the same age and type imposed by
the American Bureau of Shipping (ABS) or another classification society
that also meets the inspection standards of the United States Coast
Guard with respect to the documentation of U.S.-flag vessels, or in the
case of an Eligible Export Vessel, such standards as may be imposed by
a member of the International Association of Classification Societies
(IACS) classification societies to be ISO 9000 series registered or
Quality Systems Certificate Scheme qualified IACS
[[Page 44159]]
members who have been recognized by the United States Coast Guard as
meeting acceptable standards with such recognition including, at a
minimum, that the society meets the requirements of IMO Resolution
A.739(18) with appropriate certificates required at delivery, so long
as the home country of the IACS member accords equal reciprocity, as
determined by the Secretary, to United States classification
societies.''
d. By removing the last sentence of paragraph (c).
5. Section 298.12 is revised to read as follows:
Sec. 298.12 Applicant and operator's qualifications.
(a) Operator's qualifications. No Letter Commitment shall be issued
by the Secretary without a prior determination that the applicant,
bareboat charterer, or other Person identified in the application as
the operator of the Vessel or Advanced or Modern Shipbuilding
Technology, possesses the necessary experience, ability and other
qualifications to properly operate and maintain the Vessel(s) or
Advanced and Modern Shipbuilding Technology which serve as security for
the Guarantees, and otherwise to comply with all requirements of this
part.
(b) Identity and ownership of applicant. In order to assess the
likelihood that the project will be successful, the Secretary needs
information about the applicant and the proposed project. To permit
this assessment, each applicant shall provide the following information
in its application for Title XI guarantees.
(1) Incorporated companies. If the applicant or any bareboat
charterer is an incorporated company, it shall submit the following
identifying information:
(i) Name of company, place and date of incorporation, and tax
identification number, or if appropriate, international identification
number of the company;
(ii) Address of principal place of business; and
(iii) Certified copy of certificate of incorporation and bylaws.
(2) Partnerships, limited partnerships, limited liability
companies, joint ventures, associations, unincorporated companies. If
the applicant or any bareboat charterer is a partnership, limited
partnership, limited liability company, joint venture, association, or
unincorporated company, it shall submit the following identifying
information:
(i) Name of entity, place and date of formation, and tax
identification number, or if appropriate, international identification
number of entity;
(ii) Address of principal place of business; and
(iii) Certified copy of certificate of formation, partnership
agreement or other documentation forming the entity.
(3) Other entities. For any entity that does not fit the
descriptions in paragraphs (b)(1) and (b)(2) of this section, MARAD
will specify the information that the entity shall submit regarding its
identity and ownership.
(4) The Applicant and any bareboat charterer shall provide a brief
statement of the general effect of each voting agreement, voting trust
or other arrangement whereby the voting rights of any interest in the
Applicant or bareboat charterer are controlled or exercised by any
person who is not the holder of legal title to such interest.
(5) The Applicant and any bareboat charterer shall provide the
following information regarding the entity's officers, directors,
partners or members:
(i) Name and address;
(ii) Office or position; and
(iii) Nationality and interest owned (e.g. shares owned and whether
voting or non-voting).
(c) Applicants: Business and affiliations. The applicant shall
include:
(1) A brief description of the principal business activities during
the past five years of applicant;
(2) A list of all business entities that directly or indirectly,
through one or more intermediaries, control, are controlled by, or are
under common control with the applicant. Also indicate the nature of
the business transacted by each entity and the relationship between
these entities. This information may be presented in the form of a
chart. Indicate whether any of the affiliated entities have previously
applied for or received Title XI assistance;
(3) A statement indicating whether the applicant, any predecessor
or affiliated entity has been in bankruptcy or reorganization under any
insolvency or reorganization proceeding and if so, give details; and
(4) A statement indicating whether the applicant or any predecessor
or affiliated entity is now, or during the past five years has been, in
default under any agreement or undertaking with others or with the
United States of America, or is currently delinquent on any Federal
debt, and if so, provide explanatory information.
(5) A list of the applicant's banking references:
(i) Principal bank(s) or lending institutions(s)--name and address
(ii) Nature of relationship
(iii) Individual references. Name(s), telephone and fax number of
banking officer(s).
(d) Management of applicant. The applicant shall include:
(1) A brief description of the principal business activities during
the past five years of each officer, director, partner or member of the
applicant listed in paragraph (b)(5) of this section and if these
persons (have) act(ed) as executive officers in other entities,
indicate the names of these entities and whether such entities have
defaulted on any U.S. Government debt, and
(2) The name and address of each organization engaged in business
activities which have a direct financial relationship to those carried
on or to be carried on by the applicant with which any person listed in
paragraph (d)(2) of this section has any present business connection,
the name of each such person and, briefly, the nature of such
connection.
(e) Applicant's property and activity. The applicant shall provide:
(1) A brief description of the general character and location of
the principal assets employed in the business of the applicant, other
than vessels. Describe financial encumbrances, if any;
(2) Provide a general description of the vessels currently owned
and/or operated by the applicant or its affiliates and a description of
the areas of operation; and,
(3) In the case of an Eligible Shipyard which is an applicant for a
guarantee for Advanced or Modern Shipbuilding Technology, a brief
description of the general character (i.e., number of building ways,
launch method, drydocks and size) and location (i.e., water depth,
length of riverfront) of the principal properties of the applicant
employed in its business. Describe financial encumbrances, if any.
(f) Operating ability. (1) In the case of an applicant for a vessel
financing Guarantee, the applicant shall submit a detailed statement
showing its ability to successfully operate the Vessel(s). If a company
other than the applicant will operate the Vessel(s), then this
information shall be provided for the operating company together with a
copy of the operating agreement.
(2) The applicant shall submit a copy of any management
agreement(s) between the applicant and any related or unrelated
organization(s) which will affect the management of the Title XI vessel
or shipyard.
(3) In the case of an Eligible Shipyard which is an applicant for a
guarantee for Advanced or Modern Shipbuilding Technology, a detailed
statement shall be submitted showing the ability of the
[[Page 44160]]
applicant to successfully operate the shipbuilding technology,
including name, education, background of, and licenses held by, all
senior supervisory personnel concerned with the physical operation of
the shipbuilding technology.
(4) Where an operator has an historical performance record, this
record shall be considered in evaluating the operating ability of the
applicant. For newly formed entities, the performance of affiliates
and/or companies associated with the principals (where the principals
have a significant degree of control) shall be evaluated in determining
the operating ability of the applicant. However, unless the affiliates
or principals have an obligation with respect to the debt, historical
performance shall not be considered in evaluating the creditworthiness
of the application.
6. Section 298.13 is amended as follows:
a. By removing the sixth sentence in paragraph (a)(2)(i) and the
illustration entitled ``Illustration-Cost of Foreign Components
Satisfying Equity Requirements.'' in their entirety.
b. By removing the words, ``guarantee fees,'' in paragraph
(a)(2)(iv).
c. By removing all references to the word, ``primary'', in
paragraph (d).
d. By revising paragraph (a)(4)to read as set forth below.
e. By revising paragraphs (b)(2) through (b)(4), to read as set
forth below.
f. By removing existing paragraph (e), and redesignating paragraphs
(f), (g) and (h) as paragraphs (e), (f) and (g).
g. By removing ``paragraphs (d) and (e)'' in newly designated
paragraph (e) and adding ``paragraph (d)'' in its place.
h. By removing ``paragraphs (a)(3), (d) and (e)'' in newly
designated paragraph (f) and adding ``paragraphs (a)(3) and (d)'' in
its place.
Sec. 298.13 Financial requirements.
* * * * *
(a) * * *
(4) Financial information. The applicant shall provide the
following financial statements, footnoted to explain the basis for
arriving at the figures:
(i) The most recent financial statement of the applicant, its
parent and other significant participants, as applicable (year end or
intermediate), and the three most recent audited statements with
details of all existing debt. If the applicant is a new entity and is
to be funded from or guaranteed by external source(s), it shall provide
the above mentioned statements for such source(s) (for eligible export
vessels, the applicant's financial statements shall be in accordance
with U.S. generally accepted accounting principles (GAAP) if formed in
the U.S. or reconciled to GAAP if formed in a foreign country unless a
satisfactory justification is provided explaining the inability to
reconcile);
(ii) A pro forma balance sheet of the applicant and guarantor (if
applicable) as of the estimated date of execution of the Guarantees
reflecting the assumption of the Title XI Obligations, including the
current liability (for eligible export vessels, the applicant's
financial statements shall be in accordance with GAAP if formed in the
U.S. or reconciled to GAAP if formed in a foreign country unless a
satisfactory justification is provided explaining the inability to
reconcile); and,
(iii) Pro forma balance sheets of the applicant and guarantor (if
applicable) for five years subsequent to the Closing.
(b) * * *
(2) Working Capital shall mean the excess of current assets over
current liabilities, both determined in accordance with GAAP and
adjusted as follows:
(i) In determining current assets there shall be deducted:
(A) Any securities, obligations or evidence of indebtedness of a
Related Party or of any stockholder, director, officer or employee (or
any member of his family) of the Company or of such Related Party,
except advances to agents required for the normal current operation of
the Company's vessels and current receivables arising out of the
ordinary course of business and not outstanding for more than 60 days;
and
(B) An amount equal to any excess of unterminated voyage revenue
over unterminated voyage expenses.
(ii) In determining current liabilities there shall be deducted any
excess of unterminated voyage expenses over unterminated voyage
revenue.
(iii) In determining current liabilities there shall be added one
half of all annual charter hire and other lease obligations (having a
term of more than six months) due and payable within the succeeding
fiscal year, other than charter hire and such other lease obligations
already included and reported as a current liability on the Company's
balance sheet.
(3) Equity (net worth) means, as of any date, the total of paid-in
capital stock, paid-in surplus, earned surplus and appropriated
surplus, and all other amounts that would be included in net worth in
accordance with GAAP, but exclusive of:
(i) Any receivables from any stockholder, director, Officer or
employee of the Company or from any Related Party (other than current
receivables arising out of the ordinary course of business and not
outstanding for more than 60 days) and
(ii) Any increment resulting from the reappraisal of assets.
(4) Long Term Debt means, as of any date, the total notes, bonds,
debentures, equipment obligations and other evidence of indebtedness
that would be included in long term debt in accordance with GAAP. There
shall also be included any guarantee or other liability for the debt of
any other Person not otherwise included on the balance sheet.
7. Section 298.14 is amended as follows:
a. By adding after the first sentence in paragraph (a) the
following two sentences: ``The economic soundness and the applicant's
ability to repay the Obligations shall be the primary basis for the
Secretary's approval of a Letter Commitment. The collateral value of
the asset for which Obligations are to be issued shall be only a
secondary consideration in determining the applicant's ability to repay
the Obligations.''
b. By amending paragraph (a)(2)(ii) to add the following sentence
after the first sentence and before the second sentence: ``Vessel
revenue projections shall include shipping/hire rates for current
market conditions or market conditions expected to exist at the time of
vessel delivery, taking into account seasonal or temporary
fluctuations.''
c. By revising paragraph (a)(2)(iii) to read as set forth below.
d. By revising paragraph (a)(2)(iv) to read as set forth below.
e. By removing paragraph (a)(2)(v).
f. By adding to paragraph (b)(1)(i) the words ``or for'' after the
word ``by''.
g. By adding new paragraphs (b)(2) and (b)(3) to read as set forth
below.
Sec. 298.14 Economic soundness.
(a) Economic Evaluation. * * *
(2) Project Feasibility. * * *
(iii) Expenses. (A) For applications for vessel financing, a
statement of estimated vessel expenses including the following (where
applicable):
(1) A detailed breakdown of estimated vessel daily operating
expenses, including wages, insurance, maintenance and repair, fuel,
etc. and a detailed projection of anticipated costs associated with
long term maintenance of the vessel(s) such as drydocking and major
mid-life overhauls, with a time frame for these events over the period
of the Guarantee;
(2) If applicable, a detailed breakdown of those expenses
associated with the vessel(s) voyage, such as port fees,
[[Page 44161]]
agency fees and canal fees that are assessed as a result of the voyage;
and
(3) A detailed breakdown of annual capital costs and administrative
expenses, segregated as to:
(i) Interest on debt;
(ii) Principal amortization; and
(iii) Salaries and other administrative expenses (indicate basis of
allocation).
(B) For applications for Advanced or Modern Shipbuilding
Technology, a statement of estimated expenses related to the Advanced
or Modern Shipbuilding Technology, including the following (where
applicable):
(1) A detailed breakdown of estimated daily operating expenses for
the shipyard, such as wages, including staffing, and aggregated to a
straight-line, overtime and fringe benefits; utility costs; costs of
stores, supplies, and equipment; maintenance and repair cost; insurance
costs; and, other expenses (indicate items included); and
(2) A detailed breakdown of annual capital costs and administrative
expenses, segregated as to: interest on debt; principal amortization;
and salaries and other administrative expenses (indicate basis of
allocation).
(iv) Forecast of Operations. Utilizing the revenues and expenses
provided in paragraphs (a)(2)(ii) and (iii) of this section, the
applicant shall provide a forecast of operating cash flow, as defined
in paragraph (b)(3) of this section, for the Title XI project for the
first full year of operations and the next four years. The cash flow
statements should be footnoted to explain the assumptions used.
(b) * * *
(2) In cases where market conditions are inadequate for the
applicant to service the Obligation indebtedness at the time of vessel
delivery, or shipyard modernization completion, applications may be
approved only if there are sufficient outside sources of cash flow to
service such indebtedness.
(3) With respect to the asset for which Obligations are to be
issued, the operating cash flow to Obligation debt service ratio over
the term of the Guarantee shall be in excess of 1:1. Operating cash
flow is defined as revenues less operating and capital expenses
including taxes paid but exclusive of interest, accrued taxes,
depreciation and amortization for the Title XI asset. Debt service is
defined as interest plus principal.
Sec. 298.15 [Amended]
8. Section 298.15 is amended by removing the figure ``$1,000'' in
the second sentence of paragraph (b), and adding in its place the
figure ``$5,000''.
Sec. 298.16 [Amended]
9. Section 298.16 is amended by removing the last sentence of
paragraph (a).
Sec. 298.18 [Amended]
10. Section 298.18 is amended by removing the words, ``will aid in
the transition from naval shipbuilding to commercial ship construction
for domestic and export sales'', from the second sentence of paragraph
(a).
Sec. 298.19 [Amended]
11. Section 298.19 is amended by removing the words ``by the
Export-Import Bank of the United States and country risk analyses''
from the last sentence of paragraph (b)(3).
Sec. 298.20 [Amended]
12. Section 298.20, paragraph (a)(2) is amended by adding after the
word ``Guarantees'' and before the semi-colon, the words ``but that the
amount of the Guarantees shall relate to the amount of the depreciated
actual cost of the multiple Vessels as of the Closing''.
13. Section 298.21 is amended by revising paragraph (c)(7) to read
as follows:
Sec. 298.21 Limits.
* * * * *
(c) * * *
(7) Foreign, federal, state or local taxes, user fees, or other
governmental charges.
* * * * *
Sec. 298.22 [Amended]
14. Section 298.22 is amended by removing from the second sentence
of the introductory text the parenthetical phrase ``straight line
basis'' and adding in its place the phrase ``level principal''.
15. Section 298.23 is revised to read as follows:
Sec. 298.23 Refinancing.
The Secretary may approve guarantees with respect to Obligations to
be secured by one or more Vessels or Advanced or Modern Shipbuilding
Technology and issued to refinance: existing Title XI debt only for
Advanced or Modern Shipbuilding Technology, and existing debt for
Vessels, whether or not covered by Title XI mortgage insurance or
Guarantees, so long as the existing debt has been issued for one of the
purposes set forth in Sections 1104(a)(1) through (4) of the Act.
Section 1104(a)(1) of the Act requires that, if the existing
indebtedness was incurred more than one year after the delivery or
redelivery of the related Vessel or Advanced or Modern Shipbuilding
Technology, the proceeds of such Obligations shall be applied to the
construction, reconstruction or reconditioning of other Vessels or
Advanced or Modern Shipbuilding Technology. The Secretary may permit
the refinancing of existing debt but only if any security lien on the
Vessel(s) or Advanced or Modern Shipbuilding Technology is discharged
immediately prior to the placing of any Mortgage thereon by the
Secretary. The applicant shall satisfy all the eligibility requirements
set forth in subpart B of this part, including economic soundness, as
may be necessary.
Sec. 298.24 [Removed and Reserved]
16. Section 298.24 is removed and reserved.
Sec. 298.30 [Amended]
17. Section 298.30 is amended by adding in the first sentence after
the word ``Trustee'', before the period, the words ``if any''.
18. Section 298.31 is amended by revising paragraph (a)(5) to read
as follows:
Sec. 298.31 Mortgage.
(a) * * *
(5) The Mortgage shall be filed with the United States Coast
Guard's National Vessel Documentation Center, or with the proper
foreign authorities with respect to an Eligible Export Vessel, and with
respect to assets of a General Shipyard Facility a Mortgage and
security interest shall be filed with the proper authorities within the
appropriate state and shall be delivered to the Secretary after being
recorded.
* * * * *
Sec. 298.32 [Amended]
19. Section 298.32, is amended by removing the word ``annual'' in
the first sentence of paragraph (b)(4).
20. Section 298.33 is revised to read as follows:
Sec. 298.33 Escrow fund.
(a) Escrow Fund Deposits. At the time of the sale of the
Obligations, the Obligor shall deposit with the Secretary in an escrow
fund (the ``Escrow Fund'') all of the proceeds of that sale unless the
Obligor is entitled to withdraw funds under paragraph (b) of this
section. The Obligor shall also deposit into the Escrow Fund on the
Closing date an amount equal to six months interest at the rate borne
by the Obligations, unless the Secretary shall find the existence of
adequate consideration or accept other consideration in lieu of the
interest deposit.
(b) Escrow Fund Withdrawals. (1) The Secretary shall, within a
reasonable time after written request from the Obligor,
[[Page 44162]]
disburse from the Escrow Fund directly to the Indenture Trustee, any
Paying Agent for such Obligations, or any other Person entitled
thereto, any amount which the Obligor is obligated to pay, or to the
Obligor for any amounts it has paid, on account of the items and
amounts or any other items approved by the Secretary, provided that,
the Secretary is satisfied with the accuracy and completeness of the
information contained in the following submissions:
(i) A responsible officer of the Obligor shall deliver an officer's
certificate, in form and substance satisfactory to the Secretary,
stating that:
(A) There is neither a default under the construction contract nor
the Security Agreement;
(B) There have been no occurrences which have or would adversely
and materially affect the condition of the Vessel, its hull or any of
its component parts, or the Technologies;
(C) The amounts of the request is in accordance with the
construction contract including the approved disbursement schedule and
each item in these amounts is properly included in the Secretary's
approved estimate of Actual Cost;
(D) With respect to the request, once the contractor is paid there
will be no liens or encumbrances on the applicable Vessel, its hull or
component parts, or the Technologies for which the withdrawal is being
requested except for those already approved by the Secretary; and
(E) If the Vessel or Technologies has already been delivered, it is
in class and is being maintained in the highest and best condition. The
Obligor shall also attach an officer's certificate of the shipyard and
other general contractors, in form and substance satisfactory to the
Secretary, stating that there are no liens or encumbrances as provided
in paragraph (d) of this section and attaching the invoices and
receipts supporting each proposed withdrawal to the satisfaction of the
Secretary.
(ii) No payment or reimbursement under this Section shall be made:
(A) To any Person until the Construction Fund, if any, has been
exhausted,
(B) To any Person until the total amount paid by or for the account
of the Obligor from sources other than the proceeds of such Obligations
equals at least 12\1/2\% of the Actual Cost of the Vessel or
Technologies is made;
(C) To the Obligor which would have the effect of reducing the
total amounts paid by the Obligor pursuant to paragraph (B) of this
section; or
(D) To any Person on account of items, amounts or increases
representing changes and extras or owner furnished equipment, if any,
unless such items, amounts and increases shall have been previously
approved by the Secretary; provided, however, that when the amount
guaranteed by the Secretary equals 75% or less of the Actual Cost and
the Obligor demonstrates to the Secretary's satisfaction the ability to
pay in the remaining 25%, then after the initial 12\1/2\% of Actual
Cost has been paid by or on behalf of the Obligor for such Vessel or
Technologies and up to 37\1/2\% of Actual Cost has been withdrawn from
the Escrow Fund for such Vessel or Technologies, the Obligor shall pay
the remaining Obligor's equity of at least 12\1/2\% (as determined by
the Secretary) before additional monies can be withdrawn from the
Escrow Fund relating to such Vessel or Technologies.
(2) The Secretary shall not be required to make any disbursement
except out of the cash available in the Escrow Fund. If any sale or
payment on maturity shall result in a loss in the principal amount of
the Escrow Fund invested in securities so sold or matured, the
requested disbursement from the Escrow Fund shall be reduced by an
amount equal to such loss, and the Obligor shall pay to any Person
entitled thereto, the balance of the requested disbursement from the
Obligor's funds other than the proceeds of such Obligations.
(3) If the Secretary assumes the Obligor's rights and duties under
the Obligations or the Secretary pays the Guarantees, all amounts in
the Escrow Fund (including realized income which has not yet been paid
to the Obligor), shall be paid to the Secretary and be credited against
any amounts due or to become due to the Secretary under the Security
Agreement and the Secretary's Note.
(4) Other rights and duties with respect to withdrawals from the
Escrow Fund shall be set out in the closing documentation in form and
substance satisfactory to the Secretary.
(c) Investment and liquidation of the Escrow Fund. The Secretary
may invest the Escrow Fund in obligations of the United States. The
Secretary shall deposit the Escrow Fund into an account with the U.S.
Treasury Department and upon agreement with the Obligor, shall deliver
to the U.S. Treasury Department instructions for the investment,
reinvestment and liquidation of the Escrow Fund. The Secretary shall
have no liability to the Obligor for acting in accordance with such
instructions.
(d) Income on the Escrow Fund. Unless there is an existing default,
any income realized on the Escrow Fund shall be paid to the Obligor
upon receipt by the Secretary of such income.
(e) Termination date of the Escrow Fund. The Escrow Fund will
terminate 90 days after the delivery date of the last Vessel or
Technologies covered by the Security Agreement (the ``Termination
Date''). In the event that on such date the payment of the full amount
of the aggregate Actual Cost of all of the Vessels or Technologies has
not been made or the amounts with respect to such Actual Cost are not
then due and payable, then the Obligor and the Secretary by written
agreement shall extend the Termination Date for such period as they
shall determine is sufficient to allow for such contingencies. Any
amounts remaining in the Escrow Fund on the Termination Date which are
in excess of 87\1/2\% or 75% of Actual Cost, as the case may be, shall
be applied to retire a pro rata portion of the Obligations.
21. Section 298.34 is revised to read as follows:
Sec. 298.34 Construction fund.
(a) Circumstances requiring deposits. When the Security Agreement
provides for an Escrow Fund and the Obligor submits a claim to the
agency that it has previously paid for items of Actual Cost and is
seeking reimbursement at the Closing, the Obligor shall also make
Construction Fund deposits as follows. At the time of the sale of the
Obligations, the Obligor shall deposit with the Depository cash equal
to the principal amount of the Obligations issued at such time less the
sum of the aggregate principal amount then required to be in the Escrow
Fund and the amount in excess of 12\1/2\ or 25 percent of Actual Cost
or Depreciated Actual Cost, as applicable (whichever is payable under
Sec. 298.33(e)) which the Secretary determines has been paid by or for
the account of the Obligor. The Secretary shall have a security
interest in and control over the Construction Fund and its proceeds.
The balance of the proceeds from the sale of the Obligations, after
depositing the amounts required to be deposited in the Escrow Fund and/
or the Construction Fund, shall be retained by the Obligor.
(b) Withdrawals and redeposits. The Secretary shall, subject to the
satisfaction of any applicable conditions contained in the Security
Agreement, periodically approve disbursements from the Construction
Fund under the same procedures and conditions as from the Escrow Fund
in Sec. 298.33(e), except the request for withdrawal will not be
subject to Sec. 298.33(e)(1) and (h)(1). The administration of the
Construction Fund
[[Page 44163]]
shall also be subject to the terms and conditions of Sec. 298.33(i),
(j), and (k).
22. Section 298.35 is amended as follows:
a. By revising paragraph (b) to read as set forth below.
b. By removing paragraph (c) and redesignating paragraphs (d)
through (g) as paragraphs (c) through (f).
Sec. 298.35 Reserve Fund and Financial Agreement.
* * * * *
(b) Financial covenants. There will be two sets of covenants. One
set is covenants that will be imposed regardless of the Company's
financial condition (primary covenants). The other set of covenants
will be imposed only if the Company does not meet specific financial
conditions (supplemental covenants). The primary and supplemental
covenants are to be set forth in the Agreement. Covenants shall be
imposed on the Company as follows:
(1) Primary covenants. So long as Guarantees are in effect the
Company shall not, without the prior written consent of the Secretary:
(i) Except as hereinafter provided, make any distribution of
earnings, except as may be permitted by paragraphs (b)(1)(i)(A) or (B)
of this section:
(A) From retained earnings in an amount specified in paragraph
(b)(1)(i)(C) of this section, provided that, in the fiscal year in
which the distribution of earnings is made there is no operating loss
to the date of such payment of such distribution of earnings, and there
was no operating loss in the immediately preceding three fiscal years,
or there was a one-year operating loss during the immediately preceding
three fiscal years, but such loss was not in the immediately preceding
fiscal year, and there was positive net income for the three year
period;
(B) If distributions of earnings may not be made under paragraph
(b)(1)(i)(A) of this section, a distribution can be made in an amount
equal to the total operating net income for the immediately preceding
three fiscal year period, provided that, there were no two successive
years of operating losses, in the fiscal year in which such
distribution is made, there is no operating loss to the date of such
distribution, and the distribution of earnings made would not exceed an
amount specified in paragraph (b)(1)(i)(C) of this section;
(C) Distributions of earnings may be made from earnings of prior
years in an aggregate amount equal to 40 percent of the Company's total
net income after tax for each of the prior years, less any
distributions that were made in such years; or the aggregate of the
Company's total net income after tax for such prior years, provided
that, after making such distribution, the Company's Long Term Debt does
not exceed its Net Worth. In computing net income for purposes of this
paragraph (b)(1)(i)(C), extraordinary gains, such as gains from the
sale of assets, shall be excluded;
(ii) Enter into any service, management or operating agreement for
the operation of the Vessel or the Technologies (excluding husbanding
type agreements), or appoint or designate a managing or operating agent
for the operation of the Vessel or the Technologies (excluding
husbanding agents) unless approved by the Secretary;
(iii) Sell, mortgage, transfer, or demise charter the Vessel or the
Technologies or any assets to any non-Related Party except as permitted
in paragraph (b)(1)(vii) of this section or sell, mortgage, transfer,
or demise charter the Vessel or any assets to a Related Party, unless
such transaction is at a fair market value as determined by an
independent appraiser acceptable to the Secretary, and a total cash
transaction or, in the case of demise charter, the charter payments are
cash payments;
(iv) Enter into any agreement for both sale and leaseback of the
same assets so sold unless the proceeds from such sale are at least
equal to the fair market value of the property sold;
(v) Guarantee, or otherwise become liable for the obligations of
any other Person, except in respect of any undertakings as to the fees
and expenses of the Indenture Trustee, except endorsement for deposit
of checks and other negotiable instruments acquired in the ordinary
course of business and except as otherwise permitted in this section;
(vi) Directly or indirectly embark on any new enterprise or
business activity not directly connected with the business of shipping
or other activity in which the Company is actively engaged;
(vii) Enter into any merger or consolidation or convey, sell,
demise charter, or otherwise transfer, or dispose of any portion of its
properties or assets (any and all of which acts are encompassed within
the words ``sale'' or ``sold'' as used herein), provided that, the
Company shall not be deemed to have sold such properties or assets if
the net book value of the aggregate of all the assets sold by the
Company during any period of 12 consecutive calendar months does not
exceed ten percent of the total net book value of all of the Company's
assets; the Company retains the proceeds of the sale of assets for use
in accordance with the Company's regular business activities; and the
sale is not otherwise prohibited by paragraph (b)(1)(iii) of this
section. Notwithstanding any other provision of this paragraph
(b)(1)(vii), the Company may not consummate such sale without the prior
written consent of the Secretary if the Company has not, prior to the
time of such sale, submitted to the Secretary the financial statement
referred to in paragraph (a) of this section, and any attempt to
consummate a sale absent such approval shall be null and void ab
initio.
(2) Supplemental Covenants which may become applicable. Unless,
after giving effect to such transaction or transactions, during any
fiscal year of the Company, the Company's Working Capital is equal to
at least one dollar, the Company's Long-Term Debt does not exceed two
times the Company's Net Worth and the Company's Net Worth is at least
the amount specified by the Secretary, the Company shall not, without
Secretary's prior written consent:
(i) Withdraw any capital;
(ii) Redeem any share capital or convert any of the same into debt;
(iii) Pay any dividend (except dividends payable in capital stock
of the Company);
(iv) Make any loan or advance (except advances to cover current
expenses of the Company), either directly or indirectly, to any
stockholder, director, officer, or employee of the Company, or to any
other Related Party;
(v) Make any investments in the securities of any Related Party;
(vi) Prepay in whole or in part any indebtedness to any
stockholder, director, officer, or employee of the Company, or to any
Related Party, which has a stated maturity of more than one year from
such date;
(vii) Increase any direct employee compensation (as hereafter
defined) paid to any employee in excess of $100,000 per annum; nor
increase any direct employee compensation which is already in excess of
$100,000 per annum; nor initially employ or re-employ any person at a
direct employee compensation rate in excess of $100,000 per annum;
provided, however, that beginning with January 20, 1999, the $100,000
limit may be increased annually based on the previous years'' closing
Consumer Price Index for All Urban Consumers published by the Bureau of
Labor Statistics. For the purpose of this subsection, the term ``direct
employee compensation'' is the total amount of any wage, salary, bonus
[[Page 44164]]
commission, or other form of direct payment to any employee from all
companies with guarantees under the Act as reported to the Internal
Revenue Service for any fiscal year.
(viii) Acquire any fixed assets other than those required for the
maintenance of the Company's existing assets, including normal
maintenance and operation of any vessel or vessels owned or chartered
by the Company;
(ix) Either enter into or become liable (directly or indirectly)
under charters and leases (having a term of six months or more) for the
payment of charter hire and rent on all such charters and leases which
have annual payments aggregating in excess of an amount specified by
the Secretary;
(x) Pay any indebtedness subordinated to the Obligations or to any
other Title XI obligations;
(xi) Create, assume, incur, or in any manner become liable for any
indebtedness, except current liabilities, or short term loans, incurred
or assumed in the ordinary course of business as such business
presently exists;
(xii) Make any investment whether by acquisition of stock or
indebtedness, or by loan, advance, transfer of property, capital
contribution, guarantee of indebtedness or otherwise, in any Person,
other than obligations of the United States, bank deposits or
investments in securities of the character permitted for monies in the
Title XI Reserve Fund; and,
(xiii) Create, assume, permit or suffer to exist or continue any
mortgage, lien, charge or encumbrance upon, or pledge of, or subject to
the prior payment of any indebtedness, any of its property or assets,
real or personal, tangible or intangible, whether now owned or
thereafter acquired, or own or acquire, or agree to acquire, title to
any property of any kind subject to or upon a chattel mortgage or
conditional sales agreement or other title retention agreement, except
loans, mortgages and indebtedness guaranteed by the Secretary under
Title XI of the Act or related to the construction of a vessel approved
for Title XI by the Secretary, and liens incurred in the ordinary
course of business as such business presently exists.
Sec. 298.36 [Amended]
23. Section 298.36 is amended as follows:
a. By removing the word ``Annual'' from the heading of the section.
b. By amending paragraph (a) by removing the words in the first
sentence ``Secretary shall charge the Obligor an annual fee (Guarantee
Fee)'' and adding in their place the words ``the Guarantee Fee rate
shall be set''.
c. By removing the third and fourth sentences of paragraph (e) and
adding one sentence in their place to read as follows: ``In calculating
the present value used in determining the amount of the Guarantee Fee
to be paid, MARAD will use a discount rate based on information
contained in the Department of Commerce's Economic Bulletin Board
annual rates.''
24. Section 298.38 is revised to read as follows:
Sec. 298.38 Partnership and limited liability company agreements.
Partnership and limited liability company agreements shall be in
form and substance satisfactory to the Secretary prior to any Guarantee
closing, especially relating, but not limited to, four basic areas:
(a) Duration of the entity,
(b) Adequate partnership or limited liability company funding
requirements and mechanisms,
(c) Dissolution of the entity and withdrawal of a general partner
or member and
(d) The termination, amendment, or other modification of the entity
without the prior written consent of the Secretary.
Sec. 298.41 [Amended]
25. Section 298.41 is amended by removing paragraph (c)(1) and
redesignating existing paragraphs (c)(2) through (c)(6) as new
paragraphs (c)(1) through (c)(5).
Dated: August 6, 1999.
By Order of the Maritime Administrator.
Joel C. Richard,
Secretary, Maritime Administration.
[FR Doc. 99-20757 Filed 8-12-99; 8:45 am]
BILLING CODE 4910-81-P
