Putting Customers First in the Title XI Program

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

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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

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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

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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.

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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

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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