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HEARING

BEFORE THE

SUBCOMMITTEE ON

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OF THE

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UNITED STATES SENATE

NINETIETH CONGRESS

SECOND SESSION

ON

S. 3017

TO CHANGE THE PROVISION WITH RESPECT TO THE MAXIMUM RATE OF INTEREST PERMITTED ON LOANS AND MORTGAGES INSURED UNDER TITLE XI OF THE MERCHANT

MARINE ACT, 1936

APRIL 30, 1968

Serial No. 90-69

Printed for the use of the Committee on Commerce

U.S. GOVERNMENT PRINTING OFFICE

94-074 WASHINGTON : 1968
COMMITTEE ON COMMERCE

WARREN G. MAGINUSON, Washington, Chairman

JOHN 0. PASTORE, Rhode Island

A. S. MIKE MONRONEY, Oklahoma

FRANK J. LAUSCHE, Ohio

E. L. BARTLETT, Alaska

VANCE HARTKE, Indiana

PHILIP A. HART, Michigan

HOWARD W. CANNON, Nevada

DANIEL B. BREWSTER, Maryland

RUSSELL B. LONG, Louisiana

FRANK E. MOSS, Utah

ERNEST F. HOLLINGS, South Carolina

FREDERICK J. LoRDAN, Staff Director

MICHAEL FERTSCHUK, General Counsel

JOHN N. NASSIKAS, Assistant General Counsel

STANLEY H. BARER, Staff Counsel

NORRIS COTTON, New Hampshire

THRTISTON B. MORTON, Kentucky

HUGH SCOTT, Pennsylvania

WINSTON L. PRO UTY, Vermont

JAMES B. PEARSON, Kansas

ROBERT P. GRIFFIN, Michigan

SUBCOMMITTEE ON MERCHANT MARINE AND FISHERIES

E. L. BARTLETT, Alaska, Chairman

WARREN G. MAGNUSON, Washington

JOHN 0. PASTORE, Rhode Island

PHILIP A. HART, Michigan

DANIEL B. BREWSTER, Maryland

RUSSELL B. LONG, Louisiana

ERNEST F. HOLLINGS, South Carolina

ROBERT P. GRIFFIN, Michigan

WINSTON L. PROUTY, Vermont

NORRIS COTTON, New Hampshire
CONTENTS

Page

Opening statement by the Chairman 1

Text of bill, S. 3017 7

Agency comments:

Comptroller General of the United States 10

Department of Commerce 8

General Counsel of the Treasury 9

STATEMENTS

Davis, Carl C., General Counsel, Maritime Administration, Department of

Commerce; accompanied by John R. Tankard, Assistant General Counsel, Division of Mortgage and Marine Insurance and Roy H. Yowell,

Chief, Division of Mortgage Insurance Contracts, Office of Government

Aid 2

May, Albert E., assistant executive director, Committee of American

Steamship Lines; accompanied by: Howard Adams, Pacific Far East

Line and Marvin J. Coles, Coles & Goertner, Washington, D.0 10

ADDITIONAL INFORMATION

Fannie Mae Sale Marks Rate Rise, New York Times, March 27, 1968_ 15

(m)

•
I
MAXIMUM RATE OF INTEREST ON SHIP LOANS AND

MORTGAGES

TUESDAY, APRIL 30, 1968

U.S. SENATE,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON MERCHANT MARINE AND FISHERIES,

Washington, D.C.

The subcommittee met, pursuant to notice, at 10:13 a.m., in room

5110, New Senate Office Building, the Honorable E. L. Bartlett

(chairman of the subcommittee) presiding.

Present: Senator Bartlett.

OPENING STATEMENT BY THE CHAIRMAN

Senator BARTLETT. The committee will be in order.

Today we shall hear testimony on S. 3017, a bill to change the

provisions with respect to the maximum rate of interest permitted

on loans and mortgages insured under title XI of the Merchant

Marine Act, 1936.

Title XI now provides that to be eligible for mortgage insurance

a ship mortgage may not secure a loan bearing interest at a rate

exceeding 5 percent, except when special circumstances justify 6

percent, nor may a construction loan be insured if the rate of interest

exceeds 6 percent.

This bill would substitute for the 5-percent and 6-percent maximums a provision that the interest rate shall not exceed a rate determined by the Secretary of Commerce to be reasonable, taking into

account interest rates prevailing in the private market.

It is my understanding that a subcommittee of the House Merchant

Marine Committee has held hearings on H.R. 14796, a companion

measure to this bill, and has favorably reported that measure to the

full committee.

As a matter of interest, I would point out that section 18 of S. 2650,

the maritime program bill introduced by Senator Magnuson, Senator

Brewster, and myself, upon which we will begin hearings next month,

is identical to the provisions of this bill.

The first witness will be Carl Davis, General Counsel of the Maritime Administration, accompanied by associates whom he will

identify for the record.

Staff member assigned to this hearing: Stanley H. Barer
0

STATEMENT OF CARL C. DAVIS, GENERAL COUNSEL, MARITIME ADMINISTRATION, DEPARTMENT OF COMMERCE; ACCOMPANIED BY

JOHN R. TANKARD, ASSISTANT GENERAL COUNSEL, DIVISION OF

MORTGAGE AND MARINE INSURANCE; AND ROY H. YOWELL,

CHIEF, DIVISION OF MORTGAGE INSURANCE CONTRACTS, OFFICE

OF GOVERNMENT AID

Mr. DAVIS. Thank you, Mr. Chairman.

I am accompanied by John R. Tankard, assistant general counsel,

in the Division of Mortgage and Marine Insurance, and Mr. Roy H.

Yowell, chief, division of mortgage insurance contracts, Office of

Government Aid.

I appreciate the opportunity to appear before you to present the

views of the Maritime Administration and the Department of Commerce with respect to S. 3017.

Section 1104(a) (5) of the Merchant Marine Act, 1936, provides

that to be eligible for mortgage insurance a ship mortgage must,

among other requirements, secure bonds, notes or other obligations

bearing interest—exclusive of premium charges for insurance—at a

rate not to exceed 5 per centum per annum on the unpaid principal

balance or not to exceed 6 per centum per annum on such balance if

the Secretary of Commerce finds that in certain areas or under special

circumstances the mortgage or loan market demands it.

By reference to section 1104(a) (5), section 1104(b) (6) places the

same requirement on loans with respect to the maximum interest rate

if they are to be eligible for insurance. This refers to loans which are

made to finance construction of the ship and which precede the mortgage which is placed on the ship after the ship is completed.

The bill would amend section 1104(a)(5) to substitute for the 5

and 6 percent maximums a provision that the intereest rate shall

not exceed a rate determined by the Secretary of Commerce to be

reasonable, taking into account the range of interest rates prevailing

in the private market for similar loans and the risks assumed by the

Department of Commerce. Under this language, there could be circumstances under which the rate determined by the Secretary to be

reasonable would exceed 6 percent.

Since November 1966, the Department has approved interest rates

under the terms of the existing law as follows:

Interest fate

Date approved: (percent)

Nov. 17, 1966 5. 75

Feb. 1, 1967 5. 10

Mar. 30, 1967 5. 50

Apr. 21, 1967 5. 50

May 25, 1967 5. 40

June 28, 1967 6. 00

Aug. 10, 1967 6. 00

Senator BARTLETT. Almost steadily upward?

Mr. DAVIS. Almost steadily upward. That is right, Mr. Chairman.

At the present time we have applications for mortgage and loan

insurance totaling $314,075,100—of which financing of $35,500,000 has

already been arranged--for 70 ships and 691 barges which are to be

built by private owners with privately generated funds to upgrade and

modernize the American merchant marine. Under existing law, since
3

the market requires a rate of interest higher than 6 percent, the Department cannot insure these loans and mortgages, and the vessels

therefore cannot be built.

A comparison of the yields of various long-term corporate and

Government bonds with title XI bonds over a 10-year period shows

the following:

(a) Title XI bond interest rates closely approximated the yields of

triple-A rated corporate bonds. The spread between said bonds varied

from zero to one-fifth of 1 percent, depending on the specific features of

the corporate bonds. For example, a triple-A corporate bond with

10-year call protection may yield 6.25 percent whereas a title XI bond

may yield about 6.40 percent.

(b) Although not of directly comparable characteristics, title XI

bond interest rates have ranged from one-quarter to 1 percent more

than comparable long-term U.S. Treasury bonds, depending upon

currently prevailing market conditions.

Based on said review, triple-A corporate bond yields constitute the

most accurate and consistent indicator of title XI bond interest rates.

In fact, in today's market, a title XI bond would sell to yield a rate not

less than a triple-A rated corporate bond.

The following is a listing of current quotations of recent triple-A

corporate bond, Government bond, and World Bank bond interest

rates and yields.

To summarize, Mr. Chairman, we have it running from a yield high

of 6.68 to a low of 5.44.

Senator BARTLETT. The entire table will be placed in the record

with your statement.

Mr. DAVIS. Thank you.

(The table referred to follows:)

Issue Coupon interest

rate (percent)

Maturity date Yield (percent)

Houston Light & Power 6U 1998 6.65

Kansas City Power & Light 6% 1998 6.65

A.T. & T 6 2000 6.25

Bell Telephone of Pennsylvania 6 2008 6.68

New Jersey Bell Telephone 6% 2008 6.58

Pacific Gas & Electric 6% 2000 6.65

Philadelphia Electric 6M 1993 6.50

Fannie 

Do__1973

Mae 1971 6.30

6.45

Do — 1988 6.45

U.S. Treasury 4% 1987-92 5.44

4Yi 1975-85 5.55

World Bank 43. 1982 6.37

Standard Oil of New Jersey 6 1997 6.18

Texaco Oil Co 58% 1997 6.24

Mr. DAVIS. In view of the foregoing, it is our opinion that title XI

bonds in today's market would have to bear an interest rate of about

6.50 percent, which is comparable to recent triple-A corporate yields,

about 1 percent greater than long-term U.S. Treasury bond yields, and

about one-fifth of 1 percent greater than World Bank bond yields.

We recommend enactment of the bill so that we can continue to have

private financing of vessel construction.

Thank you, Mr. Chairman.

I will be happy to answer any questions.

Senator BARTLETT. Thank you, Mr. Davis.
4

Has this conclusion been approved by the Bureau of the Budget?

Mr. DAVIS. It has, Mr. Chairman.

Senator BARTLETT. It represents the official administration position?

Mr. DAVIS. It does.

Senator BARTLETT. Good.

Mr. DAVIS. I might say in addition, Mr. Chairman, this is the first

bill I have had the pleasure to testify on in some time in which I know

of no opposition—unless it is Mr. May's wife back there. I haven't

questioned her yet. [Laughter.]

Senator BARTLETT. Off the record.

(Remarks off the record.)

Senator BARTLETT. Mr. Davis, has the Government made money—

Mr. DAVIS. Yes, they have.

Senator BARTLETT (continuing). On the title XI operations?

Mr. DAVIS. Yes, they have, Mr. Chairman. We have made about

$18 million.

Senator BARTLETT. Over how long a period of time?

Mr. DAVIS. Since 1954.

Senator BARTLETT. Making more or less in recent years than it

did for the few years after 1954?

Mr. DAVIS. Oh, it's making more.

Senator BARTLETT. Making more?

Mr. DAVIS. In fact, it is running now an average of about $4 million

a year.

I am corrected to add "before administrative expenses."

Senator BARTLETT. And they amount to what by way of percentage?

Mr. DAVIS. They do not know what the administrative expenses

will run.

Senator BARTLETT. Please furnish for the record the administrative

costs in percentages relating to the revenues to the Government.

Mr. DAVIS. Thank you. It will have to be an estimated figure, but

we will be happy to do so.

(The figures requested follow:)

Administrative costs of Title XI mortgage and loan operators (fiscal year 1967)

Title XI revenues to U.S. Government:

Insurance premiums and fees $2,790,000

Interest and other income 1,459,000

Gain from sale of U.S. securities 37,000

Total 4,286,000

Administrative costs: 1

Payment of interest to Treasury on money borrowed to liquidate defaulted mortgages 172,000

Miscellaneous expenses incident to mortgage default 83,000

Total 255,000

Percentage: Administrative costs/revenues 6

'Does not include cost for Maritime Administration staff time directly related to title XI mortgage and

loan activities.

Senator BARTLETT. Is it your opinion, Mr. Davis, that more

revenue will accrue to the Government if this bill becomes law?

Mr. DAVIS. It certainly is, Mr. Chairman, because it will enable

us to cover the additional financing for additional construction, and

all that governs additional moneys to the Government.

•
5

Senator BARTLETT. No further questions from me, unless Mr.

Barer has some.

Mr. BARER. Just one question.

In your statement, the concluding paragraph, you state:

At the present time we have applications for mortgage and loan insurance

totaling $314,075,100 for 70 ships and 691 barges which are to be built by private

owners with privately generated funds.

None of that, therefore, is being utilized by any subsidized operators?

Mr. DAVIS. Well, yes, some of it will be utilized by subsidized

operators. These applications include both subsidized and unsubsidized operators.

Mr. BARER. So in some instances the title XI is being utilized with

a precondition that the Government pay construction subsidy? Is

that correct?

Mr. DAVIS. No; this is after subsidy.

Mr. BARER. I have no further questions.

Senator BARTLETT. Thank you, gentlemen.

Mr. BARER. Oh, one other question. What is the breakdown on

these applications between the subsidized operators and the nonsubsidized?

Mr. DAVIS. Mr. Yowell, I am sure, can furnish you the entire

breakdown of all the applications.

Mr. YOWELL. Yes; if you would like, I can read the applications:

American Export for three ships, Commercial Steamship for two

ships.

Well, let me break it down into subsidized and unsubsidized.

First would be subsidized:

American Export Lines for three ships.

Farrell Lines for five ships.

Lykes Bros. for seven ships.

Oceanic for two ships.

Pacific Far East for six new ships and two nonsubsidized conversions.

Lykes for 266 barges.

Prudential Lines for 425 barges.

The nonsubsidized operators would be:

Commercial Steamship for two ships.

Greene Line for one ship.

Hawaiian Lines for three ships.

Matson for four ships.

TMT Trailer for one ship.

Trans-Marine for 10 tugboats and 22 barges.

South Atlantic and Caribbean Line for one ship.

That's it.

Mr. DAVIS. That's all.

Mr. BARER. Could you explain for my education—I'm sure everybody else in the room understands this clearly but I don't think I do—

exactly how the title XI ship mortgage or construction loan insurance

relates timewise and in your financing to receipt of your construction

subsidy and then use of your tax-free reserve funds?

What is the relation between utilization of the tax-free reserve funds

and the title XI?

Mr. DAVIS. Well, what do you mean by timewise?

Mr. BARER. I mean what is the financing sequence?

94-074—GS 2
6

Mr. DAVIS. Well, the financing sequence is this: The title XI

mortgage does not go on the ship during the period of its construction

because it isn't a ship. You take out what we will characterize as a

commercial loan to finance the construction, because shipyards have to

have progress payments.

But the minute the vessel is constructed, all the commercial loan has

to be paid off. So at that time you put on the title XI mortgage, or

you put the mortgage on the ship insured by title XI insurance.

The ship is paid off insofar as the building is concerned, but this

obligation substitutes for that obligation and is paid off over a period

of years.

Generally you have a trustee setup, and you issue bonds, and these

bonds are sold to the general public—for example, pension funds,

endowment funds, insurance companies, and State and municipal

funds. They are all great purchasers of these bonds.

And as the bonds come due on periodic payment the bonds are

paid off. Once the bonds are all paid off, you take the mortgage off

the ship.

Mr. BARER. In other words, to pay the bonds off is how you utilize

the reserve funds? Is that correct?

Mr. DAVIS. Yes; statutory reserve funds. That's right. In paying

off the bonds.

Mr. BARER. Is there a limitation on how much you can guarantee

now?

Mr. DAVIS. Well, yes; $900-and-something million. The overall is a

billion dollars but we have transferred part of that to the fishing

industry. $980 million, I am informed.

Mr. BARER. You don't have a problem under title XI like you do

under your construction-differential subsidy where there is not enough

money to go around 

Mr. DAVIS. Oh, no.

Mr. BARER (continuing) . Because of financial obligations?

Mr. DAVIS. No; we have about $300 million to go.

Senator BARTLETT. You have $300 million what?

Mr. DAVIS. We have $300 million of additional loans we can insure.

If we should reach that point, we would have to come to the Congress

and ask that our billion ceiling be raised.

Mr. BARER. Mr. Davis, under title XI, fishing vessels come within

the definition of vessels for purposes of title XI construction loan and

mortgage insurance assistance?

Mr. DAVIS. Yes, they do; but that isn't administered by us. That

is administered by the Department of Interior.

Mr. BARER. Is there also a fishing-loan guarantee statute in addition

to title XI?

Mr. DAVIS. Yes, there is. That is also administered by the Department of Interior.

Mr. BARER. Is there some clear advantage between the two statutes

for fishing operators?

Mr. DAVIS. Yes, there is. I would say that an individual going into

the fishing business has to meet much more stringent requirements

under title XI than he does under the other loan program administered

by the Department of Interior.

Senator BARTLETT. I didn't quite hear you. Which is more advantageous?
7

Mr. DAVIS. Well, the one more advantageous is the other program,

which I am sorry I cannot identify by name.

Senator BARTLETT. Not title XI?

Mr. DAVIS. It is not title XI. There the Department of Interior

is allowed to make highly speculative loans. They don't have to make

commercial feas.bility findings that you have to make under title XI.

Mr. BARER. What about the rate of interest?

Mr. DAVIS. Now you have got me. I don't know. I only know about

those since one time I was in a job where if there was a default under

them I had to sue to try to recover the moneys that were lost. It is

entirely administered by the Department of Interior.

Senator BARTLETT. Now, you have nothing to do with the title

XI mortgages administered by the Interior Department?

Mr. DAVIS. That is right, Mr. Chairman.

Senator BARTLETT. And does the ceiling which applies to the total

amount of mortgages that you can deal with incorporate the Interior

Department loans, or is that separate?

Mr. DAVIS. Yes, it does? Mr. Chairman. It is both.

Senator BARTLETT. Bahl

Mr. DAVIS. Yes.

Senator BARTLETT. Do you have any notion of how much the Interior Department has committed?

Mr. DAVIS. The overall ceiling is $1 b Ilion, Mr. Chairman, and we

still retain $980 million.

Senator BARTLETT. They have not made many inroads, substantial inroads, from the Department of Interior with respect to

fishing vessels?

Mr. DAVIS. Yes, they have made numerous small loans.

Senator BARTLETT. Small loans, but not 

Mr. DAVIS. Yes, they are small loans.

Senator BARTLETT. But not in terms of total amounts of money?

Mr. DAVIS. Yes.

Senator BARTLETT. We have likewise a report from the Treasury

Department favoring this legislation. That report will be placed in the

record together with the report from the Department of Commerce

supplementing the testimony you have given here and a copy of the

bill.

Thank you all.

Mr. DAVIS. Thank you, sir.

(A copy of S. 3017 and agency comments follow:)

[S. 3017, 90th COng., second sess.]

A BILL To change the provision with respect to the maximum tate of interest permitted on loans arid

mortgages insured under title XI of the Merchant Marine Act, 193t1

Be it enacted the Senate and House of Representatives of the United States of

America in Congress assembled, That Section 1104(a) (5) of the Merchant Marine

Act, 1936, as amended, is amended to read as follows:

"(5) Shall secure bonds, notes, or other obligations bearing interest (exclusive

of • premium charges f or insurance, and service charges, if any) at rates not to

exceed such per cen.tum per annum on the principal obligation outstanding AS the

Secretary of Commerce determines to be reasonable, taking into account the range

of interest rates prevailing in the private market for similar loans and the risks

assumed by the Department of Commerce."
8

DIGEST OF S. 3017—To CHANGE THE PROVISION WITH RESPECT TO THE MAXIMUM

RATE OF INTEREST ON LOANS AND MORTGAGES INSURED UNDER TITLE XI OF

THE MERCHANT MARINE ACT, 1936

S. 3017, introduced by Chairman Magnuson at the request of the Secretary

of Commerce, would remove the 6% interest ceiling on loans and mortgages

insured under Title XI of the Merchant Marine Act of 1936. Title XI now provides

that a construction loan or ship mortgage may not involve a rate of interest

exceeding 6% and this legislation would substitute for that maximum a provision that the interest rate shall not exceed a rate determined by the Secretary

of Commerce to be reasonable taking into account interest rates prevailing in

the private market.

The Department of Commerce has requested this change in the law and all

segments of the affected industry are in accord with its purposes. It is believed

that enactment will allow a much greater flow of private capital into the maritime

industry. Further, no additional cost will accrue to the Government, and in fact

the Administration witness predicted that the Government would actually enhance their already profitable operation of the Title XI loan insurance fund.

Two purely technical changes should be made in the bill which would not

affect the substantive provisions of the measure:

(1) At Line 5, Page 1, the capital "S" should be in lower case, and

(2) At Line 2 of Page 2 a semicolon should be substituted for the period.

THE SECRETARY OF COMMERCE,

Washington, D.C., December 20, 1967.

Hon. HUBERT H. HUMPHREY,

President of the 'Senate,

Washington, D.C.

DEAR MR. PRESIDENT: Submitted herewith are four copies of a draft bill "To

change the provision with respect to the maximum rate of interest permitted

on loans and mortgages insured under title XI of the Merchant Marine Act,

1936." The accompanying statement of purposes and provisions explains the

changes the bill would make in existing law and the need for enactment of the

bill.

The Bureau of the Budget advises there is no objection to the submission of this

legislation to the Congress from the standpoint of the Administration's program.

Sincerely yours,

ALEXANDER B. TROWBRIDGE,

Secretary of Commerce.

STATEMENT OF THE PURPOSES AND PROVISIONS OF THE BILL TO CHANGE THE

PROVISION WITH RESPECT TO THE MAXIMUM RATE OF INTEREST PERMITTED

ON LOANS AND MORTGAGES INSURED UNDER TITLE XI OF THE MERCHANT

MARINE ACT, 1936

Section 1104(a)(5) of the Merchant Marine Act, 1936, provides that to be

eligible for mortgage insurance a ship mortgage must, among other requirements,

secure bonds, notes or other obligations bearing interest (exclusive of premium

charges for insurance) at a rate not to exceed 5 per centum per annum on the unpaid principal balance or not to exceed 6 per centum per annum on such balance

if the Secretary of Commerce finds that in certain areas or under special circumstances the mortgage or leading market demands it.

By reference to section 1104(a)(5), section 1104(b)(6) places the same requirement on loans with respect to the maximum interest rate if they are to be

eligible for insurance. This refers to loans which are made to finance construction

of the ship and which precede the mortgage which is placed on the ship after the

ship is completed.

The bill would amend section 1104(a) (5) to substitute for the 5 and 6 percent

maximums a provision that the interest rate shall not exceed a rate determined

by the Secretary of Commerce to be reasonable, taking into account the range

of interest rates prevailing in the private market for similar loans and the risks

assumed by the Department of Commerce. Under this language, there could be

circumstances under which the rate determined by the Secretary to be reasonable

would exceed 6 percent.
9

Since November 1966, the Department has approved interest rates under the

terms of the existing law as follows:

Interest rate: Dale approval

5.75 percent Nov. 17, 1966

percent Feb.5.10 1, 1967

5.50 percent Mar. 20, 1967

5.50 percent Apr. 21, 1967

5.40 percent May 25, 1967

6.00 percent June 28, 1967

6.00 percent Aug. 10, 1967

At the present time the Department has applications for mortgage and loan

insurance totaling $252,002,000 for 45 ships and 691 barges which are to be built

by private owners with privately generated funds to upgrade and modernize the

American merchant marine. Under existing law, if the market should require a

rate of interest higher than 6 percent, the Department could not insure these

loans and mortgages and the vessels therefore could not be built.

Companies with plans to build ships do not want to take the risk that the Department will be unable to provide title XI insurance because of the demand for

rates in excess of 6%. If the ceiling were removed, the Department could negotiate

freely without the restraint caused by the ceiling and the pressure on the operator,

who is willing to pay the price of high rates for assurance that financing will be

available when needed.

H011. WARREN G. MAGNusoN,

Chairman Committee on Commerce,

U.S. Semite, Washington, D.C.

DEAR MR. CHAIRMAN: Reference is made to your request for the views of this

Department on S. 3017, "To change the provision with respect to the maximum

rate of interest permitted on loans and mortgages insured under title XI of the

Merchant Marine Act, 1936."

Under title XI of the Merchant Marine Act, 1936, the Secretary of Commerce

is authorized to insure up to $1 billion outstanding of ship mortgages and loans,

and such insurance may be for the benefit of holders of bonds and notes (merchant

marine bonds) issued under a trust indenture under which the trustee is the mortgagee or lender. The faith of the United States is pledged to the payment of both

interest and principal of insured mortgages and loans. In the event of default,

the Secretary is required to make cash payments simply upon the assignment

to him of the mortgage or loan. These payments are made from the federal ship

mortgage insurance fund, which is a revolving fund consisting of receipts from

insurance premiums, other fees

'

and appropriations made to the fund. If the fund

is inadequate to pay claims, the Secretary is authorized to borrow from the

Treasury to satisfy claims.

The bill would remove the 6 percent interest rate limit on mortgages insured

under the title XI program and provide instead for "rates not to exceed such per

centum per annum on the principal obligation outstanding as the Secretary of

Commerce determines to be reasonable, taking into account the range of interest

rates prevailing in-the private market for similar loans and the risks assumed by

the Department of Commerce."

Since there is no risk to the private lender under the ship mortgage insurance

program, there is a serious question as to whether the program is encouraging

private participation of the sort which would eventually lead to the provision of

private credit without continued Federal assistance. Merchant marine bonds are

rated Aaa (least investment risk) by Moody's which indicates that they are regarded by lenders as obligations of the United States Government rather than

obligations of private borrowers. Thus, the Secretary of Commerce cannot rely

on the judgment of the lender in determining the soundness of a prospective loan,

and is required, in keeping with the provisions of title XI, to review each application as thoroughly as if he were making a direct Federal loan.

The bill incorporates legislation submitted to the Congress by the Secretary

of Commerce. We understand that removal of the 6 percent insured loan ceiling

is necessary to attract investors to these fully guaranteed merchant marine bonds.

Under the circumstances, the Department has no objection to the bill.

THE GENERAL COUNSEL OF THE TREASURY,

Washington, D.C., April 3, 1968.
10

The Department has been advised by the Bureau of the Budget that there is

no objection from the standpoint of the Administration's program to the submission of this report to your Committee.

Sincerely yours,

Hon. WARREN G. MAGNUSON,

Chairman Committee on Commerce,

U.S. Senate.

FRED B. SMITH, General Counsel.

COMPTROLLER GENERAL OF THE UNITED STATES,

Washington, D.C., March 19, 1968.

DEAR Mn. CHAIRMAN: Your letter of February 26, 1968, requests our comments

on S. 3017, a bill to change the provision with respect to the maximum rate of interest permitted on loans and mortgages insured under title XI of the Merchant Marine Act, 1936.

The bill would eliminate the maximum interest rates of 5 and 6 percent presently

in effect pursuant to section 1104(a) (5) of title XI of the Merchant Marine Act,

1936, as amended, and give the Secretary of Commerce the authority to approve

such interest rates as he determines to be reasonable, taking into account the

range of interest rates prevailing in the private market for similar loans and the risks assumed by the Department of Commerce.

In submitting the proposed legislation to the Congress, the Secretary of Commerce stated that the Department, in June and August, 1967, has approved interest rates of 6 percent under the terms of the existing law; that the Department has pending applications for mortgage and loan insurance of over $250 million for 45 ships and 691 barges which are to be built by private owners with privately generated funds to upgrade and modernize the American merchant marine; and that under the existing law, if the market should require a rate of interest higher than 6 percent, the Department could not insure these loans

and mortgages and the vessels therefore could not be built. The Secretary further

stated that the companies which propose to build ships do not want to take

the risk that the Department will be unable so provide title XI insurance because

of the demand for interest rates in excess of 6 percent, and that if the ceiling were removed, the Department could negotiate freely without the restraint caused

by the ceiling and the pressure on the operator, who is willing to pay the price of higher rates for assurance that financing will be available when needed.

In addition we note that Standard and Poor's "Bond Guide" shows that bonds issued by private corporations and rated AAA currently yield over 6 percent.

Therefore, it would seem clear that the maximum interest rate presently prescribed in section 1104(a) (5) will have to be increased if the purpose of Maritime's

Federal ship mortgage insurance program is to be effective in the construction of

new vessels.

S. 3017 is in accordance with the language recommended by the Bureau of the Budget in Circular No. A-70 for legislation on Federal credit programs. Accord- ingly, we recommend the enactment of S. 3017.

Sincerely yours,

FRANK H. WEITZEL,

Assistant Comptroller General of the United States.

Senator BARTLETT. The next witness is Albert E. May, assistant

executive director, Committee of American Steamship Lines.

And I understand that Mr. May is representing, together with the

gentlemen appearing at the table, the entire industry. Is this correct,

Mr. May?

STATEMENT OF ALBERT E. MAY, ASSISTANT EXECUTIVE DIRECTOR,

COMMITTEE OF AMERICAN STEAMSHIP LINES ACCOMPANIED BY

HOWARD ADAMS, PACIFIC FAR EAST LINE, AND MARVIN J. COLES,

COLES & GOERTNER, WASHINGTON, D.C.

Mr. MAY. Remarkably enough, it is, Mr. Chairman. We have in

my statement a list of a very broad group of the industry, labor,

shipbuilders, shipowners of all types, tankers, tramps, subsidized

xxxxxxxx
11

liners, unsubsidized liners. And it is really quite a unique circumstance,

I believe to see the whole industry together.

Senator BARTLETT. I agree.

Perhaps while we are sitting here in a unified frame of mind we can

endorse the broad maritime program.

Mr. MAY. I think that would be excellent. I might be shot later.

[Laughter.]

Senator BARTLETT. You are accompanied, Mr. May, by whom?

Mr. MAY. By Mr. Howard Adams of Pacific Far East Line, and

Mr. Marvin Coles of Coles & Goertner.

Senator BARTLETT. Mr. Adams, I note in the papers that Pacific

Far East is going to acquire several additional ships. Will title XI

mortgages be involved?

Mr. ADAMS. Yes, sir. We have two ships which are C-4 conversions which will require an expenditure of roughly $10 million for

the two ships, between $4.5 million and $5 million for each.

Senator BARTLETT. Those will run from where to where?

Mr. ADAMS. They will run from the west coast to Guam in an

unsubsidized service off of Pacific Far East Line.

Senator BARTLETT. And they turn around from Guam?

Mr. ADAMS. Yes, sir; turnaround from Guam and return to the

west coast.

Senator BARTLETT. They don't serve the trust territories?

Mr. ADAMS. They serve as a feeder for the trust territories up from

Guam to Saipan and Kwajalein. They do stop at Kwajalein on the

way out, stop at Wake on the way out or on the way back. But

principally it is U.S. west coast to Guam service as a marshaling or

distribution point for the trust territories.

Senator BARTLETT. How many ships in the fleet?

Mr. ADAMS. At the present time we have a total of five C-2's and

AP-3 Victory vessels. There will be a total of seven when these

two ships go into service.

Senator BARTLETT. Thank you.

You may proceed with your prepared statement, Mr. May, if you

so desire.

Mr. MAY. Thank you, Mr. Chairman.

This legislation, to remove the ceiling on the rate of interest permitted on loans and mortgages insured under title XI of the Merchant

Marine Act of 1936, is supported, as far as I am aware, by all segments

of the maritime industry, both management and labor. A great many

witnesses were prepared to appear before you to express their companies', unions', or associations' support for this important bill. However, your counsel, Mr. Barer, recognizing the universal support and

lack of controversy over this legislation, and being aware of the heavy

schedule of the committee, requested that industry representatives

agree upon a single statement.

This has been done, and it is my privilege to present this statement

on behalf of the following associations, companies, and unions.

As you can see, Mr. Chairman this is a very long list, and I don't

think it is necessary to read it, unless you wish me to do so.

Senator BARTLETT. No, indeed. It will be placed in the record.

(The list referred to follows:)
12

American Maritime Association.

American Merchant Marine Institute.

American Tramp Ship Owners Association, Inc.

Committee of American Steamship Lines.

Committee of American Tanker Owners.

Industrial Union of Marine and Shipbuilding Workers of America.

International Brotherhood of Boilermakers, Iron Shipbuilders, Blacksmiths,

Forgers and Helpers.

Labor-Management Maritime Committee.

Maritime Trades Department, AFL—CIO.

Matson Navigation Co.

Pacific American Steamship Association.

Shipbuilders Council of America.

Mr. MAY. It does represent the largest group of a broad segment

of the industry that to my knowledge has ever supported a single bill

in recent years.

Senator BARTLETT. To mine too.

Mr. MAY. The companies represented in this group own and operate

the vast majority of ships flying the U.S. flag.

S. 3017 was introduced at the request of the Secretary of Commerce

and has been approved by the Bureau of the Budget and the Comptroller General. This widespread support underscores the critical need

for prompt amendment of the totally unrealistic ceiling of 6 percent on

loans and mortgages insured under title XI of the 1936 act.

Title XI authorizes the Secretary of Commerce to pledge the full

faith and credit of the United States to guarantee loans and mortgages

made by U.S. shipowners, both subsidized and unsubsidized, for the

construction of new vessels and conversion of existing vessels. Historically shipping has been and remains today a highly cyclical business

enterprise. Long periods of depressed earnings were commonplace, and,

as a result, it has often been difficult for shipowners to secure financing.

Title XI has been highly effective in solving this problem as witnessed by the fact that virtually all commercial ships built in the

United States since World War 11 were financed under it, usually at

quite favorable interest rates.

The entire operation of this vital section of the 1936 act may well be

frustrated unless the 6-percent ceiling on insured loans and mortgages

is raised because during the past 6 months interest rates have risen to

alltime record highs for this century. The rates for Governmentinsured loans are presently in excess of 6 percent, and, thus, title XI

insurance is now not available to American shipowners.

If the instant legislation is not enacted, orders for new construction

of merchant ships will be sharply curtailed with severe damage to

our merchant fleet capability.

Testimony presented before this committee last year clearly demonstrated that no one is better aware than the members of this committee of the bloc obsolescence facing large segments of our merchant

fleet. During many hearings over the past 2 years, you have documented this situation in exhaustive detail and demonstrated the

urgent, in fact critical, need for major new shipbuilding programs to

be undertaken immediately.

We are confident that as a result of the recent authorization hearings

on Maritime Administration appropriations for fiscal year 1969 that

you will recommend and the Senate will authorize a substantial

increase in construction-differential subsidy funds.
13

If these new funds are finally approved by the Congress, and if they

are made available for expenditure by the Administration, the title

XI problem will still remain critical because subsidized steamship

companies who are presently receiving all of the available constructiondifferential subsidy funds finance a large share of their own portion

of new construction costs through title XI. Operators who must build

without the assistance of shipyard subsidies are even more dependent

on title XI financing.

Nonsubsidized U.S.-flag operators presently have on file with the

Maritime Administration title XI applications for over $140 million

and subsidized operators have on file applications for $100,304,000,

for a total of over $240 million of private capital which would, if

approved, become eligible for the implementation of ship construction

programs during the current year. These totals, of course, do not include any construction-differential subsidy funds.

Mr. Chairman, I'd like to interrupt the statement to point out these

numbers are low, and the Maritime Administration total figure of

$314 million broken down between various subsidized and unsubsidized companies is more current and certainly more correct than

these numbers.

Much of the urgently needed new ship construction represented

by these applications would be delayed, if not entirely frustrated,

unless S. 3017 is enacted into law.

At the time it was enacted, the 6-percent ceiling was a reasonable

provision in a new and untested law, to prevent the shipowner from

paying, and the Government from insuring, uneconomically high interest charges. Today it is nothing more than an artificial and outdated

restraint on new ship construction.

As the Secretary of Commerce pointed out in his statement in

support of this legislation, title XI interest rates at the ceiling of 6 percent were approved as long ago as June 1967. Since that time, the

general trend has been upward because of continuing pressure on the

dollar and high borrowings by both Government and industry. All

indications are that the interest rate today on title XI mortgages

and similar securities is well above 6 percent.

Attached to my statement is an article reproduced from the New

York Times of Wednesday, March 27, 1968, which states:

The Federal National Mortgage Association (Fannie Mae) sold an issue of

20-year participation certificates yesterday—the next best thing to a Treasury

bond—at a yield of 6.45%, the highest return on a new long-term Government

issue in more than a century.

The interest rate on title XI insured loans and mortgages has

generally ranged very close to the rate on Federal National Mortgage

Association certificates.

As the Comptroller General pointed out in commenting upon this

legislation, Standard & Poor's "Bond Guide" shows that bonds issued

by private corporations and rated AAA currently yield over 6 percent.

In fact, as the New York Times article points out:

In the corporate bond market, another milestone was passed yesterday: A

double-A bond issue with 5 years of call protection was offered with a 7 percent

interest coupon for the first time.

Let me give you a specific example with regard to title XI. For

over 3 months, one steamship company, Pacific Far East Line, Inc.,

has been working with several of the largest investment and commercial banks in the United States to secure title XI financing for
14

its new Lash-type barge carriers. The cheapest interest rate which

they could negotiate during this period was between 6.15 percent and

6.2 percent. In early April they were advised that the rate was a

minimum of 6.45 percent. Since that time the discount rate has been

raised by Y2 percent, so it is reasonable to assume that today the rate

would be still higher. Pacific Far East Line holds an operating-,

differential subsidy contract with the Government and,. thus, is able

to secure one of the lowest title XI interest rates available to U.S.

shipowners.

Historically, tankers and other nonsubsidized carriers have had to

pay about one-half of 1 percent more for their title XI financing than

have the subsidized companies. Thus, a nonsubsidized company today

would probably have to pay almost 7 percent interest on an insured

loan.

Let me assure you, gentlemen, that no steamship operator wants

to pay higher interest rates. Every company makes strenuous and

continuing efforts to hold financing costs down to an absolute minimum, for even a fraction of a percent increase in the cost of financing

expensive flights of ships over long periods of time can amount to

hundreds of thousands of dollars.

However, we are willing to pay higher interest rates in order to

secure the ships needed to replace our aging fleets and to meet foreign

competition.

We hope you will give us the opportunity by permitting the Secretary of Commerce, in his discretion, to authorize rates which are in

accord with the market at the time that financing is undertaken.

Giving such authority to the Secretary would, in effect, be continuing the procedure that has been in use since World War II.

Until the last several years, interest rates on Government-insured

loans and mortgages were generally far below 6 percent. For example,

in June 1966, States Steamship Co. secured title XI financing

at an interest rate of 5.1 percent. Their financing prior to that time

was at 4.25 percent and 5.0 percent. During these years, all loans

and interest rates, even though well below 6 percent, had to be approved

by the Secretary of Commerce as fair and reasonable.

And I might add the statute also requires that the Secretary find

that the entire venture is, in his opinion, sound and economical.

The Secretary's wisdom is approving loans and the soundness of

the title XI concept are testified to by the fact that the program has

been a profitable one to the Government, because defaults have been

so few that the 0.5-percent insurance charge paid by the subsidized

operator and the 0.75 percent paid by the unsubsidized operator has

more than covered losses and resulted in a profit to the Government.

Again, I would like to thank you for this opportunity to appear

before this committee to urge prompt passage of S. 3017.

Senator BARTLETT. Thank you, Mr. May.

Your Times article will be included as part of your statement.

Mr. MAY. Thank you, sir.

(The article from the New York Times referred to follows:)
15

[From the New York Times, Mar. 27, 1968]

FANNIE MAR SALE MARKS RATE RISE—CORPORATE BONDS AUCTIONED TO CARRY

A 7-PERCENT COUPON

(By John H. Allan)

The Federal National Mortgage Association sold an issue of 20-year participation certificates yesterday—the next best thing to a Treasury bond—at a yield

of 6.45 per cent, the highest return on a new long-term Government issue in more

than a century.

The financing provided the most dramatic example of rising interest rates,

pushed up recently chiefly by the failure of Congress to enact a tax increase at a

time of gigantic Federal budget deficits.

In the corporate bond market, another milestone was passed yesterday: A

double-A bond issue with five years of call protection was offered with a 7 per cent

interest coupon for the first time. It was priced to yield 6.80 per cent, equaling

two other issues offered late last year.

INVESTORS HESITATE

New tax-exempt bond issues were priced to yield slightly less than similar bonds

marketed last week, but investors hesitated to buy them. Of the five largest issues,

a total of $58.75-million of bonds, about 65 per cent remained unsold late in the

afternoon.

In the Fanny Mae P.C. sale, $730-million were sold to the public and $270-

million were sold directly to Government investment accounts.

The participation certificates were offered by an underwriting syndicate

headed by the First Boston Corporation; the Morgan Guaranty Trust Company;

Merrill Lynch, Pierce, Fenner & Smith, Inc., and Salomon Brothers & Hutzler.

The $730-million offered to the public was made up of three issues: $200-million

due April 8, 1971, priced to yield 6.30 per cent; $330-million due April 9, 1973,

priced to yield 6.45 per cent, and $200-million due April 8, 1988, also priced to

yield 6.45 per cent.

The participation certificates were completely sold, with corporations and banks

purchasing most of the two shorter maturities and pension funds taking the 20-

year issue. Individuals also purchased some of the P.C.s, but the sale appeared

to be timed to lessen any tendency to switch out of savings accounts. The grace

period for first quarter savings dividends and interest begins today.

The 6.45 per cent yield on the 20-year P.C.'s, which are noncallable, is 5 basis

points higher than a similar issue marketed Nov. 28.

FANNIE MAE SECURITIES BACKED BY FULL FAITH

If you accept the Attorney General's opinion dated Sept. 30, 1966, the Fannie

Mae guarantee "brings into being a general obligation of the United States

backed by its full faith and credit."

Not since July ,1861, has the Government sold a new issue of long-term securities

yielding more than the new 6.45 per cent P.C.'s. At that time, the Treasury sold

a $50-million 6 per cent loan redeemable in 1881 at a price of 89% to yield 6.70

per cent. During the Civil War, Government issues traded at prices to yield more.

And short-term Treasury issues traded at prices to yield more than 6.45 per cent

during the tight-money period of 1920.

Between the November P.C. sale and yesterday's, Fanny Mae also sold $1.25-

billion on Jan. 16, a time when interest rates had been pushed downward largely

by a heightened feeling that peace in Vietnam might develop. The total included

20-year P.C.'s priced to yield 6.084 per cent.

In the corporate bond market, the Union Electric Company auctioned

$50-million of double-A bonds that may not be refunded for five years. The

Missouri utility awarded the issue to a syndicate managed by Halsey, Stuart &

Co., Inc., and Merrill Lynch, Pierce, Fenner & Smith, Inc.

The winning group bid 101.151 for the bonds, specifying the pace-setting 7

per cent interest rate. It repriced the bonds at 102.545 to produce their 6.80

per cent yield to maturity in April, 1968.

By late afternoon, the issue, which will be offered formally today, was 75 to

80 per cent spoken for, a canvass of the underwriters disclosed.
16

Senator BARTLETT. With reference, if you know, to the bonds

which have been sold at an interest rate of 6 percent, what is their

experience in the market? That is to say, are they commanding par,

below par, or above par?

Mr. MAY. I have not looked at any of the specific prices on the

title XI bonds, sir. They are not widely traded because they are

usually bought up in blocks by institutions such as insurance companies or college trust funds, so they are not widely traded.

But I did look at the general bond market about 2 weeks ago, with

this hearing in mind, and bonds with an interest rate of 6 percent were

generally selling at a discount. They were selling below par.

As Mr. Adams points out, they have been selling to yield whatever

the market rate is. So if we assume the market rate is 7 percent now,

the bonds would be selling considerably below par.

Senator BARTLETT. You are informing the committee, as I gather,

that if this bill does not become law the steamship companies simply

won't be able to secure the financing for new vessels?

Mr. MAY. In very many cases that would be exactly the result.

Yes, sir.

Senator BARTLETT. What would be the upper limit, in your opinion,

of interest which an operator could accommodate himself to in building

a new vessel or vessels? By this I mean if the Secretary of Commerce

were advised to lift the ceiling in a year and a half from now to 10

percent because the market had moved at extraordinary level, would

the operator be able, looking toward the future, to accept any such

interest rate?

Mr. MAY. I think this would be a circumstance that would vary

from case to case.

In my own mind, I would not think that anyone would build at a

10-percent rate of interest.

It is important to remember that the Secretary even at the present

time, and even when the rates were well below 5 percent, looked into

the soundness of the entire venture, and exercised a great deal of

interest and even coercion at times, in forcing companies who came in

and said they had such and such a rate of interest that they had

secured commercially—he would make them go back sometimes

repeatedly to try to get a lower rate.

So the Secretary has had a downward effect on the market.

I would think that rates much beyond 7 percent would probably

not be attractive for new ship construction, because when you begin

to look at a 25-year life and 7-percent interest on a $10, $20, $30, or

even a $100 million investment when you are building a fleet of ships,

you are eating a tremendous hole in your profits, and you are making

that commitment against your profits for a very long period in the

future.

Mr. Coles represents some nonsubsidized companies, and he might

have a view on that.

Mr. COLES. It is impossible to say what the upward rate would be.

I suppose one of the great deterrents to all capital expenditures is

high money rates. In other words, it is quite conceivable to me that

if the entire money market goes up beyond 7 percent, shipowners will

build. In other words, I think you have got to take your money rate

into consideration along with the other factors of what the potential

profits are and also what the inflation factor is.
17

In other words, a 7-percent rate of return with a 5-percent inflation

factor may in the long run be substantially less than a 4-percent

interest with no inflation factor.

Senator BARTLETT. You have to have a vision that no man can

possibly possess?

Mr. COLES. I don't think, as a personal opinion right now, it takes

much vision to see inflation. What the rate will be, I, of course, can't

tell.

Senator BARTLETT. You think there is going to be continued

inflation?

Mr. COLES. Senator, I think I could ask you that, because I think

it is largely a political decision rather than an economic decision.

Senator BARTLETT. You ask me, and I will say probably so.

To reverse this would, as you all know, create some agonies too.

Mr. COLES. It is a serious problem. It is a difficult fence to straddle.

I don't know what the answer is.

Senator BARTLETT. You know much more about economics than

I do, so I will leave that alone.

Now, Mr. May, tell us a bit more, if you will, about shipbuilding

on the part of the subsidized lines who rely, despite the construction

subsidies, as you relate, for financing a large share of their own cost

through title )(I.

Mr. MAY. Yes, sir. The general procedure is that the company will

make a downpayment on the ship from its reserve funds or from the

sale of a ship that is being replaced if the ship is sold at that time. The

company then through the period of construction will make progress

payments to the shipyard for the full foreign cost of the vessel, and

the Government pays

'

as you know, a subsidy of around 50 percent

directly to the shipyard.

During this period some of the subsidized lines who over the years

have accumulated large reserve funds can make all of their payments

directly from those funds. In some cases when the ship was delivered

to them they have not had to put a mortgage on it. In fact, they have

paid cash for it. In this event there is no title XI effect because there

is no mortgage or bonds to insure.

Other companies, who have not been so fortunate in being able to

accumulate a substantial reserve fund, have had to make a commercial

loan during the period of building of the ship in order to make progress

payments to the yard, and then when the ship is delivered to them

they put on a mortgage which is insured.

The important factor here and the importance to the subsidized

companies, as well as everyone else, is that it enables a company to

undertake programs that would otherwise be impossible or uneconomic.

Shipbuilding is a risky business and, therefore, the rate charged by

commercial lending companies is high without Government assistance. The shipowner would probably have to pay 1 percent more

without the Government insurance—perhaps in some circumstances

considerably more than that.

One percent on an investment such as the new Lash ships would

involve probably $12 million, because the ships have a total cost of

$240 million. They are going to be financed, I believe, for 25 years. Isn't

that right, Howard?

Mr. ADAMS. Yes.
18

Mr. MAY. So you begin to look at 1 percent of $240 millipn for 25

years, and you realize you are dealing with millions of dollars in savings

because of the effect of title XI and the lower interest rate that it

makes possible.

Many people don't appreciate how much this means to the subsidized companies, as well as others.

I might put it in perspective by noting that the best figures we

have—and all of the annual reports aren't in yet—show that the

subsidized companies as a group made about 4 percent on their

owners' equity last year, and they made 2.6 percent on their total

assets.

Well, when you are making this sort of money, the savings that are

possible because of the workings of title XI are extremely important.

I think this is even more true for the nonsubsidized companies.

Marvin?

Mr. COLES. I am not certain I agree, because, in addition to paying

the interest rate of 6 percent or 7 percent, as Mr. May has noted, a

subsidized line must pay an extra one-half percent for insurance

premium, and an unsubsidized line or tanker owner must pay threefourths of 1 percent.

So, using his rationale of 7 percent, the net effective rate is 7.5

percent, which is expensive money.

On the cost of the $240 million, I figured this out, and if my mathematics are correct it would mean with a 1-percent increase $17.5

million more in interest cost, which is a very substantial saving if

you can keep the rate down.

Now, as far as title XI being necessary, that goes by company. My

recollection is, subject to correction, that Lykes Bros. previously has

financed its own ships out of its own pocket. A client of mine in the

last year has financed a good many ships with many millions of dollars

without title XI. But it's a matter of personal preference and ability

to obtain credit.

I would agree, though, that the interest rate is a very important

factor.

Senator BARTLETT. Mr. May, would you say that the majority of

the subsidized lines, building new ships in terms of numbers of companies or in terms of the total amounts committed additionally, rely

upon title XI mortgages?

Mr. MAY. Yes, sir. The majority do.

Senator BARTLETT. Do these bonds have a time limit? May the

company issue them for whatever period it desires? Or does title XI

say the limit is 20, 25, or whatever number of years?

Mr. MAY. I believe they are serial up to the length of time of the

mortgage, so that they are paid off periodically.

Mr. Adams is probably more familiar with that.

Mr. ADAMS. They are serially issued, but there are provisions in.

the bonds for acceleration of retirement of the bonds, and some operators have accelerated the retirement of the bonds.

Senator BARTLETT. Thank you.

Mr. MAY. Mr. Coles just pointed out that the total term would be

keyed to the ship—that for a subsidized liner it might be 25 years; a

tanker, which has a shorter life, might be geared to 20 years; and in

the case of reconversions it might be 10 years because that is all

the effective life that is left in the ship. The mortgages are serial to

each one of these time periods.
19

Senator BARTLETT. Are the shipping interests which you represent,

Mr. Coles, the tankers and other nonsubsidized carriers, required at

any point to face competition from the subsidized group?

Mr. COLES. Yes, very severe competition in two principal fields:

The unsubsidized ships rely largely on what I call Government

reserve cargo, and in the foreign trades I will divide that down into

two parts—to the 50/50 cargo and the MSTS cargo.

Now, in the 50/50 cargo we face competition from the subsidized

ships. In the MSTS cargo we face dual competition. No. 1, a good deal

of berth cargo is taken at berth terms from MSTS. But also a number

of subsidized vessels are time-chartered to MSTS today.

Now, when they are under time charter there is no operating subsidy, but they still have the benefits of the construction subsidy.

In other words, if an unsubsidized owner offered a ship and a subsidized owner a similar ship, roughly speaking, the capital cost of the

subsidized vessel would be half that of the unsubsidized.

There is a great deal of competition.

Senator BARTLETT. And the group that you appear for pay more

money for the ships before they are ever put into the seas?

Mr. COLES. Yes. In other words, the unsubsidized pays 100 percent

of the American cost.

Senator BARTLETT. And more interest?

Mr. COLES. Well, if you increase the principal, you increase the

total interest. For example, let's take a hypothetical situation that a

subsidized line wished to build a $10 million ship and an unsubsidized

line wished to build a similar ship. The subsidized line would pay $5

million. The unsubsidized would pay $10 million.

Now, the mortgage on a $5 million ship would be $3,750,000, and

the net investment would be $1,250,000. On a $10 million ship the

investment would be the same $1,250,000, but the mortgage would

be $8,750,000. So the unsubsidized would be paying additional interest

on an additional $5 million and would also have to pay off that additional $5 million.

So it becomes a tremendous burden.

I don't think that is in issue here.

Senator BARTLETT. I understand that it isn't in point here at all.

I just brought it up because Mr. May had declared in his statement

that these shippers had to pay about one-half of 1 percent more for

their title XI financing than the others.

Mr. MAY. This, Mr. Chairman, correctly reflects the confidence

that comes from the long-term subsidy contract and the security it

gives an operator.

As Mr. Adams points out, it reflects the problems of the other

segments and the fact that all of the defaults under title XI that have

occurred have occurred in the nonsubsidized area.

I would just like to make two comments on this. We hope to be

invited to appear before you next month when many of these questions will come up. The CASL companies are advocating, as we have

for 4 years, that operating and construction subsidies be made available to all segments of the American merchant marine.

Senator BARTLETT. Yes.

Mr. MAY. I think this is the ultimate solution to the problem. We

don't operate any tankers, and there are some fine new tankers that

have been built since the war, so our companies don't compete with

the tanker.
20

With regard to the other ships outside of the subsidized area, there

are no ships built for the foreign-liner trade since World War II. You

simply can't do it without a subsidy. And all the ships that were built

during World War II were sold under the Ship Sales Act at approximately a 50-percent discount, so they are all subsidized vessels,

every one of them, as to construction cost.

I think it is important to remember that there is no such thing as a

nonsubsidized liner, as far as construction-differential subsidy goes,

in our ocean trade.

Mr. COLES. Mr. Chairman, I don't want to break up unanimity

here, and I'm not going to, but I think there is a fallacy in one respect.

What Mr. May has said about most of the unsubsidized vessels

having been purchased from the Government is completely correct.

But I think that what has not been put forward is in many cases a

vessel has been purchased from the Government at let us say a half a

million cost merely to utilize its engine, and then owners, unsubsidized

owners, have built as much as $6 million apiece in American yards

on each of those ships.

So that there is a substantial number of unsubsidized ships today

having a higher capital cost than the brandnew ships have to the

subsidized line owner.

So I think that the statement that Mr. May has given must be

elaborated upon in that manner.

Senator BARTLETT. We will accept your statement. We will now

switch and return to the bill itself. And I will ask Mr. Barer if he has

any questions.

Mr. BARER. I assume you have no objection to two technical

changes in the bill, one at line 5 to change that capital "S" to a small

"s," and to change the period at the end to a semicolon.

Mr. MAY. No.

Mr. BARER. That is the only question I have.

Senator BARTLETT. Thank you, gentlemen.

We hope the subcommittee will take up this bill at a very early

date and that likewise the full committee may consider it soon.

I think that you and Mr. Davis and his associates have made a,

powerful case. These changes, in my judgment, are absolutely necessary, and I shall so recommend to the subcommittee and to the full

committee.

Thank you very much.

Mr. MAY. Thank you very much.

Mr. ADAMS. Thank you, sir.

Mr. COLES. Thank you.

(Whereupon, at 11:07 a.m., the subcommittee adjourned subject

to the call of the Chair.)

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