21302 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

DEPARTMENT OF TRANSPORTATION

Maritime Administration

46 CFR Part 298

[Docket No. R–154]

RIN 2133–AB14

Obligation Guarantees—Program

Administration

AGENCY: Maritime Administration,

Department of Transportation.

ACTION: Final rule.

SUMMARY: The Maritime Administration

(‘‘MARAD’’) is issuing this final rule

which amends certain provisions of the

existing regulations implementing Title

XI of the Merchant Marine Act, 1936, as

amended (‘‘Act’’). This rule is intended

to improve administration of the Title

XI program. MARAD administers

financial assistance under Title XI of the

Act in the form of obligation guarantees

for all types of vessel construction and

shipyard modernization and

improvement, except for fishing vessels.

The part of the Title XI program related

to fishing vessels is administered by the

National Oceanic and Atmospheric

Administration of the U.S. Department

of Commerce, (‘‘NOAA’’), pursuant to

NOAA regulations, which appear at 50

CFR part 253.

EFFECTIVE DATE: This final rule is

effective on May 9, 1996.

FOR FURTHER INFORMATION CONTACT:

David A. Lippold, Senior Financial

Analyst, Division of Capital Assets

Management, Office of Ship Financing,

Maritime Administration, Room 8122,

400 Seventh Street SW., Washington,

DC 20590. Telephone 202–366–1907.

SUPPLEMENTARY INFORMATION: Title XI of

the Act, 46 App. U.S.C. 1271 et seq.,

authorizes the Secretary of

Transportation (‘‘Secretary’’) to provide

guarantees of debt (‘‘obligation

guarantees’’) issued for the purpose of

financing or refinancing the

construction, reconstruction or

reconditioning of vessels in United

States shipyards for U.S. citizen owners.

Applications for obligation guarantees

are made to MARAD acting under

authority delegated by the Secretary to

the Maritime Administrator

(‘‘Administrator’’). Prior to execution of

a guarantee, MARAD must, among other

things, make a determination of

economic soundness of the project, and

the financial and operating capability of

the applicant. Prior to amendment by

Public Law 103–160, guarantees could

be issued only for debt issued by United

States citizens. The Title XI program

enables applicants to obtain long-term

financing on terms and conditions and

at interest rates comparable to those

available to large financially sound

corporations. Funds secured by the

obligation guarantees are borrowed in

the private sector.

Background

On November 30, 1993, the ‘‘National

Defense Authorization Act for Fiscal

Year 1994’’ (‘‘Authorization Act’’), Pub.

L. 103–160, was enacted. Subtitle D of

Title XIII of the Authorization Act, cited

as the ‘‘National Shipbuilding and

Shipyard Conversion Act of 1993’’

(‘‘Shipbuilding Act’’), expanded the

Title XI program by authorizing the

Secretary to guarantee obligations

issued to finance the construction,

reconstruction, or reconditioning of

eligible export vessels and for shipyard

modernization and improvement. The

Shipbuilding Act establishes ‘‘a

National Shipbuilding Initiative (NSI)

program to be carried out to support the

industrial base for national security

objectives by assisting in the

reestablishment of the United States

shipbuilding industry as a self-sufficient

internationally competitive industry.’’

On March 31, 1994, MARAD

published in the Federal Register an

interim final rule, effective on

publication, which amended its

regulations implementing Title XI in

order to carry out the provisions of

Subtitle D of Public Law 103–160,

expanding the authorization for

obligation guarantees to finance the

construction, reconstruction, and

reconditioning of eligible export vessels

and shipyard modernization and

improvement. A final rule was

published on September 16, 1994. The

final rule stated that MARAD would

publish at a later date a separate notice

of proposed rulemaking to improve

administration of the entire Title XI

program.

MARAD initiated a review of the

administration of its Title XI program

regulations with the objective of

implementing President Clinton’s

ongoing Regulatory Reform Initiative

and to reaffirm and implement the

principles of Executive Order 12866—

Regulatory Planning and Review

(September 30, 1993). This rulemaking

significantly shortens the time for

processing applications for guarantees

and reduces the economic burden on

applicants in complying with MARAD

requirements for the submission of

information. Accordingly, it is expected

to encourage the construction,

reconstruction and/or reconditioning of

vessels in United States shipyards and

the modernization and improvement of

general shipyard facilities located in the

United States.

NPRM

MARAD published a notice of

proposed rulemaking (NPRM) on April

26, 1995, in the Federal Register (60 FR

20592) and is now issuing this final rule

concerning program administration.

This rule reflects consideration of all

comments received in response to the

NPRM and the interim final rule.

Consideration has been given in the

final rule to all concerns addressed

relative to the Title XI program.

In the interim final rule issued to

implement the expanded authorization

in Public Law 103–160 for issuing

Obligation Guarantees, MARAD

requested and received public

comments on two additional issues,

applicable to the entire Title XI

program, namely: (1) The issuance by

the Secretary of a Letter of Interest prior

to an applicant’s submission of a

complete application and the

subsequent issuance, if any, of a Letter

Commitment, and (2) the establishment

of a deadline, such as 60 days, by which

the Secretary would act on a Title XI

application considered complete by the

Secretary. In the final rule of September

16, 1994, MARAD determined that these

two issues would be addressed in the

subsequent NPRM concerning program

administration because they apply to

both the export and domestic programs.

The reason is that this would allow

MARAD to consider the issues for both

the domestic and export programs at the

same time. MARAD advised that

commenters need not resubmit their

views on Letters of Interest and the 60

day processing period in response to the

new NPRM. The discussion of the

rulemaking text below differentiates

between comments received in response

to the interim final rule and the NPRM

on these two specific areas.

These regulations do not require more

extensive paperwork or reporting

requirements than exist under the

present Title XI regulations. Exemptions

provided herein should substantially

lessen the aggregate reporting burden.

In order to alleviate a potential source

of confusion in the discussion of the

regulations by section, when one

particular section pertains to more than

one issue, the discussion and MARAD’s

subsequent response is divided into

individual issues related to the content

of that section.

Discussion of Rulemaking Text

The discussion that follows

summarizes the comments submitted to

MARAD by 23 commenters on the

NPRM and the commenters on the
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21303

interim final rule, notes where changes

have been made to the Title XI

regulations and the rationale therefor,

and, where relevant, states why

particular recommendations/suggestions

have not been adopted. It is noted that

where the first letter of one or more

words is capitalized, that term is

defined in § 298.2. In addition to

soliciting comments on specific

amendments to the Title XI regulations

proposed in the NPRM, MARAD

solicited industry and other public

comments on three additional issues in

general. The first issue is the retention

in § 298.13 of the waiver requirement

for foreign components and services to

be included in Actual Cost. MARAD

expressed concern about the potential

adverse effect of eliminating the waiver

requirement on the U.S. supplier base,

which MARAD recognizes as critical to

the national defense and economy.

MARAD stated that it is attempting to

create an environment where both the

shipbuilding and ship supply industries

have the opportunity to be competitive

based on fair pricing, quality, and

timeliness. All comments received in

this area are in the discussion of

§ 298.13.

The second issue on which MARAD

solicited public comments is

construction period financing. As the

Secretary may approve Guarantees with

respect to obligations to be issued for

the applicable period of construction,

reconstruction, or reconditioning,

MARAD invited comments on available

forms of security, in addition to surety

bonds, that could protect MARAD’s

interests as a lender, how progress

should be monitored, what new

procedures/methodologies should be

developed to improve the previously

utilized progress payment system, and if

payment of interest on the obligations

should be made on a more frequent

basis (i.e., weekly, monthly or quarterly)

than that outlined in § 298.22,

Amortization of Obligations. In

addition, comments were solicited as to

how the Title XI applicant will verify/

certify to MARAD that certain costs

have been paid prior to disbursement of

Title XI funds from the escrow account,

for example, the use of an agent on

MARAD’s behalf to verify that certain

costs have been paid. All comments

received in this area are discussed in

§ 298.21 below.

Finally, MARAD also requested

comments concerning the standard

application Form MA–163 referenced in

§ 298.3, Applications, and the required

documentation outlined in subpart D of

this part 298. All comments received in

these areas are discussed under § 298.3

or subpart D of this part.

Discussion of Regulations by Section.

Note: Paragraph references are as

designated or redesignated in the notice of

proposed rulemaking.

Section 298.2 Definitions

(b), Actual Cost. One commenter

suggested the inclusion of Guarantee

Fees as an item in the definition of

Actual Cost.

MARAD Response: The present

definition of ‘‘Actual Cost’’ refers to

§ 298.21(b) which is being amended in

the final rule to clearly state that

‘‘Guarantee Fees determined in

accordance with the provisions of

section 1104(e) of the Act shall be

included in the items of Actual Cost.’’

Hence, adoption of the NPRM as a final

rule will effectively accomplish the

commenter’s suggestion without the

necessity to change the definition of

Actual Cost.

(f), Depreciated Actual Cost. One

commenter suggested the inclusion of

Guarantee Fees as an item in the

definition of Depreciated Actual Cost.

MARAD Response: The same

response as to the preceding comment

applies.

(l) Guarantee Fee. One commenter

suggested deletion of the reference to

interest accrual on the Guarantee Fee.

MARAD Response: The definition of

‘‘Guarantee Fee’’ does not include a

reference to interest accrual and,

therefore, is not being amended.

(o) Letter of Interest. While no

commenter suggested a change to the

proposed definition of a Letter of

Interest, comments were received

regarding the Letter of Interest concept

and content.

MARAD Response: MARAD’s

response to the comments are outlined

below in the discussion regarding

§ 298.3(f). In view of the fact that

MARAD is deleting § 298.3(f) in its

entirety, this definition will not be

included in the Title XI regulations.

(y) Related Party. One commenter

suggested that the definition of Related

Party should be revised to be consistent

with the existing definition in generally

accepted accounting principles (GAAP).

MARAD Response: The intent behind

replacing the terms ‘‘Affiliate’’ and

‘‘Affiliated’’ with the term ‘‘Related

Party’’ was to be consistent with a

terminology change in GAAP as

promulgated by the Financial

Accounting Standards Board of the

American Institute of Certified Public

Accountants. Although the commenter

has provided the present GAAP

definition for Related Party, MARAD

has determined that it would be

inappropriate to incorporate the precise

GAAP definition as it exists today in the

Title XI regulations due to the frequent

modifications to GAAP definitions. It

should be noted, however, that

MARAD’s regulations are to be

construed in a manner consistent with

GAAP, unless the regulations expressly

deviate from GAAP.

(cc) Vessel. The definition of Vessel

was not modified in the NPRM.

However, three of the four commenters

supported MARAD’s announcement of a

change in policy to expressly include

passenger vessels engaged in

commercial common carriage, in

particular ferries, as eligible for the Title

XI program. One commenter also was in

favor of an expansion of Title XI

financing to the ‘‘cruise to nowhere’’

segment and gaming vessels, as the

commenter believes that the passenger

vessel segment of the U.S. flag merchant

marine will make the most gains in the

next decade. One commenter does not

believe that the change in policy on

passenger vessels should include ferries

and/or gambling vessels on U.S. rivers

because use of scarce Title XI resources

for these vessels would not promote the

Act’s objective of ocean-going vessels or

vessels capable of serving as a military

auxiliary.

MARAD Response: MARAD does not

believe that a regulatory change to this

definition is necessary. It is MARAD’s

position that the expansion of Title XI

financing in the passenger vessel market

generally will aid in the development

and maintenance of an adequate and

well-balanced U.S. merchant marine

and will promote U.S. commerce. As to

the concern expressed about MARAD’s

scarce Title XI resources, MARAD

retains informal discretion under the

Act and formal discretion under

§ 298.3(e) (priorities), in appropriate

circumstances, to limit allocation of its

Title XI resources to ensure optimal use

of MARAD’s appropriated funds in

terms of promoting the objectives of the

Act.

Section 298.3 Applications

Section 298.3 (a). This section

specifies the format for submitting and

amending applications for Title XI

financing. As mentioned above,

MARAD specifically solicited comments

on the current standard application

Form MA 163 and any proposed

amendments to the form and standard

documentation, particularly with regard

to export vessels and shipyard

modernization.

One commenter stated that

inadequate time was given to review

and comment on the application form;

however, as a general comment, the

form needs to be revised to be consistent

with the recent changes in law for
21304 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

shipyard modernization and Eligible

Export Vessels. Another commenter

stated that the application form is overly

complicated and greatly increases

transaction costs and discourages

applicants. The commenter suggested

the establishment of an advisory

committee composed of representatives

from MARAD, the maritime bar,

investment and commercial banking

industry, shipbuilding industry and the

shipowning and operating industry to

review and assist in revisions.

A final commenter believes that the

administration of the program will be

improved by including a list of all

documents required to be submitted

with an application, i.e., any demise

charters, time charters in excess of six

months, contracts of affreightment,

drilling contracts or other contractual

arrangements (§ 298.3) and legal

opinions ensuring the enforceability of

the mortgage or security interest for

Eligible Export Vessels (§ 298.31(a) (2)

and (3)).

MARAD Response: In view of the

time required to determine appropriate

changes and to obtain approval from the

Office of Management and Budget for a

revised form, MARAD has decided to

defer consideration of this matter in

order to avoid delay in promulgating

this rule. MARAD supports the

suggestion that a non-Governmental

authority establish a working group

composed of representatives from

MARAD, the maritime bar, investment

and commercial banking industry,

shipbuilding industry and the

shipowning and operating industry to

review and assist in revisions to the

form.

MARAD agrees with the comment

that the administration of the Title XI

program will be improved by including

with the application form a list of all

documents required to be submitted

with the application. MARAD will

prepare such a list of documents, which

list shall be provided with the standard

application form.

In addition, MARAD has determined

that the document required to be filed

with the Secretary of the Senate and the

Clerk of the House of Representatives by

the Lobbying Disclosure Act of 1995,

Pub. L. 104–65, must be filed as part of

a formal Title XI application, together

with the declaration required to be filed

by 31 U.S.C. 1352. MARAD will still

require similar forms at Closing. Finally,

as part of the application process

MARAD may request that the applicant

submit information to assist MARAD in

the preparation of a National

Environmental Policy Act analysis.

The instructions regarding the filing

of a Title XI application on Form MA–

163 require that 12 complete sets (of

which three must be duly executed and

certified by the applicant), including

schedules and exhibits as required,

must be filed with MARAD. MARAD

has reviewed its internal requirements

for processing applications and has

reduced the required number of

application sets to ten. Only two of the

sets must be duly executed and certified

by the applicant. In addition, MARAD

has examined the possibility of allowing

Title XI applicants to submit their Title

XI applications on computer disk to be

accompanied by two hard sets of the

application duly executed and certified

by the applicant. Upon request a list of

the computer software which can be

utilized for disk submission of the

application will be made available by

the Office of Ship Financing.

Section 298.3(b)(1). In response to the

1994 interim final rule, most

commenters thought that the 60-day

processing period for completed

applications was reasonable,

appropriate, and adequate. Some

commenters suggested a shorter period

of 30 days as conforming more closely

to purported international commercial

norms. Some shipyards were concerned

that the 60-day turnaround is

noncompetitive in the international

market because a ‘‘complete’’

application may in itself take more than

60 days to draft. They suggested that

guidelines would be necessary to define

the procedures for submitting a

complete application. Some suggested

that, for a pre-approved ship design,

MARAD should be able to issue Letter

Commitments within 30 days, and

further suggested that MARAD review

its application requirements to ensure

that it is not requiring burdensome

information. One commenter suggested

that a deadline for processing completed

applications is an unnecessary

requirement.

The April 1995 NPRM reiterated the

60 day guideline and also proposed a

15-day deadline, after notification by

MARAD, by which an applicant must

correct deficiencies in the application or

face possible termination of the

application. In response to the NPRM,

most commenters supported MARAD’s

efforts to shorten the time for processing

guarantee applications. Several

commenters suggested that to be world

competitive, a 60-day turnaround, from

when the application is submitted to the

Closing, is necessary. Some commenters

were concerned about the proposed

reduced amount of time the applicant

has to correct deficiencies in the

application. One stated that placing a

15-day limit on correcting deficiencies

would place an undue hardship on the

applicant as well as make it impossible

to meet the deadline where deficiencies

involve engineering or architectural

items and, therefore, suggested a

minimum of 60 days to correct

deficiencies. One commenter noted that

the requirement makes no distinction as

to the nature, complexity, or availability

of the requested information.

Several commenters suggested that

termination of an application should

occur only when it is the applicant’s

failure to complete the application that

results in inaction and that failure to

supply the deficient information should

result in suspension of the application

process, rather than termination. Several

commenters stated that if an application

is resubmitted, no new filing fee should

be assessed unless the application is for

a substantially different project. Finally,

one commenter indicated that having to

start over will actually result in

prejudice to MARAD’s consideration of

a subsequent application.

MARAD Response: Prior to the

issuance of the NPRM, this section

indicated that the period between the

filing of the application and the

anticipated date by which a Letter

Commitment is issued was six months

and that the period for completing an

application and the Secretary taking

action on a completed application is

within one year. The NPRM proposed

significant modifications to the Title XI

regulations in this section in order to

provide for expeditious processing of

each Title XI application, resulting in

lower administrative costs and a more

timely response to the applicant.

The 60-day processing period for

completed applications is a general

guideline for processing Title XI

applications. If possible, MARAD will

process completed Title XI applications

on a more expedited basis than 60 days

in order to enable applicants to more

quickly respond to market

opportunities.

As to some shipyard concerns

regarding the drafting of a ‘‘complete’’

application, the time that it takes to

draft a Title XI application is not

factored into the 60-day processing

period. MARAD is on public record as

encouraging Title XI applicants to have

at least one pre-application meeting

with MARAD personnel to, among other

things, determine what essential pieces

of information about the applicant and

its proposal must be included in the

application. As each application is

project specific, the information

necessary for submitting a complete

application for a given project will be

discussed at the pre-application

meeting(s). If applicants follow

MARAD’s suggestion to have pre-
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21305

application meetings, the application

drafting time should be significantly

reduced.

The suggestion that MARAD issue a

Letter Commitment in the case of preapproved ship designs within 30 days is

rejected because MARAD still has to

review the application for economic

soundness and review of a company’s

financial position. In most cases, this

could not be completed in the proposed

30-day period. With regard to the

suggestion that MARAD review its

application requirements to ensure that

it is not requiring burdensome

information, MARAD is undertaking

this review.

Finally, one commenter’s suggestion

that a deadline for processing completed

applications is an unnecessary

requirement is rejected because MARAD

believes that it is critical to an orderly

and expeditious process to have a

specific indication as to the period for

such process.

Several commenters expressed

concerns about the reduced amount of

time (from the previous period of nine

months) the applicant has to correct

deficiencies in the application. In

response, MARAD notes that failure by

the applicant to correct deficiencies

within 15 days does not result in

automatic termination of the

application. The regulation provides

that the Secretary may terminate

processing of the application without

prejudice. MARAD thus has the

flexibility to extend the deadline, if

appropriate, taking into consideration

the nature, complexity, or availability of

the requested information.

MARAD does not believe it necessary

to amend the language in this paragraph

to provide that, in lieu of terminating an

application without prejudice, MARAD

may elect to suspend processing of an

application for any number of

contingencies. MARAD may use its

discretion to do whatever is appropriate

in processing applications.

The position of several commenters

that, if an application is terminated, no

new filing fee should be assessed unless

a subsequent application is for a

substantially different project, is

justifiable and is being adopted.

In view of the foregoing, MARAD sees

no reason to change the present wording

of § 298.3(b)(1), with the exception of

one item. The paragraph is being

amended to clarify that if an application

is terminated by MARAD without

prejudice, no new filing fee will be

assessed for a subsequent application

for a similar project that is filed within

one year of the termination date. If a

subsequent application is for a

substantially different project as

determined by MARAD on a case-bycase basis a new filing fee will be

assessed.

Section 298.3(c). The NPRM proposed

requiring each Title XI application to be

accompanied by a filing fee in the

amount of one quarter of the

investigation fee amount, calculated

pursuant to the formula outlined in

§ 298.15, but in no event less than

$1,000.

Several commenters do not support

raising the $1,000 filing fee, arguing that

preparing a Title XI application shows

seriousness. Other commenters object to

raising the filing fee to the amount

proposed in the NPRM, but believe a

modest fee increase is appropriate. One

commenter believes that a multiple

vessel application should not result in

a substantially greater fee than a single

vessel application of the same type

because the amount of analysis involved

is not significantly more. Therefore, the

commenter believes that the filing fee

should be capped at $25,000 to

discourage frivolous applications.

Another commenter supports capping

the filing fee at a maximum of $10,000.

A $10,000 non-refundable maximum

filing fee will ensure the seriousness of

the applicant and provides the

government with a substantial and

immediate contribution toward the cost

of processing the application. At the

same time, the commenter states that a

$10,000 cap will not result in applicants

undertaking substantial economic risk

simply to file an application.

One commenter states that the

proposed filing fee increase would act

as a major disincentive to program

participation by portions of the

maritime community the program is

designed to serve, bearing most heavily

on those least able to afford its terms.

The increased fee would create a severe

disincentive and is not only onerous in

the extreme for any large project but

also discriminatory against larger

projects which tend to bring greater

benefits to the country. Such a fee level,

in the case of large projects, bears no

relationship to a greater cost to MARAD

of processing a given application up to

the point of approval and receipt of the

investigation fee.

Another commenter believes that if

the proposed NPRM modifications are

adopted, either the Letter of Interest

procedure will in effect become the

application procedure, with prospective

applicants submitting applications

complete in all respects (except for

signatures and payment of the

application fee) or the number of Title

XI applications will decline

dramatically. The commenter states that

MARAD cannot adequately review a

Title XI application in a ten-day time

frame set out for Letters of Interest, and

many applicants, particularly for

Eligible Export Vessels, will not pay

thousands of dollars to find out if

MARAD might approve their

application.

MARAD Response: MARAD has

reconsidered its proposed amendment

and has decided to further amend this

paragraph by requiring each Title XI

application to be accompanied by a

filing fee in the amount of $5,000. Since

the filing fee is deducted from the

investigation fee, which is paid at the

end of the application process, there

will be no net increase in cost to the

applicant. However, the increase in the

initial filing fee will enable the

Government to recover more of its

administrative costs for application

processing at the beginning of the

application period. The instructions for

filing Form MA–163 will be modified to

reflect the increased fee.

Section 298.3(f). In response to the

1994 interim final rule, almost all of the

28 commenters responded favorably to

the proposal that the Secretary exercise

discretion to issue a Letter of Interest

prior to the applicant’s submission of a

complete application. Commenters

noted that the procedure could be

particularly useful if the shipbuilder

could use the document as a marketing

document to compete effectively against

foreign yards. Some suggested that if

MARAD were also to preapprove ship

designs, Letters of Interest would be

very effective indicators of MARAD’s

interest in a proposed financing. One

commenter suggested that Letters of

Interest could be used by applicants to

forecast the cost of a transaction and the

expertise that will be needed to

complete a proposed transaction.

Commenters proposed that requests

for Letters of Interest should contain

information about (1) the type and

design of the Vessel to be financed and

its intended trade, (2) the approximate

cost of the Vessel and its proposed

builder, (3) the amount of the requested

Guarantee, (4) recent financial

information on the prospective

shipowner or bareboat charterer, (5) a

description of the collateral to secure

the Secretary’s Guarantee, and (6)

identification of the country in which

the Vessel would be owned and

documented. A commenter

recommended that there be no charge or

fee for the issuance of a Letter of

Interest, that the letter be issued prior to

the filing of an application, and that the

letter be issued within ten days of the

request.

Several commenters raised two

concerns about Letters of Interest. First,
21306 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

they argued that requests for such letters

must be treated confidentially because a

request for a letter may come during the

negotiating process and the subject

shipyard would not want its

competitors to be aware of the

negotiations or potential prices. A

second concern raised was that the

formalization of a Letter of Interest

procedure could slow down the

expeditious approval by MARAD of

loan guarantee applications by

effectively duplicating the formal

application process. It was suggested by

one commenter that MARAD could

substitute preapplication meetings for

the Letter of Interest. Additional

concern was expressed that the

conditions contained in the Letter of

Interest should not be deemed by the

agency to be binding if the applicant

later demonstrates that it can meet

alternative, but equivalent conditions.

MARAD Response: MARAD noted in

its comments above to § 298.2(o) its

deletion of the Letter of Interest

definition. Initially, MARAD intended

its Letters of Interest to parallel those of

the Export-Import Bank of the United

States. However, MARAD has, with the

passage of time, significantly diluted the

content of its Letter of Interest to the

point where the letter is in the nature of

a letter of eligibility. MARAD found it

necessary to amend the letters because,

in certain instances, they had been held

forth to outside institutions as

representing some sort of commitment

to a project by MARAD. Currently, the

letters describe only the general

eligibility of a project and advise that,

as such, they do not and should not be

construed as approval of the project by

MARAD or the terms that would be

applicable to the project. The letters

state that approval of any project would

be based on MARAD’s determination

that the project meets all statutory,

regulatory and financial requirements.

The letters further state that, although a

project may be deemed eligible for Title

XI financing, issuance of the letter does

not give any assurances that MARAD

would be interested in proceeding with,

or that funds would be available for, the

type of project should an application be

filed. Therefore, MARAD believes that

to continue to call these letters ‘‘Letters

of Interest’’ is inaccurate. MARAD will

continue to issue letters of eligibility to

indicate the general eligibility of a

project for Title XI financing. However,

it will no longer issue any document

referred to as a Letter of Interest.

MARAD believes that the letter of

eligibility concept does not have to be

formalized in the Title XI regulations

and, therefore, paragraph (f) is being

deleted in its entirety.

MARAD does not agree with the

commenters’ concern that letters of

eligibility be treated on a confidential

basis. As a general matter, all letters of

eligibility including all formal actions

taken by MARAD, including the

issuance of a letter of eligibility, must be

disclosed to the public. However, if the

request for a letter of eligibility,

including attachments thereto, contains

information which the submitter

considers to be trade secrets or

commercial or financial information and

privileged or confidential, or otherwise

exempt from disclosure under the

Freedom of Information Act (FOIA) (5

U.S.C. 552), the submitter shall assert a

claim of exemption at the time of filing

a letter of eligibility request. The same

requirement shall apply to any

amendment to the request. The

procedures outlined in paragraph (d) of

this section shall apply with respect to

the assertion and review of FOIA

exemption claims. Due to the nature of

a request for a letter of eligibility,

MARAD does not agree with the

comment that the letter of eligibility

procedure would slow down the

expeditious approval by MARAD of

Title XI applications. Finally, MARAD

believes to be unfounded the comment

that MARAD could substitute preapplication meetings for the letter of

eligibility as the two concepts are

unrelated. The purpose of a preapplication meeting is to exchange

information and the purpose of a letter

of eligibility is to identify the general

eligibility of a project.

Section 298.10 Citizenship.

This section sets forth the citizenship

requirements for Title XI applicants and

certain other parties that must establish

U.S. citizenship prior to acquiring a

legal or beneficial interest in a Vessel

financed under Title XI of the Act. The

exceptions to this requirement are

Eligible Export Vessels and General

Shipyard Facilities.

Section 298.10(a). MARAD received

four comments on this issue. One

commenter merely pointed out a

typographical mistake. The other three

commenters supported the elimination

of the citizenship requirement for all

Title XI financed U.S.-flag vessels and

stated that the only requirement should

be the vessel documentation

requirements administered by the U.S.

Coast Guard. One of the three

commenters, with known foreign

involvement, is interested in converting

semi-submersible drilling rigs into

floating production systems (FPS) for

use in the oil and gas industry in the

Gulf of Mexico area. Therefore, their

view is that Title XI financing should be

available to ‘‘transnational ship-owning

corporations.’’ Another commenter

supported the elimination of the

citizenship requirement because their

desire is ‘‘to see that the potential

beneficiaries of the Title XI program are

as broad as possible * * *’’ A comment

from a law firm stated that sections

1103(a) and 1104(a)(1) were amended by

the Shipbuilding Act to eliminate

Section 2 citizenship requirements for

Title XI financed U.S.-flag vessels and

that MARAD is misreading the U.S.

citizenship requirements set forth in the

defined term ‘‘vessel’’ at section

1101(b). Their view is that the U.S.

citizenship requirement in this section

is not all inclusive and applies only to

certain types of vessels. One of the four

commenters also stated that the

citizenship of a preferred mortgagee is

‘‘immaterial’’ and MARAD should not

be concerned with the citizenship of

third party mortgagees.

MARAD Response: The U.S.

ownership requirement for U.S.-flag

vessels financed with Title XI has been

consistently required throughout the life

of the Title XI program. It was required

for the predecessor federal ship

mortgage insurance program, 52 Stat.

969 (See H.R. Rep. No. 2168, 75th.

Cong., 3d Sess. 29), retained in the

Federal Ship Loan Guarantee Program,

enacted in 1972, 60 Stat. 909, and left

unchanged by enactment of the

Shipbuilding Act in which Title XI loan

Guarantees were extended to Eligible

Export Vessels, which could be owned

by either U.S. citizens or non-U.S.

citizens, but retained the limiting

definition of vessels for non-export

purposes. Therefore, by law, U.S.-flag

Vessels receiving Title XI financing

must be owned by U.S. citizens.

With respect to the comment

regarding citizenship of mortgagees,

MARAD does not require, under the

Title XI financing program, evidence of

the mortgagee’s U.S. citizenship.

MARAD only requires confirmation that

the mortgagee complies with the

statutory requirements established for

mortgagees. Accordingly, MARAD will

not amend the regulation.

Section 298.11 Vessel requirements

Section 298.11(a). Concerning

paragraph (a), United States

Construction, one commenter suggested

that the structure of creating three

separate classes of Vessels is confusing

and unnecessary. To the extent a higher

standard is required for operation in the

coastwise trade, it should be sufficient

simply to say that the Vessel shall be

built to whatever standard is necessary
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21307

to entitle it to be eligible for such trade.

There should be no distinction between

U.S.-flag and Eligible Export Vessels.

The standard for U.S. shipyard

involvement for Eligible Export Vessels

is the standard which should apply to

all Vessels subject to specific trade

requirements. The commenter therefore

recommends that for all Vessels

MARAD adopt the definition in

§ 298.11(a)(3), which provides that the

Vessel is considered to be of U.S.

construction if assembled in a United

States shipyard. A second commenter

states that since the Organization for

Economic Cooperation and

Development Shipbuilding Agreement

recognizes the U.S. right to maintain the

Jones Act, it is appropriate for the rule

to make a distinction between Jones Act

and non-Jones Act Vessels so that any

prospective change to the guarantee

period will not apply to Jones Act

Vessels.

MARAD Response: Upon further

review, MARAD agrees with one of the

commenters that the creation of three

separate categories of Vessels is

unnecessary. As the proposed categories

were squarely in line with the standards

enunciated by the United States Coast

Guard, MARAD believes it is

appropriate instead to amend paragraph

(a) of the regulation to simply state that

for U.S.-flag Vessels, the Vessels shall be

built to whatever standard is necessary

to enable them to be eligible for their

specific trade requirement. Accordingly,

the regulation is being amended to

provide that a Vessel, including an

Eligible Export Vessel, financed by an

Obligation Guarantee is considered to be

of United States construction if the

Vessel is assembled in a shipyard

geographically located in the United

States. In addition, § 298.32(a)(6) is

being amended to reflect the above.

Section 298.11(c). Concerning

paragraph (c), Class, condition and

operation, two commenters supported

MARAD’s proposed amendment

regarding Quality Systems Certificate

Scheme (QSCS) issued by qualified

International Association of

Classification

Societies (IACS) members as meeting

acceptable standards for such a society

to participate in the Eligible Export

Vessel program.

MARAD Response: By requiring

solely ISO–9000 registration, the current

Title XI regulations do not allow

members of IACS who are QSCS

qualified members that are not ISO–

9000 registered to participate in the

Title XI Eligible Export Vessel program.

Initially, there was a thought that

merely agreeing to a QSCS standard

would screen out marginally qualified

classification societies. However,

requiring the ISO–9000 standard would

currently screen out the American

Bureau of Shipping and other highly

qualified classification societies whose

inspection and classification activities

are recognized worldwide. Paragraph (c)

has been amended to permit QSCS

qualified IACS members who have been

recognized by the United States Coast

Guard as meeting acceptable standards

for such a society to participate in the

Eligible Export Vessel program. That

recognition shall include, at a

minimum, recognition that the society

meets the requirements of IMO

Resolution A.739(18).

Section 298.11(e). Concerning

paragraph (e), Metric Usage, one

commenter states that it is not clear

what is meant in the regulation by the

statement that the ‘‘preferred system’’ is

the metric system. If some preference is

to be given to application of the metric

system, the consequences of such

preference should be spelled out.

MARAD Response: DOT Order

1020.1D ‘‘Department of Transportation

Transition to the Metric System’’

established Departmental policy for

transition to the metric system in

accordance with the Metric Conversion

Act of 1975, as amended by Section

5164 of the Omnibus Trade and

Competitiveness Act of 1988, Pub. L.

100–418 (Omnibus Act). Section 5164 of

the Omnibus Act declares that it is the

policy of the United States to designate

the metric system of measurement as the

preferred system of weights and

measures for U.S. trade and commerce.

Section 5164(b)(2) requires each Federal

agency to use the metric system of

measurement in its procurement, grants,

or other business-related activities.

Therefore, the Title XI regulations have

been amended to indicate that the

preferred system of measurement and

weights for vessels and advanced and

modern shipbuilding technology is the

metric system as a matter of policy.

However, no preference/priority is given

to processing applications where the

metric system of weights and measures

is utilized. The priorities given to Title

XI applications are outlined in

§ 298.3(e) and select criteria for

evaluating Title XI applications is set

forth in § 298.17.

Section 298.12 Applicant and

Operator’s Qualifications

Section 298.12(b)(2). This section

outlines identifying information

required to be submitted if the applicant

is a partnership, joint venture,

association, or unincorporated

company.

MARAD Response: Although no

comments were received regarding the

change to this paragraph as outlined in

the NPRM, MARAD has decided to add

a new paragraph (b)(2)(vi) requiring the

submission of information regarding

financial, management and/or equity

transactions which could have a

significant impact on the ability of the

applicant to meet the Title XI

requirements.

Section 298.12(f)(1). One commenter

stated it is unclear which individuals

need to be named in this section which

requires that the background of ‘‘all

senior supervisory personnel’’ be

submitted. To the extent that advanced

shipbuilding technology is the subject of

the application, it should be sufficient

to submit the background of the people

who will be directly responsible for the

installation or operation of the facility

or method. Additionally, one

commenter suggested that the word

‘‘personnel’’ should be stricken from the

proposed insert—’’by all senior

supervisory’’—because the word

‘‘personnel’’ already follows each place

that the phrase is inserted.

MARAD Response: MARAD agrees

that the word ‘‘personnel’’ should be

stricken from the proposed amendment

to that paragraph. MARAD sees no

reason to change the present wording of

paragraph (f)(1) regarding the

background of all senior supervisory

personnel for Advanced Shipbuilding

Technology. It is a sufficiently clear

standard to apply to particular

circumstances.

Section 298.13 Financial

Requirements

Section 298.13(a)(2)(i). One issue on

which MARAD solicited public

comments in the NPRM is the retention

in section 298.13 of the waiver

requirement for foreign components and

services to be included in Actual Cost,

which waiver shall not be granted for

foreign components of the hull and

superstructure. MARAD indicated its

concern about the potential adverse

effect on the U.S. supplier base, which

MARAD recognizes as critical to the

national defense and economy. In the

NPRM, MARAD stated that it is

attempting to create an environment

where both the shipbuilding and ship

supply industries have the opportunity

to be competitive based on fair pricing,

quality, and timeliness.

A broad spectrum of comments were

received on this issue. Some

commenters supported the retention of

the current waiver requirement for

foreign components and services. One

commenter submits that the retention of

the waiver provision is the most
21308 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

prudent path for applicants to follow

and outweighs any speculative adverse

impact that retention of the waiver

might have on the U.S. supplier base.

There are instances in which a foreign

component or service is necessary for

the construction, reconstruction, or

conversion of a vessel, and the applicant

should not be penalized in such

instances. Additionally, the commenter

states that removal of the waiver might

place a U.S. supplier who competes

with foreign suppliers in a position to

demand what might amount to

monopolistic prices; the supplier who

normally competes in the world market

would be given dominant market power

if the applicant were required to

purchase supplies from such a U.S.

supplier in order to obtain financing for

the cost of such supplies. The

commenter states that removal of the

waiver provision has the potential to

hinder, rather than enhance, the

creation of a competitive domestic ship

supply industry based on fair pricing,

quality and timeliness. In addition, the

commenter submits that it should be

made clear that, in addition to the hull

and superstructure, each additional

foreign component or service for which

a waiver is not granted, and thus which

is not included in Actual Cost, can be

regarded as owner-furnished equipment

that may be used in satisfying the

applicant’s equity requirements. Finally,

that commenter proposes adding the

following underscored language to

§ 298.13(a)(2)(1): ‘‘Although excluded

from Actual Cost, foreign components of

the hull and superstructure and other

foreign components and foreign services

for which a waiver has not been granted

can be regarded as owner-furnished

equipment that may be used in

satisfying the applicant’s equity

requirements * * *.’’

Another commenter states that the

term ‘‘component’’ should be defined in

order to eliminate the possibility that

raw materials, such as steel, might be

considered to be a component and

required to be of U.S. origin. It is

important to retain the ability to waive

the requirement for U.S. components,

MARAD needs the flexibility and it is

too hard to predict technological

changes that may be beneficial to a

vessel that may be obtained only

through a foreign source or to

compensate for shortages in the U.S.

supply of components affecting delivery

schedules. Another commenter notes

that the regulations are not specific as

to what items are to be considered as

components of the ‘‘hull and

superstructure.’’

Other commenters supported the

introduction of a more restrictive waiver

requirement by recommending that

waivers ‘‘ordinarily be granted only

where the applicant has demonstrated

that the item involved: (a) Is not

manufactured by a U.S. domestic

source, or if a service, is not available

from such a source; (b) is not available

from a U.S. domestic source in a timely

fashion; or (c) is not available from a

U.S. domestic source at a competitive

price.’’ Along the same line, another

commenter states that the regulations

need to be amended to provide for

standards and procedures for granting

waivers, such that applicants will be

required to demonstrate in a clear and

convincing way that no U.S. product is

available and that sufficient and

effective steps have been taken to search

the U.S. industrial base.

Finally, some commenters opposed

the requirement for a foreign component

waiver for non-hull and superstructure

items. One commenter states that the

requirement to seek a waiver for each of

a myriad of items would be a crippling

obstacle to achieving competitiveness

and the NPRM gives no indication as to

grounds for a waiver. The commenter

states that protection of the U.S.

supplier base will not promote

competition. Where U.S. suppliers are

capable and cost-competitive, the

commenter expects U.S. suppliers to be

used. However, the commenter supports

the requirement that only hull and

superstructure components fabricated in

the U.S. should be included in Actual

Cost and that no waiver should be

granted. The commenter does not

believe that inclusion of foreign hull

and superstructure components should

disqualify the entire vessel from Title XI

financing and does not see any

significant benefit to allowing foreign

hull and superstructure components to

be included as part of the equity

contribution. Finally, the commenter

states that it is unclear in the example

given in the NPRM how foreign hull and

superstructure components will be

considered as part of the equity

contribution. Nonetheless, the

regulations should specifically state that

large items of foreign hull and

superstructure components excluded

from actual cost may be financed

externally, such as in a foreign

jurisdiction that is willing to provide

export financing.

Another commenter opposing the

requirement for a foreign component

waiver for non-hull and superstructure

items states that restrictions on the use

and financing of foreign equipment will

severely limit U.S. shipyards’ ability to

become globally competitive. The

commenter adds that it is not reasonable

to assume that these restrictions will

result in the domestic manufacture of

items. U.S. yards need to have the same

access to the global supplier base as do

other yards so that they can obtain the

low prices and technologically

advanced designs necessary to secure

orders. Restricting U.S. shipyards from

procuring foreign source machinery,

equipment, or hull and superstructure

material which has been manufactured

in a foreign facility is not the way to

make them competitive on the

international market.

Another commenter respects

MARAD’s good faith desire to try to

protect U.S. suppliers, but opposes the

actual cost disqualification for all

foreign components and services. The

commenter states that the NPRM’s

articulated policy goal is contrary to the

spirit of GATT, to the policy of the

President and the USTR, and to

Congressional intent. In order to get

export shipbuilding orders, there must

be freedom to respond to the

commercial dictates of international

customers. The commenter adds that

U.S. suppliers are done no favors by

adopting protectionist principles which

can prevent U.S. shipyards from

obtaining export orders. The commenter

states that a ‘‘Buy America’’ program

should not be adopted until choice

availability and price parity from within

the domestic U.S. is fully equal to that

internationally available. If the above

arguments are rejected, the commenter

argues that the hull and superstructure

metals components are the only items

for which no waiver should be granted.

A final commenter adds that

exclusion of foreign components of the

hull and superstructure and a waiver for

other foreign components or services is

redundant in the case of coastwiseeligible U.S.-flag Vessels since other

U.S. laws require that such Vessels be

built in the United States (which term

includes fabrication of all major

components of the hull and

superstructure in the U.S.). The

commenter states that the regulations

omit the word major thereby arguably

setting up an even higher standard than

that required to document Vessels under

the U.S. flag for coastwise trade. The

commenter recommends that MARAD

limit its requirements under Title XI in

the case of non-coastwise U.S.-flag

Vessels and foreign-flag Vessels to

assembly in a shipyard in the United

States. The commenter states that

MARAD should encourage U.S.

shipyards to compete internationally

and not limit its own program in a way

that makes it less attractive than

competing programs being offered by

foreign countries. In addition, the

commenter states that the waiver
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21309

requirement is totally unwarranted in

light of earlier removal of the ‘‘Buy

America’’ requirements. Placing

additional requirements of this type is

the kind of unnecessary government

regulation that the Administration

promised to eliminate in its October

1993 shipbuilding initiative report.

MARAD Response: MARAD reiterates

its concern about the potential adverse

effect on the U.S. supplier base of

elimination of the waiver requirement

for foreign components and services to

be included in the Actual Cost

determination. MARAD is attempting to

create an environment where both the

shipbuilding and ship supply industries

have the opportunity to be competitive

based on fair pricing, quality and

timeliness. In view of the foregoing

comments, MARAD has decided to

retain the waiver requirement and to

establish a standard for granting a

waiver. The standard would be the

certification by the applicant, to be

reviewed by MARAD, that a foreign

item or service is not available in the

U.S. on a timely or price-competitive

basis, or is not of sufficient quality.

Paragraph (a)(2)(i) is being modified

accordingly.

In addition, MARAD agrees with one

of the commenters that the omission of

the word ‘‘major’’ from defining the

components of the hull and

superstructure which must be fabricated

in the U.S. establishes a higher standard

than that required to document vessels

under the U.S. flag for coastwise trade.

Accordingly, the appropriate

clarification is being made to paragraph

(a)(2)(i).

Section 298.13(a)(4). One commenter

states that provision should be made to

accept financial information provided in

the normal accounting system used by

the applicant, provided that it is an

accepted accounting system in the

applicant’s country of origin and

further, provided that the applicant

submits some reconciliation of the

major differences between the

accounting system employed and

GAAP. The commenter adds that the

Securities and Exchange Commission

accepts this approach. One other

commenter recommends that if U.S.

GAAP is to be required of all applicants

or other entities significantly involved

with the financing, that requirement

should be reflected in the regulations.

MARAD Response: MARAD

recognizes that a requirement to meet

U.S. generally accepted accounting

standards may be unduly burdensome

in the case of Eligible Export Vessels.

Accordingly, in the interim final rule

published in the Federal Register on

March 31, 1994, MARAD amended

§ 298.42 of the Title XI regulations to

provide that, in the case of such vessels,

the company accounts shall be audited

at least annually and the Secretary may

require that the financial statements be

in accordance with generally accepted

accounting principles by accountants, as

otherwise described in § 298.42, or

certified by independent public

accountants licensed to practice by the

regulatory authority or other political

subdivision of a foreign country,

provided such accountants are

satisfactory to the Secretary. In order to

be consistent with § 298.42, MARAD

agrees that provision should be made for

MARAD to accept financial information

from Eligible Export Vessel applicants

provided in the normal accounting

system used by the applicant, provided

that it is an accepted accounting system

in the applicant’s country of origin and,

further, provided that the applicant

provides a reconciliation of the major

differences between the accounting

system employed and GAAP. This

approach would parallel that accepted

by the Securities and Exchange

Commission. MARAD has added new

language to this paragraph to

accommodate the commenter’s concerns

and to make this paragraph consistent

with § 298.42.

Section 298.13(b). This paragraph sets

forth financial definitions for §§ 298.13,

298.35 and 298.42 of the Title XI

regulations. One commenter is confused

as to how the NPRM amended this

section to be consistent with 46 CFR

part 232, as no proposed amendments to

part 232 could be found. The

commenter added that, for the

definitions of working capital, equity

and long-term debt, the NPRM deleted

references to GAAP, which revisions are

not supported by the commenter.

MARAD Response: The commenter

appears to have misinterpreted the

proposed amendment to this section of

the Title XI regulations. The NPRM

amended certain paragraphs of this

section to make them consistent with 46

CFR § 232, which was most recently

amended by MARAD with the

publication of a notice in the Federal

Register on December 9, 1993. There is

no indication in the discussion section

of the NPRM that amendments to part

232 were also being proposed, which is

the reason the commenter could not

find any proposed amendments to part

232.

With regard to the commenter’s

statement that the NPRM deleted

references to GAAP in the definitions of

working capital, equity and long-term

debt, it is important to note that 46 CFR

§ 232.2(a), which is separate from the

Title XI regulations, requires that all

contractors shall conform their

accounting policies to GAAP

(promulgated by the Financial

Accounting Standards Board of the

American Institute of Certified Public

Accountants). Although the NPRM

deletes references to GAAP in these

Title XI regulations, working capital,

equity and long-term debt definitions

must conform to GAAP as such terms

are defined in 46 CFR 232.2(a). Hence,

MARAD sees no reason to change the

present wording of paragraph (b).

Sections 298.13 (d) and (e). These

sections outline the primary and special

requirements required at the Closing.

Comments were received from only one

commenter on these paragraphs. The

commenter states that the maximum

debt to equity rate of 2:1 is unrealistic

and should be revised upwards. The

commenter considers the ratio

unrealistic because a company could

have a large asset requisition and yet

still be strong enough to pay back its

loan. Furthermore, since banks allow a

ratio of 3:1 in certain cases, MARAD

regulations are more burdensome. In

addition, the commenter states that the

working capital ratio is obsolete and

should be replaced by a cash flow ratio

for asset-based companies. A minimum

ratio of 1.25:1 is recommended by the

commenter in keeping with current

banking requirements.

MARAD Response: MARAD does not

agree that a debt to equity ratio of 2:1

and a positive working capital ratio are

either unrealistic or obsolete standards,

and is not amending these requirements.

However, MARAD recognizes that these

standards may not be appropriate in

certain cases and does not apply them

in every case. Financial requirements

are determined on a case-by-case basis

and are dependent upon numerous

financial and economic factors.

Pursuant to paragraph (h) of this

section, the Secretary may waive or

modify the financial terms or

requirements otherwise applicable

under this section, upon determining

that there is adequate security for the

Guarantees. Should an applicant have

sufficient financial resources to justify a

different ratio, the Secretary already has

the authority to modify the financial

requirements.

Section 298.14 Economic Soundness

Section 298.14. One commenter stated

that in evaluating the income stream for

a one vessel project, MARAD should

consider the assets of the entire

company which back up the loan,

including other vessels’ income. In

addition, loans should provide for

repayment without the imposition of

pre-payment penalties kicking in.
21310 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

MARAD Response: Paragraph

(a)(1)(iii) of this section states that in

making a finding of economic

soundness MARAD shall consider all

relevant factors, including, but not

limited to, the projected revenues and

expenses associated with employment

of the vessel. Whether the project is a

one Vessel project or a multi-Vessel

project, MARAD believes that it is only

reasonable to require that the projected

cash flow and net income of the project

support the Title XI debt service

requirements. Therefore, MARAD

declines to amend the requirement.

As to the comment that loans should

provide for repayment without prepayment penalties kicking in, payment

terms, conditions, and penalties, if any,

are determined prior to the issuance of

the Obligations and are subject to

negotiation. For MARAD to require that

no pre-payment penalties will kick in if

a loan should be prepaid is

inappropriate and MARAD sees no

reason to take such a position as the

issue of pre-payment penalties must be

negotiated between the Obligor and the

Obligee(s).

Although no comments were

specifically received regarding

paragraphs (b)(3) and (b)(4), MARAD

has re-evaluated this requirement and

has determined that the IRR calculation

is not necessary and is deleting the

appropriate paragraphs. The IRR

calculation regulation was originally

intended to provide specific, clear

procedures that would produce more

accurate and complete information for

selecting successful applicants.

However, on August 6, 1992, MARAD

issued a final rule which shifted the

burden for computation of the IRR from

the applicant to MARAD.

This section already outlines relevant

factors that are considered by MARAD

in making the economic soundness

finding for a project. MARAD can make

an economic soundness finding for a

particular project based on the revenue,

cost data, cash flows and other data

already required to be submitted by all

applicants. In view of the foregoing, the

IRR calculation is not necessary to make

a finding of economic soundness.

Section 298.18 Financing Advanced or

Modern Shipbuilding Technology

Section 298.18(a). This paragraph

states that the Secretary will approve

Guarantees to finance Advanced or

Modern Shipbuilding Technology only

upon a finding by the Secretary that the

Guarantees will aid in the transition

from naval shipbuilding to commercial

ship construction for domestic and

export sales, encourage shipyard

modernization, and support increased

productivity.

MARAD Response: Although no

comments were received on this

paragraph, MARAD has reevaluated the

requirement for this finding as part of its

overall concern to reduce regulatory

burden. This finding is not a statutory

requirement; it was incorporated in the

Title XI regulations on March 31, 1994,

with the publication of the interim final

rule which became final on September

16, 1994. Subtitle D of the Authorization

Act includes a similar requirement for

eligible export vessels which does not

apply to shipyard modernization and

improvement.

In view of the fact that: (1) There is

no statutory requirement for the

Secretary to include the provision in

paragraph (a) of this section; (2) Section

298.17 of the regulations already

provides that, in evaluating project

applications, the Secretary shall also

consider whether, in the case of an

Eligible Shipyard, the application

provides for the capability of the

shipyard to engage in naval vessel

construction in time of war or national

emergency; (3) paragraph (b) of this

section states that the Secretary shall

not approve applications for Advanced

or Modern Shipbuilding Technology

which, after taking into consideration

certain factors, would preclude approval

of another application which would

result in a more desirable use of

appropriated funds; and (4) § 298.3(e)

states that priority will be given to

applications from General Shipyard

Facilities that have engaged in naval

Vessel construction and that have pilot

programs for shipyard modernization

and Vessel construction, with respect to

funds appropriated to the Secretary of

Defense, it is now MARAD’s position

that General Shipyard Facilities

applying for Guarantees to finance

Advanced or Modern Shipbuilding

Technology need not satisfy a

mandatory requirement as to prior naval

shipbuilding. The language in the

paragraph is being amended

accordingly.

Section 298.20 Term, Redemption and

Interest Rate.

Section 298.20. One commenter stated

that where charter rates are very low,

financial assistance could be provided

to an operator such as an extension of

the Title XI maturity from 20 years to 25

years or a moratorium of the principal

payments for a certain period of time to

enable an owner to keep a ship out of

lay-up.

MARAD Response: This section

outlines Obligation criteria with respect

to term limitations, required

redemptions and interest rate. Title XI

Obligations shall not have a maturity

which exceeds the anticipated physical

and economic life of the asset being

financed and, with respect to vessels, no

more than twenty-five years from

certain dates. MARAD already has the

authority to defer principal payments, if

warranted. Further, to protect, preserve

or improve the collateral held as

security by MARAD to secure Title XI

debt, § 298.28 provides MARAD

discretion to make, or commit to make,

an advance or payment of funds for

Vessel-related expenses or fees.

Section 298.21 Limits

Section 298.21(c). One commenter

supports inclusion of Guarantee Fees as

an item of Actual Cost in addition to

certain broker commissions and

underwriting fees for export vessels.

MARAD Response: MARAD agrees

with the comment that if Guarantee Fees

are to be paid up front and are eligible

to be financed with Title XI, then

Guarantee Fees should be included as

an item of Actual Cost. No further

changes to paragraph (c) are necessary.

With regard to broker commissions and

underwriting fees for Eligible Export

Vessels, paragraph (c)(4) does not allow

‘‘fees, commissions or charges for

granting or arranging for financing’’, and

paragraph (c)(6) does not allow

‘‘underwriting or trustee’s fees’’ to be

included in Actual Cost. Recognizing

the importance that the payment of

commissions plays in the export market,

MARAD will allow commissions to be

included in the foreign equipment and

services amount of the Actual Cost of

the project, provided: (1) A majority of

the work done by the parties receiving

the commissions is in the form of design

and engineering work, and (2) the

commissions represent a small amount

of the total contract price. As the

commissions represent a portion of the

total shipyard contract price, therefore,

there is no need to amend paragraphs

(c)(4) and (c)(6). A new sentence is

being added to paragraph (b) which

states that commissions may be

included in the amount of the Actual

Cost of a project, subject to the foregoing

provisions.

Section 298.21(d). As mentioned

previously in the preamble, the NPRM

solicited public comments regarding the

guarantee of construction period

financing, as authorized by the Title XI

regulations. MARAD specifically invited

comments on available forms of

security, in addition to surety bonds,

that could protect MARAD’s interests as

a lender, how progress should be

monitored, what new procedures/

methodologies should be developed to
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21311

improve the progress payment system,

and if payment of interest on the

obligations should be made on a more

frequent basis (i.e., weekly, monthly or

quarterly) than that outlined in § 298.22,

Amortization of Obligations. In

addition, MARAD solicited comments

on how the Title XI applicant will

verify/certify to MARAD that certain

costs have been paid prior to

disbursement of Title XI funds from the

escrow account, including, for example,

the use of an agent on MARAD’s behalf

to verify that certain costs have been

paid.

On the payment of interest issue, one

commenter states that the question of

whether interest should be paid more

frequently has no bearing on

construction risk. A requirement for

more frequent payment than would be

required after delivery would make

issuance of long-term bonds during the

construction period more awkward.

Another commenter adds that interest

during the construction period should

be paid semi-annually. Finally, one

commenter recommended that interest

be collected monthly in arrears.

On the agent issue, one commenter

states that the use of an agent is an

unnecessary complication. Actual Cost

is readily determined by inspection of

invoice payments. The issue is really

whether progress payment criteria

established in the contract have been

met. The commenter adds that MARAD

should adopt a system with only four or

five progress payments that are keyed to

readily ascertained events, such as keel

laying or start of fabrication. MARAD

should avoid any elaborate audit

procedures for costs incurred by the

shipyard since the cost basis for the

project is a fixed price. A second

commenter states that the use of an

agent by MARAD for certification of

completion and payment of costs is

similar to the ‘‘privatization’’ going on

in many agencies and departments

today and supports the concept. A final

commenter adds that progress could be

monitored by an approved agent and the

shipyard and owner should have

flexibility to develop procedures/

methodologies. The commenter adds

that the applicant could verify/certify

certain costs paid prior to disbursement

using an agent on behalf of MARAD.

Finally, one commenter suggests that

the words ‘‘or Advanced Shipbuilding

Technology or Modern Shipbuilding

Technology’’ should not be inserted as

proposed in § 298.21(d) because they are

already in the current regulations.

MARAD Response: MARAD disagrees

with the comment that the words ‘‘or

Advanced Shipbuilding Technology or

Modern Shipbuilding Technology’’

should not be inserted in § 298.21(d)

because the words are already in the

current regulations. Although § 298.21

(b) has already been amended to reflect

the expansion of the Title XI program

for financing Advanced Shipbuilding

Technology and/or Modern

Shipbuilding Technology, it is

necessary that the applicant submit to

MARAD documents substantiating all

claimed costs eligible under that section

prior to payment from the Escrow Fund

or Construction Fund and prior to the

final Actual Cost determination for the

Advanced Shipbuilding Technology

and/or Modern Shipbuilding

Technology.

On the payment of interest issue,

MARAD agrees that the frequency of

making interest payments has no

bearing on construction risk, and a

requirement for a more frequent

payment than would be required after

delivery would make issuance of longterm bonds during the construction

period more difficult. In view of the

foregoing, MARAD does not believe that

interest on Obligations should be paid

on a more frequent basis than that

outlined in § 298.22, which, in most

cases, is semi-annually.

On the agent issue, MARAD disagrees

with the comment that the use of an

agent is an unnecessary complication.

Provided that the methodology for

substantiation of Actual Cost is

determined prior to the establishment of

an Escrow Fund or Construction Fund,

using an agent on behalf of MARAD to

verify/certify certain costs paid prior to

disbursement can improve the

administration of the Title XI program.

MARAD believes that it is important to

maintain flexibility in the procedures/

methodologies for agent certification,

and therefore declines to adopt by

regulation a progress payment schedule

based on specified milestones as such a

payment schedule keyed to definitive

events is already permissible.

Hence, MARAD will not amend the

text of paragraph (d) as proposed in the

NPRM.

Section 298.28 Advances

Concerning paragraph (a), one

commenter suggested that the fourth

sentence should be removed because the

net result of the proposed inserts and

deletions render the fourth sentence

meaningless.

MARAD Response: MARAD agrees

and the fourth sentence is being deleted.

Section 298.32 Required Provisions in

Documentation

Section 298.32 (b). Pursuant to this

section, the Obligor shall assign certain

rights and shall covenant certain items

as required by the Secretary.

Paragraph (b)(4) requires covenants

relating to the annual filing of

satisfactory evidence of continuing U.S.

citizenship, in accordance with 46 CFR

part 355, with the exception of Eligible

Export Vessels and shipyards with

Advanced or Modern Shipbuilding

Technology projects. One commenter

states that this requirement is

inappropriate for those classes of

Vessels which must be documented

under the laws of the U.S. but are not

required by Section 1101(b) of the Act

to be owned by Section 2 citizens.

Since, the Coast Guard is the agency

charged with enforcing the

documentation laws of the U.S. and its

regulations at 46 CFR 67.163 require an

annual report of eligibility for such

documentation from the owners of all

documented Vessels, the commenter

writes that no useful purpose is served

by requiring owners of cargo and

passenger Vessels, tugs and towboats

and barges and dredges to file affidavits

pursuant to Part 355.

MARAD Response: Until the Act is

further amended, MARAD will retain

the regulation regarding the filing of

affidavits pursuant to 46 CFR part 355.

Paragraph (b)(6) requires covenants to

maintain marine and war risk hull and

machinery insurance on the Vessel in an

amount equal to 110 percent of the

outstanding Obligations or up to the full

commercial value of the Vessel,

whichever is greater. One commenter

recommends that making the required

insurance co-extensive with the

Guarantee amount (as MARAD only

guarantees up to 871⁄2 percent of the

Actual Cost of the Vessel) would ensure

that MARAD is ‘‘made whole’’ in the

event of a disaster, while not creating an

unnecessary financial burden for the

owners. In addition, the commenter

recommends that war risk coverage

should not be required for vessels

operating in U.S. waters.

MARAD Response: War risk

insurance covers other perils besides

war, such as strikes, riots and civil

commotions. MARAD has not required

war risk insurance for inland Vessels,

Great Lakes Vessels, or Vessels

operating solely in the intercoastal

waterway because they are in a

protected environment from risks of

war. Vessels operating in domestic

coastal trades and Jones Act offshore

trades, including Puerto Rico and

Hawaii, are required to have war risk

insurance because these vessels are

often out of protected U.S. territorial

waters and in international waters,

where they might encounter a hostile

vessel or plane. For example, in the
21312 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

early 1960s a U.S.-flag vessel, the

FLORIDIAN was attacked by a Cuban

fighter plane in international waters off

the coast of Florida. Another U.S.-flag

vessel, operating in the U.S. coastwise

trade during that timeframe, the

MARINE SULFUR QUEEN, vanished

without a trace or established cause

somewhere off the Florida coast on a

voyage from the U.S. Gulf Coast to the

U.S. East Coast. In addition, there is the

possibility of minor regional flare ups

where there might be the possibility of

extending hostilities into international

waters where U.S.-flag vessels are

transiting. Accordingly, MARAD has

only agreed to waive the war risk

insurance requirement for vessels

operating solely on or in inland

protected waters. Finally, war risk

insurance is relatively inexpensive, with

coverage for a $10 million vessel costing

$2,500 per year.

With regard to the comments received

on the covenants to maintain marine

and war risk hull and machinery

insurance on the Vessel in an amount

equal to 110 percent of the outstanding

Obligations or up to the full commercial

value of the Vessel, whichever is

greater, MARAD has considered the

commenter’s request to reduce the

amount of coverage to equal the

outstanding Obligations on a Vessel. In

view of the fact that: (1) Any payoff by

MARAD pursuant to its Guarantee

would include interest accruals on the

outstanding Obligations, and (2) the

potential for a dispute with other parties

over the insurance proceeds is reduced

if the Vessel is insured in an amount

equal to 110 percent of the outstanding

Obligations or up to the full commercial

value of the Vessel, whichever is

greater, MARAD does not agree with the

commenter that the amount of insurance

coverage should equal the amount of the

outstanding Obligations. Hence,

MARAD sees no reason to change the

present wording of paragraph (b).

Section 298.33 Escrow Fund

Section 298.33 One commenter states

that, in the requirement that a

satisfactory certification as to the

percentage of completion of the Vessel

be made in conjunction with

distributions from the Escrow Fund, the

upfront payment of the Guarantee Fee as

an item of Actual Cost needs to be

factored into the percentage of

completion.

MARAD Response: Paragraph (e) of

this section outlines the necessary

requirements for disbursing funds from

the Escrow Fund. As the upfront

Guarantee Fee will be included in the

Actual Cost of a project and will be

factored into the percentage of

completion determination referenced in

subparagraph (3), MARAD is not

amending the present wording of this

section.

Section 298.35 Reserve Fund and

Financial Agreement

Section 298.35. The purpose of this

section is to outline the requirements in

a Title XI Reserve Fund and Financial

Agreement (RFFA), which a company

must enter into at the first Closing at

which Obligations are issued. As

mentioned previously, MARAD

specifically solicited comments in the

NPRM on any proposed amendments to

the standard documentation,

particularly with regard to Eligible

Export Vessels and shipyard

modernization.

Several commenters stated that

inadequate time was given to review

and comment on the RFFA; a reduction

in all documentation, not just the RFFA,

is badly needed but is too complex an

issue to be dealt with now. The Title XI

documentation is overly complicated

and greatly increases transaction costs

and discourages applicants according to

these commenters. As a general

comment, the documentation needs to

be revised to be consistent with the

recent changes in law for shipyard

modernization and Eligible Export

Vessels. One commenter suggests the

establishment of an advisory committee

composed of representatives from

MARAD, the maritime bar, investment

and commercial banking industry,

shipbuilding industry and the

shipowning and operating industry to

review and assist in documentation

revisions.

MARAD Response: As noted in

§ 298.3(a) above, MARAD has decided

to defer consideration of this matter in

order to avoid delay in issuance of this

rule. MARAD supports the suggestion

that a forum be established by a nonGovernmental authority composed of

representatives from MARAD, the

maritime bar, investment and

commercial banking industry,

shipbuilding industry and the

shipowning and operating industry to

review and assist in revisions to the

Title XI documents.

Section 298.36 Annual Guarantee Fee

Section 298.36. Most commenters

oppose the lump sum prepayment of the

annual Guarantee Fee, especially

without the right of reimbursement in

the event of prepayment. If the nonrefundable-if-prepaid aspect were

removed, then some of the commenters

would support the lump sum payment

of the annual Guarantee Fee. One

commenter opposes the increase and

prepayment of the Guarantee Fee unless

it results in an increase in guarantee

authority, as is provided in a current

legislative proposal. Several

commenters believe that the lump sum

payment of the Guarantee Fee would

force an applicant to incur increased

project costs beyond those which would

otherwise be due, making it more

economical to build in other countries

and resulting in MARAD and the

applicant forfeiting currently existing

program flexibility. One commenter

states that the annual nature of the fee

allows MARAD a second look at project

exposure and provides an incentive for

the prepayment of principal, as a means

of reducing the applicant’s real project

financing costs. The commenter

concludes by stating that the proposed

change appears to be clearly outside the

scope of the Title XI program.

Another commenter stated that there

is no indication as to the discount rate

to be used in calculating the present

value of the lump sum Guarantee Fee.

The commenter proposes that a

discount rate equal to the coupon rate

(expected to be carried for the

guaranteed bonds issued for the project)

be applied to calculate the guarantee fee

due at the time of the date of the

security agreement. The commenter

adds that it should be made clear that

no additional Guarantee Fee is required

in the event of a refinancing.

Finally, a commenter argues that the

calculation of the annual Guarantee Fee

schedule should be based on the

company’s overall rating, i.e., whether

the company is governed by the Section

12 or Section 13 covenants of its Title

XI Reserve Fund and Financial

Agreement, rather than a debt to equity

ratio. The commenter recommends a 50

basis points fee for Section 13 governed

companies and a 75 basis points fee for

Section 12 governed companies.

MARAD Response: Section 1104(A)(e)

of the Act, 46 App. U.S.C. 1274,

provides that the Secretary is authorized

to fix the Guarantee Fee for an

Obligation and that all fees shall be

computed and shall be payable to the

Secretary under such regulations as

prescribed by the Secretary. MARAD

has exercised its authority to require the

lump sum payment of the annual

Guarantee Fee, especially without the

right of reimbursement in the event of

prepayment, to ensure that the

Government will retain the full amount

of the Guarantee Fee should the

Obligations be retired prior to maturity,

i.e., if a default occurs on the

Obligations or the Obligations are

prepaid. The regulatory change which

indicates a modification in agency

policy is within the scope of the Title
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21313

XI program. In addition, the lump sum

Guarantee Fee payment would create an

incentive for applicants to enhance the

financial structure of their transactions

in order to merit eligibility for the

lowest possible Guarantee Fee rate, and

therefore, reduce the risk associated

with the project.

Contrary to the comments of one

party, the lump sum payment of the

annual Guarantee Fee would not result

in an increase in the Title XI guarantee

authority. The lump sum payment was

part of a legislative proposal previously

submitted to Congress which increased

the Guarantee Fees charged for a

Commitment. As the language

increasing the Guarantee Fees charged

has been deleted from the legislation,

the lump sum payment of the Guarantee

Fee will not lower the subsidy rate

MARAD is required to calculate

according to the Credit Reform Act of

1990. Therefore, the commenter is

incorrect in stating that receipt of the

guarantee fee up front will result in an

increase of the amount of available Title

XI funding without increasing

appropriations.

The belief of several commenters that

the lump sum payment of the Guarantee

Fee would force an applicant to incur

increased project costs beyond those

which would otherwise be due is not

true. It is estimated that the following

amounts are similar: (1) The full

payment of the first year’s annual

Guarantee Fee at the Closing as required

prior to this final rule, and (2) the equity

portion, or a minimum of 121⁄2 percent

of the lump sum payment being

financed. With these similarities, the

lump sum payment of the Guarantee

Fee, and the potential of financing up to

a maximum of 871⁄2 percent of this

amount, it is incorrect to assume the

lump sum payment of the Guarantee Fee

would force an applicant to incur

increased project costs beyond those

which would otherwise be due.

The comment that there is no

indication in the NPRM as to the

discount rate to be used in calculating

the present value of the lump sum

Guarantee Fee is also incorrect. The

NPRM revised paragraph (e) of this

section and stated, among other things,

that 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

quarterly rates.’’ MARAD agrees with

the comment that where bonds are

issued in more than one series, the

Guarantee Fee should be payable only to

the extent of the total amount of

obligations issued. The third sentence of

the paragraph is deleted to coordinate

the payment of the fee with § 298.36(b),

which sets forth the method of

calculating the fee.

Finally, MARAD disagrees with the

comment that the calculation of the

annual Guarantee Fee schedule should

be based on the company’s overall

rating, i.e., whether the company is

governed by the Section 12 or Section

13 covenants of its Title XI Reserve

Fund and Financial Agreement, rather

than a debt to equity ratio. The extent

to which a company is leveraged is a

reasonable basis for assessing risk

insofar as determining the appropriate

guarantee fee. In addition, the

commenter proposes a fee range of 1⁄2

percent to 3⁄4 percent; but this does not

take into account the full Guarantee Fee

range outlined in the statute of 1⁄4

percent to 1⁄2 percent for undelivered

vessels and 1⁄2 percent to 1 percent for

delivered vessels.

Section 298.40 Defaults

Paragraphs (b) and (d) of § 298.40,

Defaults, provide that if a demand for

payment of the Guarantees is made, the

Secretary shall make payment of the

unpaid principal amount of Obligations

and unpaid interest accrued and

accruing thereon up to, but not

including, the date of payment. One

commenter suggested that the

mandatory requirement for MARAD to

pay off 100% of the outstanding debt in

the case of a defaulting owner should be

changed to provide an option for an

assumption of the Obligations rather

than an early payoff.

MARAD Response: In view of the fact

that the Act provides that in the event

of a default, the Secretary may assume

the Obligor’s rights and duties under the

Title XI Obligation and agreements and

may make any payments in default,

MARAD is modifying paragraphs (b)

and (d) accordingly.

Other Comments

In addition to the above comments

received in response to the NPRM,

several commenters provided comments

which are not within the scope of this

rulemaking. One commenter suggested

that: (1) MARAD should consider

making the Depository Trust Company

(DTC) eligible as a Depository (there

would be more competition and

therefore better interest rates), (2)

MARAD should be more adaptable to

new financing techniques as they arise,

and (3) Title XI Closings should take

place at regional offices rather than in

Washington. One other commenter

expressed opposition to proposed

legislation which increases the

Guarantee Fee 50 percent.

MARAD Response: Any proposed

legislation is not within the scope of

this rulemaking. As to the other

comments, MARAD has the flexibility

under its existing regulations to

consider a DTC as a Depository, to adapt

to new financing techniques, and to

allow Closings at regional offices if

appropriate. As a result, no change in

Section 298 is necessary.

The NPRM proposed removing and

reserving § 298.25, financing repayment

of construction-differential subsidy.

Section 298.25 is removed but has not

been reserved. As a result, § 298.26

through 298.28 have been redesignated

sections 298.25 through 298.27.

In addition to the above, minor

administrative changes have been made

to §§ 298.3(e), 298.13(e)(1)(i),

298.13(e)(1)(i)(A), 298.14(a)(2)(i)(B),

298.14(a)(2)(iii)(G), 298.14(b)(1)(ii), and

298.32(a)(3). ′

Rulemaking Analyses and Notices

Executive Order 12866 (Regulatory

Planning and Review) and Other

Requirements of Law

This rulemaking has been reviewed

under section 3(f) of Executive Order

12866, Regulatory Planning and Review,

and it has been determined that this is

not an economically significant

regulatory action. However, since this

rule would further the implementation

of the National Shipbuilding Initiative

program established under Subtitle D of

Title XIII, Pub. L. 103–160, to support

the industrial base and national security

objectives by assisting in the

reestablishment of a United States

shipbuilding industry as a self-sufficient

internationally competitive industry,

and is of great interest to the U.S.

maritime industry, it has been

determined to be a significant rule

under the Department’s Regulatory

Policies and Procedures. Accordingly, it

is considered to be a significant

regulatory action under E.O. 12866 and

has been reviewed by the Office of

Management and Budget. 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

Eligible Export Vessel programs and the

modernization and improvement of U.S.

general shipyard facilities.

MARAD is publishing this final rule

to carry out the Secretary’s
21314 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

responsibilities under Title XI and to

improve program administration.

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.

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, 46 CFR part 298 is

revised as follows:

PART 298—OBLIGATION

GUARANTEES

Subpart A—Introduction

Sec.

298.1 Purpose.

298.2 Definitions.

298.3 Applications.

Subpart B—Eligibility

298.10 Citizenship.

298.11 Vessel requirements.

298.12 Applicant and operator’s

qualifications.

298.13 Financial requirements.

298.14 Economic soundness.

298.15 Investigation fee.

298.16 Substitution of participants.

298.17 Evaluation of applications.

298.18 Financing Advanced or Modern

Shipbuilding Technology.

298.19 Financing Eligible Export Vessels.

Subpart C—Guarantees

298.20 Term, redemptions and interest rate.

298.21 Limits.

298.22 Amortization of Obligations.

298.23 Refinancing.

298.24 Financing facilities and equipment

related to marine operations.

298.25 Excess interest or other

consideration.

298.26 Lease payments.

298.27 Advances.

Subpart D—Documentation

298.30 Nature and content of Obligations.

298.31 Mortgage.

298.32 Required provisions in

documentation.

298.33 Escrow fund.

298.34 Construction fund.

298.35 Reserve Fund and Financial

Agreement.

298.36 Annual Guarantee Fee.

298.37 Examination and audit.

298.38 Partnership agreements.

298.39 Exemptions.

Subpart E—Defaults and Remedies,

Reporting Requirements, Applicability of

Regulations

298.40 Defaults.

298.41 Remedies after default.

298.42 Reporting requirements-financial

statements.

298.43 Applicability of the regulations.

Subpart F—Administration [Reserved]

Authority: 46 App. U.S.C. 1114(b), 1271 et

seq.; 49 CFR 1.66.

Subpart A—Introduction

§ 298.1 Purpose.

This part prescribes regulations

implementing the provisions of Title XI

of the Merchant Marine Act, 1936, as

amended, governing Federal ship

financing assistance (46 App. U.S.C.

1271 et seq.).

§ 298.2 Definitions.

For the purpose of this part:

(a) Act means the Merchant Marine

Act, 1936, as amended (46 App. U.S.C.

1101 through 1294).

(b) Actual Cost of a Vessel or

Advanced or Modern Shipbuilding

Technology means, as of any specified

date, the aggregate, as determined by the

Secretary, of all amounts paid by or for

the account of the Obligor on or before

that date and all amounts which the

Obligor is then obligated to pay from

time to time thereafter, for the

construction, reconstruction or

reconditioning of such Vessel or

Advanced or Modern Shipbuilding

Technology (described in § 298.21(b)).

(c) Advanced Shipbuilding

Technology means:

(1) Numerically controlled machine

tools, robots, automated process control

equipment, computerized flexible

manufacturing systems, associated

computer software, and other

technology for improving shipbuilding

and related industrial production which

advance the state-of-the-art; and

(2) Novel techniques and processes

designed to improve shipbuilding

quality, productivity, and practice, and

to promote sustainable development,

including engineering design, quality

assurance, concurrent engineering,

continuous process production

technology, energy efficiency, waste

minimization, design for recyclability or

parts reuse, inventory management,

upgraded worker skills, and

communications with customers and

suppliers.

(d) Closing means a meeting of

various participants or their

representatives in a Title XI financing,

at which a commitment to issue

Guarantees is executed, or at which all

or part of the Obligations are

authenticated and issued and the

proceeds are made available for a

purpose set forth in section 1104(a) of

the Act, or at which a Vessel is

delivered and a Mortgage is executed as

security to the Secretary.

(e) Depository means a bank or other

financial institution organized and

doing business under the laws of the

United States, any State or territory

thereof, the District of Columbia or the

Commonwealth of Puerto Rico that is

authorized under such laws to exercise

corporate trust powers, is a member of

the Federal Deposit Insurance

Corporation, and accepts deposits for

purposes of implementing the program

authorized by Title XI of the Act; but in

the case of an Eligible Export Vessel can

also mean, with the specific approval of

the Secretary, foreign branches, but not

the foreign subsidiaries, of such United

States financial institutions.

(f) Depreciated Actual Cost of a Vessel

or Advanced or Modern Shipbuilding

Technology means the Actual Cost of

the Vessel or Advanced or Modern

Shipbuilding Technology, as defined in

paragraph (b) of this section (less a

residual value of 21⁄2 percent of United

States shipyard construction cost or, in

the case of Advanced or Modern

Shipbuilding Technology, a residual

value as appropriate), depreciated on a

straightline basis over the useful life of

the Vessel or Advanced or Modern

Shipbuilding Technology as determined

by the Secretary, not to exceed twentyfive years from the date the Vessel or

Advanced or Modern Shipbuilding

Technology was delivered by the

shipbuilder or manufacturer or, if the

Vessel or Advanced or Modern

Shipbuilding Technology has been

reconstructed or reconditioned, the

Actual Cost of the Vessel or Advanced

or Modern Shipbuilding Technology

depreciated on a straightline basis from

the date the Vessel or Advanced or

Modern Shipbuilding Technology was
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21315

delivered by the shipbuilder or

manufacturer to the date of such

reconstruction or reconditioning, on the

basis of the original useful life of the

Vessel or Advanced or Modern

Shipbuilding Technology, and from the

date of said reconstruction or

reconditioning on a straightline basis

and on the basis of a useful life of the

Vessel or Advanced or Modern

Shipbuilding Technology determined by

the Secretary, plus all amounts paid or

obligated to be paid for the

reconstruction or reconditioning,

depreciated on a straightline basis and

on the basis of a useful life of the Vessel

or Advanced or Modern Shipbuilding

Technology determined by the

Secretary.

(g) Documentation means all or part of

the agreements relating to an entire Title

XI financing which must be furnished to

the Secretary, irrespective of whether

the Secretary is a party to each

agreement.

(h) Eligible Export Vessel means a

Vessel constructed, reconstructed, or

reconditioned in the United States for

use in world-wide trade which will,

upon delivery or redelivery, be placed

under or continued to be documented

under the laws of a country other than

the United States.

(i) Eligible Shipyard means a private

shipyard located in the United States.

(j) General Shipyard Facility means:

(1) For operations on land, any

structure or appurtenance thereto

designed for the construction, repair,

rehabilitation, refurbishment, or

rebuilding of any Vessel, including

graving docks, building ways, ship lifts,

wharves and pier cranes; the land

necessary for any structures or

appurtenances; and equipment

necessary for the performance of any

function referred to in this paragraph;

and

(2) For operations other than on land,

any Vessel, floating drydock, or barge

built in the United States, within the

meaning of § 298.11(a), and used for, or

a type that is usually used for, activities

referred to in paragraph (k) of this

section.

(k) Guarantee means the contractual

commitment of the United States of

America, represented by the Secretary,

endorsed on each Obligation, to make

payment to the Obligee or an agent,

upon demand, of the unpaid interest on,

and the unpaid balance of the principal

of such Obligation, including interest

accruing between the date of default

(described in § 298.40 of this part) and

the date of payment.

(l) Guarantee Fee means the annual

fee payable to the Secretary in

consideration for the continuing

Guarantees.

(m) Indenture Trustee means a bank

with corporate trust powers, or a trust

company, with a combined capital and

surplus of at least $3,000,000, which is

located in and organized and doing

business under the laws of the United

States, any State or territory thereof, the

District of Columbia or the

Commonwealth of Puerto Rico, which

has duties under the terms of a Trust

Indenture, entered into with the

Obligor, providing for the issuance and

registration of the ownership and

transfer of Obligations, the

disbursement of funds held in trust by

the Indenture Trustee for the

redemption and payment of interest and

principal with respect to Obligations,

demands by the Indenture Trustee for

payment under the Guarantees in the

event of default and the remittance of

payments received to the Obligees.

Pursuant to a specific authorization of

the Secretary, the Indenture Trustee

may also authenticate the Guarantees.

(n) Letter Commitment means a letter

from the Secretary to an applicant for

Guarantees, setting forth specific

determinations made by the Secretary

with respect to the applicant’s proposed

project, as required by the Act and

regulations of this part, and stating the

Secretary’s commitment to execute

Guarantees, subject to compliance by

the applicant with any conditions

specified therein.

(o) Maritime Administration means

that agency created within the

Department of Transportation by

Reorganization Plan No. 21 of 1950 (64

Stat. 1273), amended by Reorganization

Plan No. 7 of 1961 (75 Stat. 840), as

amended by Pub. L. 91–469 (84 Stat.

1036).

(p) Modern Shipbuilding Technology

means a technology to be introduced

into the shipyard that is comprised of

the best available proven technology,

techniques, and processes appropriate

to advancing the state-of-the-art of the

applicant shipyard, or exceeds the best

available processes of American

shipbuilding, and that will enhance its

productivity and make it more

competitive internationally.

(q) Mortgage means a first Preferred

Mortgage on any Vessel or a first

mortgage with respect to Advanced

Shipbuilding Technology or with

respect to Modern Shipbuilding

Technology.

(r) Obligation means any note, bond,

debenture, or other evidence of

indebtedness, as defined in section

1101(c) of the Act, issued for one of the

purposes specified in section 1104(a) of

the Act.

(s) Obligee means the holder of an

Obligation.

(t) Obligor means any party primarily

liable for payment of principal of or

interest on any Obligation.

(u) Paying Agent means any Person

appointed by the Obligor to pay the

principal of or interest on the

Obligations on behalf of the Obligor.

(v) Person means any individual,

estate, foundation, corporation,

partnership, limited partnership, joint

venture, association, joint-stock

company, trust, unincorporated

organization or other acceptable legal

business entity, government, or any

agency or political subdivision thereof.

(w) Preferred Mortgage means:

(1) In the case of a mortgage on a

Vessel documented under United States

law, whenever made, a mortgage that—

(i) Includes the whole of a Vessel;

(ii) Is filed in substantial compliance

with 46 U.S.C. 31321;

(iii) Covers a documented Vessel or a

Vessel for which an application for

documentation has been filed that is in

substantial compliance with the

requirements of 46 U.S.C. Ch. 121 and

the regulations prescribed under that

Chapter by the United States Coast

Guard; and

(iv) Has as the mortgagee—

(A) A State;

(B) The United States Government;

(C) A Federally insured depository

institution, unless disapproved by the

Secretary for that Vessel;

(D) An individual who is a citizen of

the United States;

(E) A Person qualifying as a citizen of

the United States pursuant to a

provision of 46 App. U.S.C. 802; or

(F) A Person approved by the

Secretary pursuant to regulations at 46

CFR 221.23(d); and

(2) In the case of a mortgage on an

Eligible Export Vessel, whenever made,

a mortgage that—

(i) Constitutes a mortgage that is

established as security on an Eligible

Export Vessel under the laws of a

foreign country;

(ii) Was executed under the laws of

that foreign country and under which

laws the ownership of the Vessel is

documented;

(iii) Is registered under the laws of

that foreign country in a public register

at the port of registry of the Vessel or at

a central office;

(iv) Otherwise satisfies the

requirements of 46 U.S.C. 31301(6)(B) to

constitute a Preferred Mortgage; and

(v) Has the Secretary as the mortgagee,

or such other mortgagee as is permitted

by the applicable foreign law and

approved by the Secretary.

(x) Related Party means as that term

is defined by generally accepted
21316 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

accounting principles outlined in

paragraph 24 of Statement of Financial

Accounting Standards No. 57, Related

Party Disclosures.

(y) Secretary means the Secretary of

Transportation, acting by and through

the Maritime Administrator, Department

of Transportation, the Maritime

Administrator or any official of the

Maritime Administration to whom is

duly delegated the authority, from time

to time, to perform the functions of the

Secretary of Transportation or the

Maritime Administrator, Department of

Transportation.

(z) Secretary’s Note means a

promissory note from the Obligor to the

Secretary in an amount equal to the

aggregate amount of the Obligations,

which is issued simultaneously with the

Guarantees.

(aa) Security Agreement means the

primary contract between the Obligor

and the Secretary, providing for the

transfer to the Secretary by the Obligor

of all right, title and interest of the

Obligor in certain described property

(including rights under contracts in

existence or to be entered into), and

containing other provisions relating to

representations and responsibilities of

the Obligor to the Secretary as security

for the issuance of Guarantees.

(bb) Vessel means all types of vessels,

whether in existence or under

construction, including passenger, cargo

and combination passenger-cargo

carrying vessels, tankers, towboats,

barges and dredges which are or will be

documented under the laws of the

United States, floating drydocks which

have a capacity of at least thirty-five

thousand or more lifting tons and a

beam of one hundred and twenty-five

feet or more between the wing walls and

oceanographic research or instruction or

pollution treatment, abatement or

control vessels, which are owned by

citizens of the United States; except that

an Eligible Export Vessel shall not be

documented under the laws of the

United States.

§ 298.3 Applications.

(a) Content and amendment. Each

application for a commitment to execute

Guarantees shall be made on Form MA

163 to the Secretary, Maritime

Administration, U.S. Department of

Transportation, Washington, DC 20590,

and be certified in the manner

prescribed on said form. All required

information, including copies of any

demise charters, time charters in excess

of six months, contracts of

affreightment, drilling contracts or other

contractual arrangements with respect

to the Vessel or Vessels, shall be

presented on the form or in exhibits and

schedules submitted with the

application. In addition, the Declaration

of Lobbying form as required by 31

U.S.C. 1352 shall be filed with the

initial application, as part of the formal

submission. Each exhibit and schedule

shall contain a statement, on the first

page thereof, clearly identifying the

document as an attachment to an

application for Obligation Guarantees,

stating the name of the applicant and

the date of the application. Any

amendment of data contained in the

application filed shall be marked

‘‘Amendment,’’ and shall contain a

statement on the first page thereof,

clearly identifying the document as an

amendment to an application for

Obligation Guarantees, stating the name

of the applicant and the date of

application. The certification required

on Form MA 163 shall be affixed to each

amendment.

(b)(1) Time requirements for

application. Each application shall be

submitted to the Secretary at least four

months prior to the anticipated date by

which the applicant requires a Letter

Commitment. The Secretary may

consider applications with less notice

prior to the anticipated date by which

the applicant requires a Letter

Commitment, upon written

documentation that extenuating

circumstances exist. During the first 15

calendar day period after submission,

the Secretary will perform a preliminary

review of the application for adequacy

and completeness. If the application is

found to be incomplete, or if additional

data is required, the Secretary will

notify the applicant promptly in writing

and the applicant will have 15 calendar

days to correct deficiencies from the

date of each request for additional

information. If the applicant has not

corrected the deficiencies, or made

substantial progress toward correcting

them, within this 15 calendar day

period, then the Secretary may

terminate the processing of the

application without prejudice. Once the

Title XI application is considered

complete by the Secretary, the Secretary

will act on the application within a

period of 60 calendar days, unless for

good cause the Secretary deems it

necessary to extend such period. If an

application is not completed by the

applicant and acted upon by the

Secretary within four months from the

submission date, unless such time

period is extended by the Secretary, the

Secretary will notify the applicant in

writing that processing of the

application is terminated and that the

applicant may reapply at a later date. If

an application is terminated by MARAD

without prejudice, no new filing fee will

be assessed for a subsequent application

for a similar project that is filed within

one year of the termination date. If a

subsequent application is for a

substantially different project as

determined by MARAD on a case-bycase basis a new filing fee will be

assessed.

(2) Time requirements for

documentation. An applicant to whom

a Letter Commitment has been issued

shall submit four sets of the

documentation to the Secretary for

review. The documentation shall be

submitted to the Secretary for review at

least six weeks prior to the anticipated

closing to afford the Secretary time to

complete an adequate review of the

documentation. The applicant shall

utilize the standard form of

documentation which will be provided

by the Secretary.

(3) Processing applications. In

processing applications, the Secretary

shall consider the different degrees of

risk involved with different

applications.

(4) Additional assurances. For those

applications not involving well

established firms with strong financial

qualifications and strong market shares,

seeking financing guarantees for

replacement vessels in an established

market, in which projected demand

exceeds supply, the Secretary may

require additional assurances prior to

approval, such as firm charter

commitments, parent company

guarantees, greater equity participation,

private financing participation, security

interest on other property and similar

arrangements.

(c) Filing Fee. Each application must

be accompanied by a filing fee in the

amount of $5,000, which will be nonrefundable, irrespective of whether the

Secretary subsequently issues a Letter

Commitment.

(d) Confidential Information. If the

application, including attachments

thereto, contains information which the

applicant considers to be trade secrets

or commercial or financial information

and privileged or confidential, or

otherwise exempt from disclosure under

the Freedom of Information Act (5

U.S.C. 552), the applicant shall assert a

claim of exemption at the time of

application. The same requirement shall

apply to any amendment to the

application. If no claim of exemption is

made when the application or

amendment is filed, the Maritime

Administration shall not oppose any

request subsequently made for

disclosure, pursuant to the Freedom of

Information Act (FOIA), of any

information contained in the
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21317

application. The following procedures

shall apply with respect to the assertion

and review of FOIA exemption claims:

(1) Form and bases for claim. Any

claim of exemption shall be made in a

memorandum or letter contained in a

sealed envelope marked ‘‘Confidential

Information,’’ addressed to the

Secretary, Maritime Administration, and

shall be subscribed by the applicant, or

with respect to a corporate applicant, by

a responsible corporate officer of the

applicant. The applicant shall

specifically and separately designate

each part of the application, including

attachments or amendments thereto, to

which exemption from disclosure is

claimed by noting ‘‘Confidential

Information’’ thereon, and shall place

each page in the sealed envelope. The

applicant shall state in the

memorandum or letter the bases, in

detail, for each assertion of exemption,

including but not limited to statutory

and decisional authority.

(2) The Secretary, Maritime

Administration, shall make a

determination as to any claim of

exemption at the time a request is made

for the information pursuant to the

Freedom of Information Act. If the

Secretary, Maritime Administration

makes a determination unfavorable to

the applicant as to any item of

information in the application or

amendment, the applicant will be

advised that the Maritime

Administration will not honor the

request for confidentiality at the time of

any request for production of

information made pursuant to the

Freedom of Information Act by third

parties.

(e) Priority. The Maritime

Administration shall give priority for

processing applications to vessels

capable of serving as a naval and

military auxiliary in time of war or

national emergency, and requests for

financing construction of equipment or

vessels less than one year old as

opposed to the financing of existing

equipment or vessels that are one year

old or older. Any applications involving

the purchase of vessels currently

financed under Title XI will also receive

priority consideration for purposes of

processing the assumption of the

obligations as will applications from

those willing to take guarantees for less

than the normal term for that class of

vessel. In regard to shipyards, priority

will be 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,

with respect only to funds appropriated

to the Secretary of Defense, pursuant to

provision of section 1359(a) of Pub. L.

103–160, 107 Stat. 1547. With regard to

Eligible Export Vessels, the Secretary

may not issue a commitment to

guarantee Obligations for an Eligible

Export Vessel unless the Secretary

determines, in the sole discretion of the

Secretary, that the issuance of a

commitment to guarantee obligations for

an Eligible Export Vessel will result in

the denial of an economically sound

application to issue a commitment to

guarantee Obligations for vessels

documented under the laws of the

United States operating in the domestic

or foreign commerce of the United

States, after considering:

(1) The status of pending applications

for commitments to guarantee

obligations for vessels documented

under the laws of the United States and

operating or to be operated in the

domestic or foreign commerce of the

United States;

(2) The economic soundness of the

applications referred to in paragraph

(e)(1) of this section; and

(3) The amount of guarantee authority

available.

(Approved by the Office of Management and

Budget under control number 2133–0018)

Subpart B—Eligibility

§ 298.10 Citizenship.

(a) Applicability. Prior to acquiring a

legal or beneficial interest in a Vessel

financed under Title XI of the Act,

except as provided in paragraph (e) of

this section, the applicant and any other

Person (including, but not limited to

shipowners and, if applicable, owner

trustees, equity participants and

bareboat charterers) shall establish their

United States citizenship within the

meaning of Section 2 of the Shipping

Act, 1916, as amended, (‘‘1916 Act’’) (46

App. U.S.C. 802) and MARAD’s

regulation at 46 CFR 221.3(c). All

persons holding a Preferred Mortgage on

the Vessel who do not qualify as

citizens of the United States shall

submit on the date of the Closing

evidence that they qualify for the

MARAD approval granted pursuant to

46 CFR 221.23, or that they have

received approval pursuant to 46 CFR

221.25. The Secretary will not approve

an application providing for ownership

of such Vessel by, or bareboat chartering

of such Vessel to, a non-U.S. citizen.

Citizenship may also be required of any

Person who is deemed by the Secretary

to be an operator of the Vessel or who

has authority to direct the operation of

the Vessel on behalf of the shipowner.

Certain chartering arrangements,

including time chartering and contracts

of affreightment, have been given

general approval by the Secretary

pursuant to Sections 9, 37, and 41 of the

1916 Act. See part 221 of title 46 for

more details on these approvals and

other approvals granted concerning

chartering and mortgaging of U.S.

documented Vessels.

(b) Prior to Letter Commitment. The

applicant and any Person identified in

paragraph (a) of this section, who is

required to establish United States

citizenship shall, prior to the issuance

of the Letter Commitment, establish

United States citizenship in form and

manner prescribed in 46 CFR part 355.

(c) After Letter Commitment. Any

Person who has become identified with

the project, for a reason indicated in

paragraph (a) of this section, and who

has not previously established United

States citizenship within the prior

twelve calendar months, promptly shall

establish its United States citizenship in

the form and manner prescribed in 46

CFR part 355.

(d) Supplemental proof. Unless

otherwise waived by the Secretary for

good cause, at least 10 days prior to

every Closing, all Persons identified

with the project who have previously

established United States citizenship in

accordance with paragraphs (a) and (c)

of this section shall submit pro forma

Supplemental Affidavits of Citizenship

which have previously been approved

as to form and substance by the

Secretary, and on the date of such

Closing such Persons shall submit to the

Secretary three executed copies of such

Supplemental Affidavits of Citizenship

evidencing the continuing United States

citizenship of such Persons bearing the

date of such Closing.

(e) Exemption. With regard to Eligible

Export Vessels and Eligible Shipyards,

the applicant and any other Person,

(including, but not limited to settlors,

owner trustees, owner participants and

bareboat charterers) shall be exempted

from complying with the provisions of

paragraphs (a) through (d) of this

section.

§ 298.11 Vessel requirements.

Each Vessel to be constructed,

reconstructed or reconditioned and

financed by issuance of Guarantees shall

meet the following criteria:

(a) United States Construction. A

Vessel, including an Eligible Export

Vessel, financed by an Obligation

Guarantee is considered to be of United

States construction if the Vessel is

assembled in a shipyard geographically

located within the United States. A

U.S.-flag Vessel must meet the

applicable United States Coast Guard

requirements. An Eligible Export Vessel

must meet the applicable laws, rules,
21318 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

and regulations of its country of

documentation, all applicable treaties,

conventions on international

agreements to which that country is a

signatory, and the laws of the ports it

serves. An Eligible Export Vessel shall

be constructed in accordance with the

requirements of the International

Maritime Organization.

(b) Actual Cost. The applicant’s

estimated Actual Cost as described in

§ 298.21(b), must be approved by the

Secretary for the construction,

reconstruction, reconditioning of a

Vessel as a condition for issuance of the

Letter Commitment. The Secretary may

require the applicant to have the

shipyard that has contracted to build the

vessel to submit additional technical

data, backup cost details, and other

evidence if the Secretary has

insufficient data. The estimated cost of

the Vessel may include escalation for

the anticipated construction period of

the Vessel, as described in § 298.21(e).

(c) Class condition and operation. 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

other such standards as may be

approved by the United States Coast

Guard, 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

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

that IACS member accords equal

reciprocity, as determined by the

Secretary, to United States classification

societies. A Vessel, except an Eligible

Export Vessel, shall comply with all

applicable laws, rules, and regulations

as to condition and operation,

including, but not limited to, those

administered by the United States Coast

Guard, Environmental Protection

Agency, Federal Communications

Commission, Public Health Service, or

their respective successor agencies, and

all applicable treaties and conventions

to which the United States is a

signatory, including, but not limited to,

the International Convention for Safety

of Life at Sea. An Eligible Export Vessel

shall be documented in a country that

is party to the International Convention

for Safety of Life at Sea, or other treaty,

convention, or international agreement

governing vessel inspection to which

the United States is a signatory, and

shall comply with the applicable laws,

rules, and regulations of its country of

documentation, all applicable treaties,

conventions on international

agreements to which that country is a

signatory, and the laws of the ports it

serves. An Eligible Export Vessel shall

be constructed in accordance with the

requirements of the International

Maritime Organization.

(d) Reconstruction or reconditioning.

Repairs necessary for the Vessel to meet

the classification standards approved by

the Secretary, or any regulatory body, or

because of previous inadequate

maintenance and repair, shall not

constitute reconstruction or

reconditioning within the meaning of

this paragraph. An applicant for

Guarantees secured by a Vessel to be

reconstructed or reconditioned shall

make the Vessel available at a time and

place acceptable to the Secretary for a

condition survey to be conducted by

representatives of the Secretary. The

applicant shall pay the cost of the

condition survey. The scope and extent

of the condition survey shall not be less

effective than that required by the last

ABS special survey completed (if the

Vessel is classified), next due or

overdue, whichever date is nearest in

accordance with the Vessel’s age. The

Vessel shall meet the standard of the

survey necessary for retention of class

(if the Vessel is classified), and the

operating records of the Vessel shall

reflect normal operation of the Vessel’s

main propulsion and other machinery

and equipment, consistent with

accepted commercial experience and

practice.

(e) Metric Usage. The preferred

system of measurement and weights for

Vessels and Advanced and Modern

Shipbuilding Technology shall be the

metric system.

§ 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, possesses the

necessary experience, ability and other

qualifications to properly operate and

maintain the Vessel or Vessels 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 is an incorporated company, it

shall submit the following identifying

information:

(i) Exact name of applicant and tax

identification number of a U.S.

corporation, or if appropriate,

international identification number of

the applicant;

(ii) State or country in which

incorporated and date of incorporation;

and

(iii) Address of principal executive

offices and of important branch offices,

if any.

(2) Partnerships, joint-ventures,

associations, unincorporated

companies. If the applicant is a

partnership, joint-venture, association,

or unincorporated company, it shall

submit the following identifying

information:

(i) Name of partnership, association,

or unincorporated company, and tax

identification number, or if appropriate,

international identification number of

applicant;

(ii) Business address;

(iii) Date of organization;

(iv) Name of partners (general and

special) of the partnership or trustee and

holders of beneficial interest in the

association or company;

(v) Certified copy of Partnership or

Joint Venture Agreement, as amended;

and

(vi) A detailed statement regarding

financial, management and/or equity

transactions which could have a

significant impact on the ability of the

applicant to meet the requirements

placed on the applicant under its

financing.

(3) Other entities. For any entity that

does not fit the descriptions in

paragraphs (b)(1) through (b)(3) of this

section, MARAD will specify the

information that the entity shall submit

regarding its identity and ownership.

(c) Applicants: Business and

affiliations. The applicant shall include:

(1) A brief description of the principal

business activities during the past 5

years of applicant and of any

predecessor of the applicant. If any

change in the principal business

activities is presently contemplated

(whether in connection with the work to

be financed by the guarantees applied

for, or otherwise), applicant shall give a
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21319

brief statement of the nature and

circumstances thereof;

(2) A list of all companies or persons

(hereinafter referred to as related

companies) 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, the relationships

between the companies named, and the

nature and extent of the control. This

information may be furnished in the

form of a chart. Specify whether any

related companies have previously

applied for or received any Title XI

assistance;

(3) A statement of whether or not

during the past 5 years the applicant, or

any predecessor or related company, has

been in bankruptcy or in reorganization

under the Federal Bankruptcy Act or in

any other insolvency or reorganization

proceedings under either domestic or

foreign statutes, and whether or not any

substantial property of the applicant or

a predecessor or related company has

been acquired in any such proceedings

or has been subject to foreclosure or

receivership during such period, and

details of all such occurrences; and

(4) A statement of whether or not the

applicant or any predecessor or related

company is now, or during the past 5

years has been, in default under any

agreement or undertaking:

(i) With others, the United States or a

country other than the United States; or

(ii) Guaranteed or insured by the

United States or a country other than

the United States.

(d) Management of applicant. The

applicant shall include:

(1) A brief description of the principal

business activities during the past 5

years of each director and each

principal executive officer of the

applicant; and

(2) The name and address of each

organization engaged in business

activities related to those carried on or

to be carried on by the applicant with

which any person named in answer to

paragraph (d)(1) of this section has any

present business connection, the name

of each such person and, briefly, the

nature of such connection.

(e) Applicant’s property and activity.

The applicant shall provide:

(1) A brief description of the general

character and location of the principal

properties of the applicant employed in

its business, other than vessels,

describing encumbrances, if any;

(2) A statement with respect to each

vessel owned by the applicant, or

operated by it under charter, stating

name, gross tonnage, net tonnage,

deadweight tonnage, age, type, speed,

registry, cargo capacity and number and

type of cargo units (container, trailer,

etc.); and

(3) A summary statement which

addresses the services, routes, or line

(including ports served) on which the

applicant operates any of the vessels

owned or chartered by it. Also, a

schedule and tonnage of cargo carried

by the applicant during the two

preceding years, the units carried

(containers, barges, passengers, etc.) and

the cargo capacity utilization factor

experienced.

(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),

including name, education, background

of, and licenses held by all senior

supervisory personnel concerned with

the physical operation of the ships

owned by the applicant or proposed for

construction. If not now an operator of

Vessel(s), the applicant shall indicate a

proposed organizational structure of key

operating personnel or the name of the

proposed operating agent. If now the

owner and/or operator of ships, the

applicant shall furnish data as to union

affiliations and existing contracts

necessary to the management and

operation of the Vessel(s) covering such

items as bunkers, repairs, stores and

stevedoring, and names of companies

(domestic and foreign) for which the

company acts as agent. If a company

other than the applicant is designated to

operate the Vessel(s), then the above

information shall be provided for that

company, together with a copy of the

proposed operating agreement(s).

(2) 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 evidencing its ability to

successfully construct/reconstruct

vessel(s), including name, education,

background of, and licenses, if any, held

by all senior supervisory personnel in

the shipyard concerned with the

physical operation of the shipyard,

union affiliations and existing contracts

necessary to the management and

operation of the shipyard.

§ 298.13 Financial requirements.

(a)(1) In general. To be eligible for

guarantees, the applicant and/or the

parent organization (when applicable),

and any other participants in the project

having a significant financial or

contractual relationship with the

applicant shall submit information,

respectively, on their financial

condition. This information shall be

submitted at the time of the application

and supplemented as subsequently

required by the Secretary. In addition,

the applicant shall submit information

satisfactory to the Secretary that

financial resources are available to

support the project which is the subject

of the Title XI application.

(2) Cost of the project. Applicant shall

submit the following cost information

with respect to the project:

(i) In the case of an applicant for

Vessel financing Guarantees, a detailed

statement of the estimated Actual Cost

of construction, reconstruction or

reconditioning of the Vessel(s)

including those items which would

normally be capitalized as Vessel

construction costs. Net interest during

construction is the total estimated

construction period interest on nonequity funds less estimated earnings

from the escrow fund, if such fund is to

be established prior to Vessel(s)

delivery. Each item of foreign

components and services shall be

excluded from Actual Cost, unless a

waiver is specifically granted for the

item, which waiver shall not be granted

for major foreign components of the hull

and superstructure. The standard for

granting a waiver is certification by the

applicant, to be reviewed by the

Secretary, that a foreign item or service

is not available in the United States on

a timely or price-competitive basis, or is

not of sufficient quality. Although

excluded from Actual Cost, foreign

components of the hull and

superstructure can be regarded as

owner-furnished equipment that may be

used in satisfying the applicant’s equity

requirements imposed by paragraph

(a)(3) of this section. An illustration of

how the cost of foreign components of

the hull and superstructure may be used

to satisfy an applicant’s equity

requirements is outlined below. If any of

the costs have been incurred by written

contracts such as the shipyard contract,

management or operating agreement,

signed copies should be forwarded with

the application. The applicant may be

required to have the contracting

shipyard submit back-up cost details

and technical data. This information

shall be submitted in the format as

prescribed by the Title XI application

procedures.

ILLUSTRATION—COST OF FOREIGN

COMPONENTS SATISFYING EQUITY

REQUIREMENTS.

Assuming that the total project cost is $100

million, of which the cost of major foreign

components in the hull and superstructure

total $20 million, and that the Title XI

applicant has requested financing for 871⁄2

percent of the cost of the project, the

following is a demonstration of how the

value of the major foreign components in the
21320 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

hull and superstructure may be used in

meeting the equity requirements of § 298.13

(a)(3):

Cost of Foreign Components Excluded from

Actual Cost

Cost of Project ........................... $100.0 million

Cost of Major Foreign Components in

Hull and Superstructure ...... $20.0 million

Total Actual Cost of Project........ $80.0 million

Required Equity (121⁄2 percent)............... $10.0

million

Total Project Cost Financed w/Title XI

(871⁄2 percent) .......................$70.0 million

The $10 million in required equity may be

satisfied by the owner’s contribution of the

foreign components of hull and

superstructure to the project.

(ii) In the case of Advanced or

Modern Shipbuilding Technology, a

detailed statement of the actual cost of

such technology, including those items

which would normally be capitalizable.

If any of the costs have been incurred

by written contracts, signed copies shall

be forwarded with the application. The

applicant may be required to have

manufacturers submit back-up cost

details and technical data. This

information shall be submitted in the

format prescribed by the Title XI

application procedures.

(iii) A detailed statement showing the

actual cost of any shore facilities, cargo

containers, etc., required to be

purchased in conjunction with the

project.

(iv) A detailed statement showing any

other costs associated with the project

which were not included in paragraphs

(a)(2) (i) through (iii) of this section,

such as: Legal and accounting fees,

printing costs, guarantee fees, vessel

insurance, underwriting fees, fee to a

Related Party, etc.

(v) If the project involves refinancing,

the exhibit entitled Request for Actual

Cost Approval and Reimbursement, its

summary sheet and supplemental

schedules shall be submitted at the time

of filing the application.

(3) Financing. The applicant shall

describe, in detail, how the costs of the

project (sums referred to in paragraph

(a)(2) of this section) are to be funded

and the timing of such funding. The

applicant shall include any vessel tradeins, related or third party financings,

etc. The applicant shall also provide the

proposed terms and conditions of all

private funding, from both equity and

debt sources and clearly identify all

parties involved. If the applicant

intends to utilize co-financing

(involving a blend of Title XI and

private financing for the debt portion),

the terms and conditions of such

financing shall be subject to approval by

the Secretary. The applicant shall

demonstrate with financial statements

that at least 121⁄2 percent of the

construction or reconstruction costs of

the Vessel(s) or the cost of the Advanced

Shipbuilding Technology or Modern

Shipbuilding Technology will be in the

form of equity and not additional debt,

except to the extent allowed by

paragraph (g) of this section. The

applicant shall disclose all of the

Vessel(s), Advanced Shipbuilding

Technology or Modern Shipbuilding

Technology financing in the format

prescribed by the Title XI application

procedures. If the applicant uses cofinancing (involving a blend of Title XI

and private financing for the debt

portion of the project), the ability of the

co-financiers to exercise their rights

against collateral shared with the

Secretary for any transaction shall be

subject to the approval of the Secretary.

(4) Financial Information. The

applicant shall submit the following

additional financial statements with

respect to both the proposed Title XI

project and the overall operations of the

applicant, prepared in accordance with

46 CFR part 232 and including notes to

explain the basis used for arriving at the

figures (in the case of Eligible Export

Vessels, the Secretary may accept

financial information provided in the

normal accounting system used by the

applicant provided that it is an accepted

accounting system in the applicant’s

country of origin and, further, provided

that the applicant provides a

reconciliation of the major differences

between the accounting system

employed and U.S. generally accepted

accounting principles):

(i) The three most recent audited

financial statements of the applicant, its

parent, if any, and other significant

participants. If the applicant is a new

entity or is to be funded from or

guaranteed by external source(s), it shall

provide the audited financial statements

of the funding source(s);

(ii) A pro forma balance sheet of the

applicant as of the estimated date of

execution of the Guarantees reflecting

the assumption of the Title XI

Obligations;

(iii) A schedule of amortization of all

existing debt (Title XI or otherwise) of

the applicant for the period in which

the Guarantees are to be outstanding;

and

(iv) A Sources and Uses Statement for

the first full year of operations and the

following five years, including a clear

source of funding for the payment of all

debt when due.

(b) Financial definitions. For the

purpose of this section and §§ 298.35

and 298.42 of this part:

(1) Company means any Person

subject to financial requirements

imposed under paragraphs (d) and (e) of

this section and paragraphs (b) and (c)

of § 298.35, as well as the reporting

requirements imposed by § 298.42.

(2) Working Capital means the

difference between current assets and

current liabilities, adjusted as follows:

(i) Current assets shall exclude:

(A) Amounts in or required to be set

aside in any Title XI Reserve Fund,

pursuant to § 298.35(e) or Capital

Construction Fund Security Amount

prescribed by § 298.35(f), (excluding

that portion of such fund which is

available for the payment of current

liabilities) that is being maintained

pursuant to an agreement covering a

Vessel owned or leased by the company,

or in another similar fund required

under any other mortgage, indenture or

other agreement to which the company

is a party; and

(B) Any receivables from a Related

Party or from any stockholder, director,

officer or employee (or their family) of

the company or of a Related Party other

than current receivables arising out of

the ordinary course of business and not

outstanding for more than 60 days.

(ii) Current liabilities shall include

the current portion of charter hire and

other lease obligations not already

included as a current liability.

(3) Equity (net worth) shall be

exclusive of:

(i) Any receivables from a Related

Party or from any stockholder, director,

officer or employee (or their family) of

the company or of a 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 shall exclude the

balance of Escrow Fund deposits

attributable to the principal of

Obligations sold, where deposits are

required in accordance with § 298.33.

However, there shall be included any

guarantee or other liability for the debt

of any other Person.

(5) Capitalizable Cost means the

aggregate of the Actual Cost of the

Vessel or Advanced or Modern

Shipbuilding Technology and those

other items which customarily would be

capitalized as Vessel costs or Advanced

or Modern Shipbuilding Technology

costs under generally accepted

accounting principles and those other

items which customarily would be

capitalized as Vessel costs under

generally accepted accounting

principles.

(6) Depreciated Capitalizable Cost

means the Capitalizable Cost of a Vessel

or Advanced or Modern Shipbuilding

Technology, depreciated on a straight
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21321

line basis over the same useful life as

determined by the Secretary for Actual

Cost, and depreciated as required by

§ 298.21(g).

(c) Applicability. The financial

resources shall be adequate to meet the

Equity requirements in the project and

existing Working Capital requirements,

as set forth in paragraphs (d) and (e) of

this section.

(1) The various financial requirements

shall be met by the owner of the Vessel

or Vessels or Advanced or Modern

Shipbuilding Technology to be security

to the Secretary for the Guarantees,

except that if the owner is not the

operator, the overall financial

requirements shall be allocated among

the owner, the operator and other

parties as determined by the Secretary.

(2) The Company shall satisfy the

applicable financial requirements, in

addition to any other financial

requirements already imposed or which

may be imposed upon it in connection

with other Vessels financed under the

Title XI program or in connection with

other Advanced or Modern

Shipbuilding Technology financed

under the Title XI program.

(3) A determination as to whether the

Company has satisfied all financial

requirements shall be based on the

assumption that the projected financing

has been completed. Accordingly, a pro

forma balance sheet shall be submitted

at the time of the application, reflecting

any adjustment made pursuant to

paragraph (d)(1)(i) of this section, and a

revised pro forma balance sheet,

reflecting the completion of the

projected financing, shall be submitted

at least five business days before the

first Closing at which the Obligations

are issued.

(d) Primary financial requirements at

Closing. Where the primary minimum

financing requirements at Closing are

satisfied, the financial convenants in

§ 298.35(b) are applicable. Primary

financial requirements can apply to one

or more Companies, and are determined

as follows:

(1) Owner as operator. Where the

owner is to be the Vessel operator,

minimum requirements at Closing

usually are as follows:

(i) Working Capital. The Company’s

Working Capital shall not be less than

one dollar. This Working Capital

requirement is based on the premise

that the Company engages in a servicetype activity with only normal Vessel

inventory. If Working Capital includes

other inventory, in addition to such

normal Vessel inventory, the Secretary

may adjust the requirement as

considered appropriate. Also, if the

Secretary determines that the

Company’s Working Capital includes

amounts receivable that it reasonably

could not expect to collect within one

year, the Secretary may make

adjustments to the Working Capital

requirements.

(ii) Equity (net worth). The Company’s

Equity shall be the greater of:

(A) 50 percent of its Long Term Debt

or

(B) 90 percent of its Equity as shown

on the last audited balance sheet, dated

not earlier than six months before the

date of issuance of the Letter

Commitment.

(2) Lessee or charterer as operator.

Where a lessee or charterer is to be the

Vessel operator, minimum requirements

at Closing usually are as follows:

(i) Working Capital. The operator’s

Working Capital requirement shall be

the same as that which would have

otherwise been imposed on the owner

as operator under paragraph (d)(1)(i) of

this section and based on the same

premise stated therein.

(ii) Long Term Debt. The operator’s

Long Term Debt shall not be greater

than twice its Equity.

(iii) Equity (net worth). Different

Equity requirements shall be imposed

on the owner and operator of the Vessel,

respectively, as follows:

(A) The owner’s Equity shall at least

be equal to the difference between the

Capitalizable Cost or Depreciated

Capitalizable Cost of the Vessel

(whichever is applicable) and the total

amount of the Guarantees.

(B) The operator’s Equity shall be the

same as that which would have

otherwise been required of the owner as

operator under paragraph (d)(1)(ii) of

this section.

(3) Owner as General Shipyard

Facility. Where the owner of Advanced

or Modern Shipbuilding Technology is

a General Shipyard Facility, minimum

requirements at Closing will be the same

as those set forth in paragraph (d)(1) of

this section for an owner as operator.

(e) Special financial requirements at

closing. If the proposed project involves

a leverage lessor, parent company or

‘‘hell or high water’’ charterer

committed to financing the debt service

for the term of the Guarantees and who

meets the primary financial requirement

at closing, then with respect to the

applicant, the eligibility for Guarantees

may be based upon satisfaction of

special financial requirements, in which

the financial covenants imposed and the

requirements for maintenance of a Title

XI Reserve Fund shall be as provided for

in § 298.35(c) of this part. Special

financial requirements are as follows:

(1) Owner as operator. Where the

owner is the Vessel operator, the special

requirements at Closing are as follows:

(i) Working Capital. The Company’s

Working Capital, which may be adjusted

by the Secretary in accordance with the

provisions set forth in paragraph

(d)(1)(i) of this section, shall be an

amount at least equal to the sum of the

following:

(A) The first year’s debt service

relating to the Vessel to be financed

upon delivery (redelivery in the case of

a reconstructed or reconditioned

Vessel), or the first year’s debt service

relating to the Vessel to be financed or

refinanced after delivery. With respect

to a reconstructed or reconditioned

Vessel, the estimated Capitalizable Cost

or Depreciated Capitalizable Cost,

whichever is applicable (depending

upon when financing occurs), shall be

that related only to the cost of work

performed in the reconstruction or

reconditioning;

(B) One year’s premium for vessel

insurance including Hull, Machinery,

Protection and Indemnity, and War Risk

coverage; and

(C) One year’s Guarantee Fee.

(ii) Equity (net worth). The Company’s

Equity shall be at least equal to 90

percent of the Equity as shown on the

last audited balance sheet dated not

earlier than six months before the

issuance of the Letter Commitment, but

not less than the sum of the following:

(A) The difference between:

(1) The estimated Capitalizable Cost

of a new Vessel to be financed upon

delivery, the estimated Capitalizable

Cost of the work to be performed in

reconstructing or reconditioning a

Vessel, the Depreciated Capitalizable

Cost of an existing Vessel to be

refinanced or the Depreciated

Capitalizable Cost of a new Vessel to be

financed after delivery, and

(2) The amount of the Guarantees; and

(B) The amount of Working Capital as

determined in accordance with the

provisions of paragraph (e)(1)(i) of this

section.

(2) Lessee or charterer as operator.

Where the lessee or charterer is the

Vessel operator, the special financial

requirements at Closing are as follows:

(i) Working Capital. The Company

shall have Working Capital in an

amount determined in accordance with

the provisions of paragraph (e)(1)(i) of

this section, applicable as if the owner

were the operator.

(ii) Equity (net worth). Different

Equity requirements shall be imposed

on the operator and the owner,

respectively as follows:

(A) The operator shall have Equity at

least equal to 90 percent of the Equity
21322 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

shown on the last audited balance sheet

dated not earlier than six months before

the issuance of the Letter Commitment,

but no less than its Working Capital

requirement.

(B) The owner shall have Equity in an

amount determined in accordance with

the provisions of paragraph (e)(1)(ii)(A)

of this section.

(3) Owner as General Shipyard

Facility. Where the owner of Advanced

or Modern Shipbuilding Technology is

a General Shipyard Facility, special

financial requirements at Closing will be

the same as those outlined in paragraph

(e)(1) of this section for an owner as

operator insofar as they apply to such

technology.

(f) Adjustments to financial

requirements at Closing. If the owner,

although not operating a Vessel,

assumes any of the operating

responsibilities, the Secretary may

adjust the respective Working Capital

and Equity requirements of the owner

and operator, otherwise applicable

under paragraphs (d) and (e) of this

section, by increasing the requirements

of the owner and decreasing those of the

operator by the same amount.

(g) Subordinated debt considered to

be Equity. With the consent of the

Secretary, part of the Equity

requirements applicable under

paragraphs (a)(3), (d) and (e) of this

section may be satisfied by debt, fully

subordinated as to the payment of

principal and interest on the Secretary’s

Note and any claims secured as

provided for in the Security Agreement

or the Mortgage. Repayment of

subordinated debt may be made only

from funds available for payment of

dividends or for other distributions, in

accordance with requirements of the

Reserve Fund and Financial Agreement

(described in § 298.35 of this part). Such

subordinated debt shall not be secured

by any interest in property that is

security for Guarantees or mortgage

insurance under Title XI, unless the

Obligor and the lender enter into a

written agreement, satisfactory to the

Secretary, providing, among other

things, that if any Title XI financing or

advance by the Secretary to the Obligor

shall occur in the future, such security

interest of the lender shall become

subordinated to any indebtedness

incurred by the Obligor and to any

security interest obtained by the

Secretary in that property or other

property, with respect to the subsequent

indebtedness.

(h) Modified requirements. The

Secretary may waive or modify the

financial terms or requirements

otherwise applicable under §§ 298.13,

298.35 and 298.42, upon determining

that there is adequate security for the

Guarantees. The Secretary may impose

similar financial requirements on any

Person providing other security for the

Guarantees.

§ 298.14 Economic soundness.

(a) Economic Evaluation. No Letter

Commitment for guarantees shall be

given by the Secretary without a finding

that the proposed project, with respect

to which the Vessel(s) or Advanced or

Modern Shipbuilding Technology to be

financed or refinanced under Title XI,

will be economically sound.

(1) Basic feasibility factors. In making

the economic soundness findings the

Secretary shall consider all relevant

factors, including, but not limited to:

(i) The need in the particular segment

of the maritime industry for new or

additional capacity, including any

impact on existing equipment for which

a guarantee under this title is in effect;

(ii) The market potential for the

employment of the Vessel or utilization

of the Advanced Shipbuilding

Technology or Modern Shipbuilding

Technology of a General Shipyard

Facility over the life of the guarantee;

(iii) Projected revenues and expenses

associated with employment of the

Vessel or utilization of the Advanced

Shipbuilding Technology or Modern

Shipbuilding Technology of a General

Shipyard Facility;

(iv) Any charters, contracts of

affreightment, transportation

agreements, or similar agreements or

undertakings relevant to the

employment of the Vessel or utilization

of the Advanced Shipbuilding

Technology or Modern Shipbuilding

Technology of a General Shipyard

Facility;

(v) For inland waterways, the need for

technical improvements including but

not limited to increased fuel efficiency,

or improved safety; and

(vi) Other relevant criteria.

(2) Project Feasibility. The applicant

shall state in detail the purpose for the

obligations to be guaranteed and shall

supplement the application by exhibits

deemed to be necessary. The applicant

shall submit the following information

to demonstrate the economic feasibility

of the project over the Guarantee period.

(i) Relevant market. A written

narrative of the market (or potential

market) for the project including full

details on the following, as applicable:

(A) Nature and amount of cargo/

passengers available for carriage and

applicant’s projected share (provide also

the number of units; i.e., containers,

trailers, etc.);

(B) Services or routes in which the

Vessel(s) will be employed, including

an itinerary of ports served, with the

arrival and departure times, sea time,

port time, hours working or idle in port,

off hire days and reserve or contingency

time, proposed number of annual

sailings and number of annual working

days for the Vessel(s) or, with respect to

Advanced or Modern Shipbuilding

Technology, how the equipment will be

employed;

(C) Suitability of the Vessel(s) or

Advanced or Modern Shipbuilding

Technology for their anticipated use;

(D) Significant factors influencing the

applicant’s expectations for the future

market for the Vessel(s) or Advanced or

Modern Shipbuilding Technology, for

example, competition, government

regulations, alternative uses, and charter

rates; and

(E) Particulars of any charters,

contracts of affreightment,

transportation agreements, etc. The

narrative should be supplemented by

providing copies of any marketing

studies and/or supporting information

(for instance, existing or proposed

charters, contracts of affreightment,

transportation agreements, and letters of

intent from prospective customers).

(F) The potential for purchasing

existing equipment of a reasonable

condition and age from another source,

including information regarding—

(1) Market assessment concerning the

availability and cost of existing

equipment that may be an alternative to

new construction or the new

technology;

(2) The cost of modification,

reconditioning or reconstruction of

existing equipment to make it suitable

for intended use; and

(3) Descriptions of any bids or offers

which the company had made to

purchase existing equipment, especially

Vessels which currently are financed

with Title XI Obligations including date

of offer, Vessels and amount of offer.

(ii) Revenues. A detailed statement of

the revenues expected to be earned from

the project based upon the information

in paragraph (a)(2) of this section. The

revenues shall be based on a realistic

estimate of the Vessel(s) or the new

technology utilization rate at a

breakeven rate for the project. A

justification for the utilization rate shall

be supplied and should indicate the

number of days per year allowed for

maintenance, drydocking, inspection,

etc.

(iii) Expenses. A detailed statement of

estimated daily vessel expense or

expenses associated with Advanced or

Modern Shipbuilding Technology,

including the following (where

applicable):
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21323

(A) Wages, including staffing (submit

itemized staffing schedule and wages,

identifying the seamen’s unions

involved), and aggregated as to straight

time, overtime and fringe benefits;

(B) Subsistence cost (indicate cost per

person per day);

(C) Fuel cost (specify purchase ports),

including estimated fuel consumption at

design speed loaded and in port;

(D) Cost of stores, supplies and

equipment, segregated as to Deck,

Engine and Stewards Departments;

(E) Maintenance and repair cost at

midlife of ship (specify in years)

segregated as to voyage repairs, special

surveys, drydocking and tailshaft

removal, annual survey and structural

renewals;

(F) Insurance costs, Hull and

Machinery, Protection and Indemnity,

War Risk and other (an insurance

broker’s estimate based upon current

premium rates, if available, is

considered preferable); and

(G) Other expenses directly allocable

to the asset (indicate items included).

(iv) Estimated voyage expense: These

items shall include:

(A) Port expense segregated by port as

to agency fees, wharfage and dockage

and other port expenses;

(B) Cargo expense, segregated as to

stevedoring and other cargo expense

(show average cost per ton for loading

and discharging for each port or

geographic area);

(C) Brokerage expense, segregated as

to freight and passenger; and

(D) Other voyage expense segregated

as to canal tolls and other expense

(indicate items included).

(v) Owner’s expenses annually. These

expenses shall be segregated as to:

(A) Interest and amortized principal

on mortgage indebtedness;

(B) Estimated government Guarantee

Fee; and

(C) Salaries and other administrative

expenses (indicate basis of allocations).

(b) Objective Criteria. The Secretary

shall make a finding of economic

soundness with respect to each

proposed project based on an

assessment of the entire project. In order

to be considered for approval, a project

must meet the following criteria as

determined by the Secretary:

(1) The projected long-term demand

(equal to length of financing being

requested) for the particular Vessel(s) or

new technology to be financed must

exceed the supply of similar Vessels or

new technology in the applicable

markets, based on the Secretary’s

assessment of existing equipment,

similar Vessels or new technology under

construction and the projected need for

new equipment in that particular

segment of the maritime industry. Such

an assessment shall be determined by

the Secretary’s analysis of the following

three elements:

(i) Conformity of the company’s

projections with supply and demand

analyses prepared by the Maritime

Administration;

(ii) Availability of charters, letters of

intent, outstanding contractual

commitments, contracts of

affreightment, transportation agreements

or similar agreements or undertakings;

and

(iii) The applicant’s existing market

share compared with the market share

necessary to meet projected revenues.

(2) A projected cash flow and net

income, supported by the findings of

paragraph (b)(1) of this section, that is

sufficient to meet the projected Title XI

debt service requirements and any other

debt obligations of the company.

§ 298.15 Investigation fee.

(a) In general. Prior to the issuance of

the Letter Commitment the applicant

shall pay an Investigation Fee,

computed as hereinafter provided, to

the Secretary in the amount stated in the

Letter Commitment. This fee is imposed

to pay for the investigation of the project

described in the application and the

participants in the project, the appraisal

of properties offered as security, Vessel

inspection during construction,

reconstruction or reconditioning (where

applicable) and other administrative

expenses. If, for any reason, the

Secretary shall subsequently disapprove

the application, one-half of the

Investigation Fees shall be due and

payable.

(b) Base Fee. The investigation fee

shall be one-half of one percent on

obligations to be issued up to and

including $10,000,000 and 1⁄8 of one

percent on all obligations to be issued

in excess of $10,000,000. The $1,000

filing fee previously paid upon filing the

original application (described in

§ 298.3 of this part) shall be credited

against the investigation fee.

§ 298.16 Substitution of participants.

(a) Application may be made to the

Maritime Administration for permission

to substitute participants to a Mortgage

and/or Security Agreement in a

financing that is receiving assistance

authorized by Title XI of the Act, both

prior and subsequent to amendment by

Pub. L. 92–507. A non-refundable fee

shall be imposed, payable at the time of

application. This fee shall be in addition

to the Annual Guarantee Fee or annual

premium charge for Mortgage insurance,

whichever is applicable.

(b) A $3,000 fee shall be required to

defray all costs of processing and

reviewing a joint application by a

mortgagor and/or Obligor and a

proposed transferee of a Vessel or

Advanced or Modern Shipbuilding

Technology, which is security for Title

XI debt, if the proposed transferee is to

assume the Mortgage and/or the

Security Agreement.

§ 298.17 Evaluation of applications.

(a) In evaluating project applications,

the Secretary shall also consider

whether the application provides for:

(1) The capability of the Vessel(s)

serving as a naval and military auxiliary

in time of war or national emergency.

(2) The financing of the Vessel(s)

within one year after delivery.

(3) The acquisition of Vessel(s)

currently financed under Title XI by

assumption of the total obligation(s).

(4) The Guarantees extend for less

than the normal term for that class of

vessel.

(5) In the case of an Eligible Shipyard,

the capability of the shipyard to engage

in naval vessel construction in time of

war or national emergency.

(6) In the case of Advanced or Modern

Shipbuilding Technology, the

Guarantees extend for less than the

technological life of the asset.

(b) In determining the amount of

equity which must be provided by the

applicant, the Secretary shall consider,

among other things, the following:

(1) The financial strength of the

company;

(2) Adequacy of collateral; and

(3) The term of the Guarantees.

§ 298.18 Financing Advanced or Modern

Shipbuilding Technology.

(a) Initial criteria. The Secretary may

approve Guarantees issued to finance

Advanced or Modern Shipbuilding

Technology at a General Shipyard

Facility. The Secretary will approve

such Guarantees after consideration of

the following factors: whether the

Guarantees will aid in the transition

from naval shipbuilding to commercial

ship construction for domestic and

export sales, will encourage shipyard

modernization, and/or will support

increased productivity. The applicant

shall provide a detailed statement with

the Guarantee application which will

provide the basis for such consideration

by the Secretary.

(b) Other conditions. Applications for

loan guarantees under this section shall

not be approved unless the Secretary

determines that the following

requirements have been met:

(1) The term for such Guarantees will

not exceed the reasonable economic
21324 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

useful life of the collective assets which

comprise this technology, as determined

by the Secretary;

(2) There is sufficient collateral to

secure the Guarantee; and

(3) Approval of the application will

not preclude approval of any other

pending application for Advanced or

Modern Shipbuilding Technology

Guarantees which, in the sole opinion of

the Secretary, would result in a more

desirable use of appropriated funds. The

Secretary’s opinion will take into

consideration such factors as the types

of vessels which will be built by the

shipyard, the productivity increases

which will be achieved, the geographic

location of the shipyard, the long-term

viability of the shipyard, the soundness

of the financial transaction, any

financial impact on other Title XI

transactions, and the furtherance of the

goals of the Shipbuilding Act.

§ 298.19 Financing Eligible Export

Vessels.

(a) Transmittal to Secretary of

Defense. Upon receiving an application

for a loan Guarantee for an Eligible

Export Vessel, the Secretary shall

promptly provide to the Secretary of

Defense notice of the receipt of the

application. During the 30-day period

beginning on the date on which the

Secretary of Defense receives such

notice, the Secretary of Defense may

disapprove the loan guarantee based on

the assessment of the Secretary of

Defense of the potential use of the

Vessel in a manner that may cause harm

to United States national security

interests. The Secretary of Defense may

not disapprove a loan Guarantee under

this section solely on the basis of the

type of vessel to be constructed with the

loan Guarantee. The authority of the

Secretary of Defense to disapprove a

loan Guarantee under this section may

not be delegated to any official other

than a civilian officer of the Department

of Defense appointed by the President,

by and with the advice and consent of

the Senate. The Secretary of

Transportation may not make a loan

guarantee disapproved by the Secretary

of Defense.

(b) Determinations by the Secretary.

(1) If the loan Guarantee commitment

cost of any such Vessel is made

available from funds transferred from

the Secretary of Defense pursuant to

section 108 of the National Defense

Authorization Act for Fiscal Year 1994

(Pub. L. 103–160, 107 Stat. 1547), the

Vessel must be of at least 5,000 gross

tons and found by the Secretary to be

commercially marketable on the

international market. Vessels of less

than 5,000 gross tons can receive

Guarantees with funds appropriated to

the Department of Transportation.

(2) Such Guarantees shall not be

approved unless:

(i) The Secretary finds that the

construction, reconstruction or

reconditioning of the Vessel will aid in

the transition of United States shipyards

to commercial activities or will preserve

shipbuilding assets that would be

essential in time of war or national

emergency; and

(ii) The owner of the Vessel agrees

with the Secretary that the Vessel shall

not be transferred to any country

designated by the Secretary of Defense

as a country whose interests are hostile

to the interests of the United States.

(3) The Secretary may approve

Guarantees issued to finance Eligible

Export Vessels. Such Guarantee shall

not be approved unless the Secretary

determines that the countries in which

the shipowner, its charterers,

guarantors, or other financial interests

supporting the transaction, if any, have

their chief executive offices or have

located a substantial portion of their

assets, present an acceptable financial or

legal risk to MARAD’s collateral

interests. The Secretary’s determination

shall be based on confidential risk

assessments provided by the ExportImport Bank of the United States and

country risk analyses provided by the

Inter-Agency Country Risk Assessment

System and shall take into account any

other factors related to the loan

guarantee transaction deemed pertinent

by the Secretary.

Subpart C—Guarantees

§ 298.20 Term, redemptions and interest

rate.

(a) In general. To be eligible for

Guarantees, Obligations shall have a

maturity date satisfactory to the

Secretary, not exceeding the anticipated

physical and economic life of the Vessel

or Vessels or Advanced or Modern

Shipbuilding Technology. Such

maturity date may be less than but in no

event more than:

(1) Twenty-five years from the date of

delivery from the shipbuilder of a single

new Vessel which is to be security for

Guarantees;

(2) Twenty-five years from the date of

delivery from the shipyard of the last of

multiple Vessels which are to be

security for the Guarantees;

(3) The later of twenty-five years from

the date of original delivery of a

reconstructed or reconditioned Vessel

which is to be security for the

Guarantees, or at the expiration of the

remaining useful life of the Vessel, as

determined by the Secretary; and

(4) The technological life of the

Advanced or Modern Shipbuilding

Technology.

(b) Required redemptions. Where

multiple Vessels or multiple Advanced

Shipbuilding Technology or Modern

Shipbuilding Technology assets are to

be used as security for the Guarantees,

as set forth in paragraph (a) of this

section, the Secretary may require

payments of principal prior to maturity

(redemptions) with respect to all related

Obligations, as may be deemed

necessary to maintain adequate security

for the Guarantees.

(c) Interest rate. The interest rate of

each Obligation must be determined by

the Secretary 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 Secretary.

§ 298.21 Limits.

(a) Actual Cost basis. The amount of

Obligations to be issued shall be

satisfactory to the Secretary based upon

the economic soundness of the

transaction. Such amount may be less

than but in no event more than 75

percent or 871⁄2 percent, whichever is

applicable under the provisions of

section 1104A(b)(2) or section

1104B(b)(2) of the Act, of the Actual

Cost of the Vessel or Vessels or

Advanced Shipbuilding Technology or

Modern Shipbuilding Technology

asset(s). If minimum horsepower of the

main engine is a requirement for

Guarantees up to 871⁄2 percent of the

Actual Cost, the standard with respect

to such horsepower shall be continuous

rated horsepower. Where existing debt

is being refinanced, pursuant to section

1103A(a)(5) of the Act, the amount of

new Obligations issued in respect to

such existing debt may not exceed the

lesser of:

(1) The amount of outstanding debt

being refinanced (whether or not

receiving assistance under Title XI); or

(2) Seventy-five or 871⁄2 percent

whichever is applicable, of the

Depreciated Actual Cost of the Vessel or

Advanced Shipbuilding Technology or

Modern Shipbuilding Technology with

respect to which the new Obligations

are being issued.

(b) Actual Cost items. Actual Cost is

comprised essentially of those items

which would customarily be capitalized

as Vessel or Advanced Shipbuilding

Technology or Modern Shipbuilding

Technology construction costs such as

designing, engineering, constructing

(including performance bond premiums

approved by the Secretary), inspecting,

outfitting and equipping. There shall be

included those cost items usually
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21325

specified in Vessel or Advanced

Shipbuilding Technology or Modern

Shipbuilding Technology construction

contracts, e.g., changes and extras, cost

of owner furnished equipment,

shoreside spare parts and commitment

fees and interest on the Obligations or

other borrowings during the

construction period (excluding interest

paid on subordinated debt considered to

be Equity, and incurred during the

construction period), and less income

realized from investment of Escrow

Fund deposits during the construction

period. Recognizing the importance that

the payment of commissions plays in

the export market, commissions (which

represent a portion of the total shipyard

contract price) may be included in the

foreign equipment and services amount

of the Actual Cost of an export project,

provided:

A majority of the work done by the

parties receiving the commissions is in

the form of design and engineering

work, and

The commissions represent a small

amount of the total contract price. In

addition, Guarantee Fees determined in

accordance with the provisions of

section 1104(e) of the Act shall be

included in the items of Actual Cost. In

approving Actual Cost the Secretary will

consider all pertinent factors.

(c) Items excludible from Actual Cost.

Actual Cost shall not include any other

costs such as the following:

(1) Legal fees or expenses;

(2) Accounting fees or expenses;

(3) Commitment fees or interest other

than those specifically allowed;

(4) Fees, commissions or charges for

granting or arranging for financing;

(5) Fees or charges for preparing,

printing and filing an application for

Title XI Guarantees and supporting

documents, for services rendered to

obtain approval of the application and

for preparing, printing and processing

documents relating to the application

for Guarantees;

(6) Underwriting or trustee’s fees;

(7) Federal documentary tax stamps;

(8) Investigation Fee determined in

accordance with section 1104(f) of the

Act and § 298.15 of this part;

(9) Predelivery Vessel operating

expenses, Vessel insurance premiums

and other items which may not be

properly capitalized by the owner as

costs of the Vessel under generally

accepted accounting principles;

(10) The cost of the condition survey

required by § 298.11(d) of this part and

all work necessary to meet the standards

set forth therein;

(11) The cost to the Shipowner of a

Vessel which is to be reconstructed or

reconditioned, e.g., cost of acquisition

or repair work;

(12) Generally not include any

amount payable to the shipyard for early

delivery of the Vessel;

(13) Generally not include any

amount payable to the manufacturer of

the Advanced Shipbuilding Technology

or Modern Shipbuilding Technology for

early delivery of the equipment to the

General Shipyard Facility;

(14) Predelivery Advanced

Shipbuilding Technology or Modern

Shipbuilding Technology expenses

which may not be properly capitalized

by the General Shipyard Facility as

costs of the technology under Generally

Accepted Accounting Principles; and

(15) The cost of major foreign

components and other foreign

components for which there is no

waiver and their assembly when

comprising any part of the hull and

superstructure of a Vessel.

(d) Substantiation of Actual Cost.

Prior to payment from the Escrow Fund

or Construction Fund (described in

§§ 298.33 and 298.34 of this part), and

prior to the final Actual Cost

determination for each Vessel or

Advanced Shipbuilding Technology or

Modern Shipbuilding Technology, the

applicant shall submit to the Secretary

documents substantiating all claimed

costs eligible under § 298.21(b) or,

alternatively, appropriate certification of

such costs by an agent approved by the

Secretary. These documents may

include but need not be limited to

copies of invoices, change orders,

subcontracts, and where required by the

Secretary, statements from independent

certified or independent licensed public

accountants that the costs for which

payment or reimbursement is sought

were actually paid or are payable with

respect to the construction of a Vessel

or Advanced Shipbuilding Technology

or Modern Shipbuilding Technology.

These documents must be summarized,

indexed and arranged according to cost

categories, pursuant to directions

contained in forms prescribed by the

Secretary.

(e) Escalation as part of Actual Cost.

Escalation clauses in construction

contracts shall be subject to approval by

the Secretary. After a review of the base

contract price and the escalation

clauses, the Secretary shall, in order to

estimate the Actual Cost amount to be

stated in the Letter Commitment, add to

the approved base contract price the

amount of estimated escalation as

approved by the Secretary. The

Secretary must subsequently approve

the amount of escalation claimed by the

applicant as Actual Cost.

(f) Moneys received in respect of

construction. If the Obligor or any

Person acting in behalf of the Obligor

shall from time to time receive moneys

due in respect to construction of a

Vessel or Advanced Shipbuilding

Technology or Modern Shipbuilding

Technology (described in the Security

Agreement) from the shipbuilder,

guarantors, sureties or other Persons, the

Obligor shall give written notice of such

fact to the Secretary. So long as the

Guarantees have not been paid by the

Secretary, the Obligor or other recipient

shall promptly make deposit of these

moneys in a Depository with a written

notice that the Depository shall hold

such moneys on deposit until it receives

written instructions from the Secretary

as to their disposition. The Secretary

shall determine the extent to which

Actual Cost is to be reduced with

respect to these moneys. In no event

shall Actual Cost be reduced with

respect to payments by the shipyard to

a Vessel or Advanced Shipbuilding

Technology or Modern Shipbuilding

Technology owner of liquidated

damages for late delivery of the Vessel

or Advanced Shipbuilding Technology

or Modern Shipbuilding Technology. If

the Secretary shall have paid the

Guarantees, the Obligor or other

recipient shall promptly pay these

moneys including any liquidated

damages to the Secretary for deposit

into the Federal Ship Financing Fund.

(g) Depreciated Actual Cost. After a

Vessel or Advanced Shipbuilding

Technology or Modern Shipbuilding

Technology has been delivered or

redelivered (in the case of

reconstruction or reconditioning), the

limitation on the amount of Guarantees

shall be 75 or 871⁄2 percent, whichever

is applicable, of the Depreciated Actual

Cost of the Vessel or Advanced

Shipbuilding Technology or Modern

Shipbuilding Technology.

§ 298.22 Amortization of Obligations.

Generally after Vessel or Advanced

Shipbuilding Technology or Modern

Shipbuilding Technology delivery, and

until maturity of the Obligations, the

Obligor shall be required by provision of

the Trust Indenture or other part of the

Documentation to make periodic

payment of interest on and principal of

the Obligations. Usually, the payment of

principal (amortization) shall be made

semi-annually, but in no event, less

frequently than on an annual basis, and

in either case shall be in equal parts

(straightline basis), unless the Secretary

consents to the periodic payment of a

constant aggregate amount, comprised

of both interest and principal

components which are variable in
21326 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

amount (level debt basis). No other

proposed method of amortization will

be allowed which would reduce the

amount of periodic amortization below

that determined under the straightline

or level debt basis at any time prior to

maturity of the Obligations, except

where:

(a) The Obligor can demonstrate to the

satisfaction of the Secretary that there

will be adequate funds to discharge the

Obligations at maturity;

(b) The Obligor establishes a fund

acceptable to the Secretary in which the

Obligor deposits an equal annual

amount necessary to redeem the

outstanding Obligations at maturity; or

(c) With regard to Eligible Export

Vessels, in accordance with such other

terms as the Secretary determines to be

more favorable and to be compatible

with export credit terms offered by

foreign governments for the sale of

vessels built in foreign shipyards.

§ 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 debt, whether or not covered by

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 or for

facilities or equipment pertaining to

marine operation (described in § 298.24

of this part). 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.

Refinancing of Title XI debt only shall

be permitted for Advanced or Modern

Shipbuilding Technology.

§ 298.24 Financing facilities and

equipment related to marine operations.

The Secretary may approve

Guarantees secured by one or more

Vessels and issued to finance the

construction, reconstruction, or

reconditioning of facilities or equipment

pertaining to marine operations. Such

facilities or equipment shall be of a

specialized nature, used principally for

servicing vessels and in handling

waterborne cargo in the close proximity

of the berthing area, excluding over-theroad equipment (other than chassis and

containers), permanent or

semipermanent structures and real

estate.

§ 298.25 Excess interest or other

consideration.

The Secretary shall not execute

Guarantees if any agreement in the

Documentation directly or indirectly

provides for:

(a) The payment to an Obligee of

interest, or other compensation for

services which have not been

performed, in a manner that such

compensation or payment is being

provided as interest in excess of the rate

approved by the Secretary; or

(b) Grants of security to an Obligee in

addition to the Guarantees.

§ 298.26 Lease payments.

If payment of principal and interest

on Obligations would in any way be

dependent upon the lease or charter hire

payments for a Vessel or Advanced

Shipbuilding Technology or Modern

Shipbuilding Technology that is

security for the Obligations, the amount

and conditions of lease or charter

payments shall be subject to the

Secretary’s approval.

§ 298.27 Advances.

(a) In general. In accordance with the

provisions of section 207 and Title XI of

the Act, the Secretary shall have the

discretion to make or commit to make

an advance or payment of funds to, or

on behalf of the owner, or operator or

directly to any other person or entity for

items, including, but not limited to,

principal, interest, insurance and other

vessel-related expenses or fees. Such

advances or payments shall be made

only to protect, preserve or improve the

collateral held as security by the

Secretary to secure Title XI debt. The

applicant making the request for an

advance shall demonstrate (with market

and cash flow analysis and other

projections) that its problems are of a

short term duration (less than two

years); with the help of an advance(s),

the applicant would be assisted over its

temporary difficulties; and there is

adequate collateral for the advance.

(b) Filing requirements. Any company

that desires to request an advance or

other payment, or a commitment to

make an advance or other payment from

the Secretary for the purposes stated in

§ 298.27 of this part, shall apply for

such assistance as far in advance as is

reasonably possible. A request for an

advance for principal and interest

payments shall be received by the

Secretary at least 30 days prior to the

initial payment date. A request for an

advance of insurance payments shall be

received by the Secretary at least 30

days prior to a renewal or termination

date. The Secretary may consider

requests for assistance with less notice,

upon written documentation of

extenuating circumstances. Any

requests for assistance must be

accompanied by supporting data with

respect to the need for the advance, that

financing assistance has been sought

from other sources, that the company is

taking and has taken measures to

alleviate its situation, financial

projections, proposed term of the

repayment, current and projected

market conditions, information on other

available collateral, liens and other

creditor information, and any other

information which may be requested by

the Secretary.

Subpart D—Documentation

§ 298.30 Nature and content of

Obligations.

An Obligation, whether issued in the

form of a note, bond of any type, or

other debt instrument, when engraved,

printed or lithographed on a single sheet

of paper shall include on its face the

name of the Obligor, the principal sum,

the rate of interest, the date of maturity,

and the Guarantee of the United States,

authenticated by the Indenture Trustee.

If the Obligation is typewritten, printed

or reproduced by other means on

several pages of paper, the Guarantee of

the United States and the authentication

certificate of the Indenture Trustee may

appear at the end of the typewritten

Obligation. The instrument which is

evidence of indebtedness shall also

contain all information necessary to

apprise the Obligees of their rights and

responsibilities with respect thereto,

including, but not limited to, time and

manner for payment of principal and

interest, redemptions, default procedure

and notification (in case of registered

Obligations) of sale or other transfer of

the instruments.

§ 298.31 Mortgage.

(a) In general. (1) Under normal

circumstances, a Guarantee shall not be

endorsed on any Obligation until the

Secretary receives satisfactory evidence

of a Mortgage in one or more Vessels or

a Mortgage or other security interest in
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21327

the Advanced Shipbuilding Technology

or Modern Shipbuilding Technology

(the ‘‘Technologies’’), in favor of the

Secretary. During construction of a new

Vessel or any of the Technologies, a

security interest may be perfected by a

filing under the Uniform Commercial

Code.

(2) In order to ensure that the

Secretary’s Mortgages or other security

interests are valid and enforceable, the

Secretary shall require that the Obligor

obtain legal opinions, in form and

substance satisfactory to the Secretary,

from independent, outside legal counsel

satisfactory to the Secretary, including

foreign independent outside legal

Counsel with respect to Eligible Export

Vessels, which opinions shall state,

among other things, that the Mortgage or

other security interest(s) are valid and

enforceable:

(i) In the country in which the Vessel

is documented (or, in the case of a

security interest, in jurisdictions

acceptable to the Secretary);

(ii) In the United States; and

(iii) For vessels operating on specified

trade routes, in the country or countries

involved in this service, unless the

Secretary determines that those

destinations are too numerous, in which

case, the Secretary will instead require

an opinion of foreign validity and

enforceability in the Vessel’s primary

port of operation.

(3) In the case where a Mortgage or

security interest on the financed assets

may not be available or enforceable, the

Secretary shall require alternative forms

of security.

(4) The Security Agreement shall

provide that upon delivery of a new

Vessel or upon final installation of the

Technologies, or at the time Guarantees

are issued with respect to an existing

Vessel or the Technologies, a Mortgage

on the Vessel and a Mortgage or other

security interest on the Technologies

shall be executed in favor of the

Secretary, unless the Secretary

determines that a Mortgage or a security

interest is not required in accordance

with the preceding sentence.

(5) The Mortgage shall be filed with

the United States Coast Guard at the

Vessel’s port of record, 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.

(b) Mortgage secured by multiple

Vessels. When two or more Vessels are

to be security for Guarantees, the

Security Agreement may provide that

one Mortgage relating to all the Vessels

(Fleet Mortgage) shall be executed,

perfected and delivered to the Secretary

by the Obligor. If the Fleet Mortgage

relates to undelivered Vessels, the Fleet

Mortgage shall be executed upon

delivery of the first vessel. At the time

of each subsequent Vessel delivery, the

Obligor shall execute a supplement to

the Fleet Mortgage which makes that

Vessel subject to the Secretary’s

Mortgage lien. The Fleet Mortgage shall

provide that payment by the Obligor of

the entire amount of Obligations

covered or to be covered by Guarantees

shall be required to discharge the Fleet

Mortgage, regardless of the amount of

the Secretary’s Note or Notes issued and

outstanding at the time of execution and

delivery of the Fleet Mortgage or the

number of Vessels covered by the Fleet

Mortgage. The discharge date of the

Fleet Mortgage shall be the maturity

date of the Secretary’s Note. The

Secretary may require, as authorized by

section 1104(c)(2) of the Act, such

payments of principal prior to maturity

(redemptions), with respect to all

related Obligations, as deemed

necessary to maintain adequate security

for the Guarantees. Each Fleet Mortgage

shall provide that in the event of

constructive total loss, requisition of

title or sale of any Vessel covered by the

Fleet Mortgage, indebtedness

represented by the Obligations shall be

paid, unless the Secretary shall

otherwise determine that there remains

adequate security for the Guarantees,

and the Vessel shall be discharged from

the Mortgage lien.

(c) Adequacy of collateral. Under

normal circumstances, a First Preferred

Mortgage on the Vessel(s) or Advanced

or Modern Shipbuilding Technology

will be adequate security for the

Guarantees. If, however, the Secretary

determines that the Mortgage on the

Vessel(s) or Advanced or Modern

Shipbuilding Technology is not

sufficient to provide adequate security,

the Secretary, as a condition to

approving the Letter Commitment or

processing the application may require

additional collateral, such as a

mortgage(s) on other vessel(s) or

Advanced or Modern Shipbuilding

Technology or on other assets, special

escrow funds, pledges of stock, charters,

contracts, notes, letters of credit,

accounts receivable assignments, and

guarantees.

§ 298.32 Required provisions in

documentation.

(a) Performance under shipyard and

related contracts. Generally, shipyard

and related contracts shall contain

provisions for:

(1) Furnishing by the shipyard or

manufacturer of the Advanced

Shipbuilding Technology or Modern

Shipbuilding Technology of satisfactory

insurance and a satisfactory

performance bond where Obligations

are issued during the construction

period, except that if the shipyard or

manufacturer of the Advanced

Shipbuilding Technology or Modern

Shipbuilding Technology demonstrates

to the satisfaction of the Secretary that

it has sufficient financial resources and

operational capacity to complete the

project, posting of a bond will not be

required;

(2) Allowing access to the Vessel or

Advanced or Modern Shipbuilding

Technology, as well as all related work

projects being performed by the

contractor and subcontractors, to a

representative of the Secretary, at all

reasonable times, to inspect

performance of the work and to observe

trials and other tests for the purpose of

determining that the Vessel or

Advanced or Modern Shipbuilding

Technology is being constructed,

reconstructed or reconditioned in

accordance with contract plans and

specifications approved by the

Secretary;

(3) Submitting to the Secretary, upon

request, one set of shipyard plans, in

form and substance satisfactory to the

Secretary, for the Vessel or Advanced or

Modern Shipbuilding Technology as

built;

(4) Making periodic payments for the

work in accordance with an agreed

schedule, submitted by the shipyard in

a form acceptable to the Secretary, based

on percentage of completion, after such

percentage and satisfactory performance

are certified by the Obligor, shipyard

and a representative of the Secretary as

to each payment;

(5) Prohibiting the use of proceeds

from the sale of Obligations for the

payment of work performed outside the

shipyard, unless the Secretary consents

in writing to such use; and

(6) Requiring that all components of

the hull and superstructure of a U.S.-

documented Vessel and an Eligible

Export Vessel shall be assembled in the

United States. If obligations will not be

issued during the period of construction

of a Vessel, shipyard-related contracts

shall generally include the provisions

specified in paragraphs (a)(2) and (a)(3)

of this section and this paragraph (a)(6).

(b) Assignments and general

covenants from Obligor to Secretary.

The Obligor shall assign rights and shall

covenant with the Secretary, as required

by the Secretary, including, but not

limited to, the following:
21328 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

(1) Assignment of all or part of the

right, title and interest under the

construction contract and related

contracts, except those rights expressly

reserved therein by the Obligor relating

to such things as patent infringement

and liquidated damages;

(2) Assignment of rights to receive all

moneys which from time to time

become due with respect to Vessel or

Advanced or Modern Shipbuilding

Technology construction;

(3) Assignment, where applicable, of

all or a part of the bareboat charter, time

charter, contracts of affreightment or

other agreements relating to the use of

the Vessel or Advanced or Modern

Shipbuilding Technology and all hire

payable to the Obligor, and delivery to

the Secretary of required consents by

appropriate parties to any such

assignments;

(4) Covenants relating to the annual

filing of satisfactory evidence of

continuing United States citizenship, in

accordance with 46 CFR part 355, with

the exception of Eligible Export Vessels

and shipyards with Advanced or

Modern Shipbuilding Technology

projects; warranty of Vessel or

Advanced or Modern Shipbuilding

Technology title free from all liens other

than those specifically excepted;

maintaining United States

documentation of the Vessel or

documentation under the laws of a

country other than the United States

with regard to an Eligible Export Vessel;

compliance with the provisions of 46

U.S.C. 31301–31343, except that Eligible

Export Vessels shall comply with the

definition of a ‘‘preferred mortgage’’ in

46 U.S.C. 31301(6)(B), requiring, among

other things, that the Mortgage shall

comply with the mortgage laws of the

foreign country where the Vessel is

documented and shall have been

registered under those laws in a public

register; Notice of Mortgage, payment of

all taxes (except if being contested in

good faith); annual financial statements

audited by independent certified or

independent licensed public

accountant.

(5) Covenants to keep records of

construction costs paid by or for the

Obligor’s account and to furnish the

Secretary with a detailed statement of

those costs, distinguishing between:

(i) Items paid or obligated to be paid,

attested to by independent certified

public accountants unless otherwise

verified by the Secretary; and

(ii) Costs of American and foreign

materials (including services) in the hull

and superstructure.

(6) Covenants to maintain Marine and

War Risk Hull and Machinery insurance

on the Vessel or Eligible Export Vessel

in an amount equal to 110% of the

outstanding Obligations or up to the full

commercial value of the Vessel or

Eligible Export Vessel, whichever is

greater; Marine and War Risk Protection

and Indemnity insurance; Interim War

Risk Binders for Hull and Machinery,

and Protection and Indemnity coverages

underwritten by the Maritime

Administration as authorized by Title

XII of the Act; and such additional

insurance as may be required by the

Secretary. All insurance required to be

maintained shall be placed with the

United States Government and

American and/or British (and/or other

foreign, if permitted by the Secretary by

prior written notice) insurance

companies, underwriters’ associations

or underwriting funds approved by the

Secretary through marine insurance

brokers and/or underwriting agents

approved by the Secretary. All

insurance required to be maintained

shall be placed under the latest (at the

time of issue) forms of American

Institute of Marine Underwriters

policies approved by the Secretary and/

or under such other forms of policies

which the Secretary may approve in

writing and/or policies issued by or for

the Maritime Administration insuring

the Vessel or Eligible Export Vessel

against the usual risks provided for

under such forms, including such

amounts of increase value other forms of

‘‘total loss only’’ insurance permitted by

the Hull and Machinery insurance

policies;

(7) Collateralize other debt due to the

Secretary under other Title XI

financings;

(8) Covenants to maintain shipyard

insurance on the Advanced

Shipbuilding Technology or Modern

Shipbuilding Technology in an amount

equal to 110% of the outstanding

Obligations or up to the full commercial

value of the technology, whichever is

greater, and such additional insurance

as may be required by the Secretary; and

(9) Covenants to maintain additional

types of insurance as may be required

by the Secretary with respect to Eligible

Export Vessels, i.e. political risk

insurance, to cover such items as the

political, financial, and/or economic

risk in a foreign country.

§ 298.33 Escrow fund.

(a) Circumstances requiring deposits.

The Obligor may be required to

establish a fund with the Secretary

(Escrow Fund) in accordance with

section 1108(a) of the Act and the

Security Agreement. The deposit with

the Secretary shall be in cash or Federal

Reserve Bank funds.

(b) Principal Deposit-Single Vessel or

Advanced or Modern Shipbuilding

Technology. If a single Vessel or

Advanced or Modern Shipbuilding

Technology is security for the

Guarantees, the deposit of principal

shall be calculated by subtracting from

the aggregate principal amount of the

Obligations sold, 75 or 871⁄2 percent

(whichever is applicable under section

1104(b)(2) of the Act) of the amount of

Actual Cost or Depreciated Actual Cost

determined by the Secretary to have

been paid, as of the date of the deposit,

by or for the account of the Obligor for

construction, reconstruction or

reconditioning of the Vessel or

Advanced or Modern Shipbuilding

Technology. In the event that

Obligations are issued and sold on a

date subsequent to the initial issuance

and sale of Obligations, a deposit shall

be calculated in the same manner as for

the first sale of Obligations.

(c) Principal deposit—multiple

Vessels or Advanced or Modern

Shipbuilding Technology. If multiple

Vessels or Advanced or Modern

Shipbuilding Technology are security

for the Guarantees, with the Secretary’s

approval, the Obligor may calculate the

aggregate deposit of principal amount in

the Escrow Fund by computing on an

individual Vessel or Advanced or

Modern Shipbuilding Technology basis

by prorating the proceeds of the sale of

Obligations, within the meaning of the

proviso in section 1108(a) of the Act,

based on the ratio of the Vessel’s Actual

Cost or Depreciated Actual Cost, to the

total Actual Cost and Depreciated

Actual Cost of all Vessels or Advanced

or Modern Shipbuilding Technology

which are security for the Guarantees

less 75 or 871⁄2 percent (whichever is

applicable under section 1104(b)(2) of

the Act) of the amount of Actual Cost or

Depreciated Actual Cost determined by

the Secretary to have been paid, as of

the date of deposit, by or for the account

of the Obligor for the construction,

reconstruction or reconditioning of the

Vessel or Advanced or Modern

Shipbuilding Technology for which the

deposit is being computed or by

allocating portions of the proceeds (up

to 75 or 871⁄2 percent, whichever is

applicable under section 1104(b) of the

Act) from the sale of the Obligations to

specific Vessels or Advanced or Modern

Shipbuilding Technology and

computing the deposit based on the

Actual Cost or Depreciated Actual Cost

of such Vessels or Advanced or Modern

Shipbuilding Technology paid, as of the

date of deposit, by or for the account of

the Obligor. In the event that

Obligations are issued and sold on a
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21329

date subsequent to the initial issuance

and sale of Obligations, a deposit shall

be calculated in the same manner as for

the first sale of Obligations. The

foregoing allocations are for the purpose

of calculating the deposits only and are

not applicable or controlling with

respect to disbursements from the

Escrow Fund.

(d) Interest deposit. Interest on the

aggregate principal amount deposited

pursuant to paragraphs (b) and (c) of

this section, shall be computed at the

same rate borne by the Obligations, for

one interest payment period, unless the

Secretary shall find the existence of

adequate consideration or accept other

consideration in lieu of the interest

deposit. If the Obligations issued and

sold bear more than one rate of interest,

the amount of interest required to be

deposited shall be based upon the

weighted average of such interest rates.

The calculation of the amount of

interest to be deposited shall take into

account the principal and interest, if

any, remaining on deposit in the Escrow

Fund.

(e) Disbursements prior to

Termination Date. Unless the

Guarantees shall become payable prior

to the Termination Date (described in

paragraph (h) of this section) of the

Escrow Fund, the Secretary shall,

subject to the satisfaction of any

applicable conditions contained in the

Security Agreement, and within a

reasonable time after written request

from the Obligor, make disbursements

from the fund directly to the Indenture

Trustee or any Paying Agent for the

payment of interest on the Obligations,

for periods prior to Vessel or Advanced

or Modern Shipbuilding Technology

delivery or redelivery, and to the

shipbuilder, the Obligor or to any other

Person entitled thereto, with respect to

costs included in Actual Cost. Also, the

Secretary may disburse to the Obligor,

upon request made at least 10 business

days prior to, and no later than 30 days

after the date on which the payment of

interest on the Obligations is due, any

excess, as determined by the Secretary,

of required interest on deposit in the

Escrow Fund on the date of

disbursement. However, no payment or

reimbursement shall be made from the

Escrow Fund to any Person until:

(1) The Construction Fund (described

in § 298.34 of this part), where provided

for in the Security Agreement, has been

exhausted;

(2) At least 121⁄2 or 25 percent

(whichever is applicable) of the Actual

Cost or Depreciated Actual Cost of the

Vessel or Advanced or Modern

Shipbuilding Technology for which the

disbursement is requested has been paid

by or for the account of the Obligor from

sources other than the proceeds of the

Obligations, except that where the

Obligor is required to pay in 25 percent

of the Actual Cost or Depreciated Actual

Cost, and demonstrates to the

Secretary’s satisfaction the ability to pay

in such 25 percent, after the Obligor has

paid the first 121⁄2 percent of the Actual

Cost or Depreciated Actual Cost, the

Obligor may be permitted to withdraw

moneys from the Escrow Fund, for

payment of the next 371⁄2 percent of

such Actual Cost or Depreciated Actual

Cost, and withdraw the remainder of the

Escrow Fund moneys after paying in the

next 121⁄2 percent of Actual Cost or

Depreciated Actual Cost; and

(3) The Secretary has approved the

Actual Cost items and has determined

that the amounts for which

reimbursement is requested have been

paid and that there has been satisfactory

certification as to the percentage of

completion of the Vessel or Vessels or

Advanced or Modern Shipbuilding

Technology, at least equal to that

amount of Actual Cost paid, except

where the Secretary has specifically

consented to an alternative procedure.

(f) Where Guarantees become payable.

If, prior to the Termination Date of the

Escrow Fund, the Guarantees shall

become payable by the Secretary, all

amounts in the Escrow Fund at such

time (including interest and realized

income which have not yet been paid to

the Obligor) shall be paid into the

Federal Ship Financing Fund, created

by section 1102 of the Act, and be

credited against any amounts due or to

become due to the Secretary from the

Obligor with respect to all Guarantees,

and to the extent not so required, be

paid to the Obligor.

(g) Requisition of title, termination of

construction contract or total loss of

Vessel or Advanced or Modern

Shipbuilding Technology. In the event

of requisition of title to or seizure or

forfeiture of the Vessel or Advanced or

Modern Shipbuilding Technology,

termination of the construction contract

(unless the Obligor and the Secretary

elect to have the Vessel or Advanced or

Modern Shipbuilding Technology

completed) or the constructiondifferential subsidy contract (where

applicable), or the actual or constructive

total loss of the Vessel or Advanced or

Modern Shipbuilding Technology, all

moneys remaining on deposit in the

Escrow Fund may be disbursed by the

Secretary for any of the following

purposes:

(1) Redemption or payment of

Obligations and accrued interest thereon

to the date of redemption or payment,

in accordance with the applicable

provisions of the Documentation

relating to such redemption or payment,

where there is no existing default;

(2) Payment to the Obligor, if all

outstanding Obligations are retired and

paid other than by payment of the

Guarantees, and all amounts payable to

the Secretary and secured by the

Mortgage have been paid; and

(3) Payment in accordance with the

priorities set forth in § 298.41 of this

part, if a default has occurred and if the

Secretary shall have paid the

Guarantees.

(h) Disbursement upon Termination

Date. The Escrow Fund shall terminate

on a date agreed upon by the Obligor

and the Secretary as set forth in the

Security Agreement (Termination Date).

If on such Termination Date the full

amount of Actual Cost of the Vessel or

Advanced or Modern Shipbuilding

Technology has not been paid by or for

the account of the Obligor, or is not then

due and payable, the Obligor and the

Secretary may extend the Termination

Date by agreement. When the Secretary

makes a final determination of Actual

Cost at the written request of the

Obligor, or at the instance of the

Secretary if the Termination Date has

occurred without such a request, the

Termination Date shall be deemed to be

the date of such final determination of

Actual Cost. If payments under the

Guarantees have not become due prior

to the Termination Date, then on or

immediately after said Termination

Date, any balance in the Escrow Fund

shall be disbursed by the Secretary in

the following manner:

(1) Where the principal amount of the

Obligations issued less the principal

amount of Obligations which have been

retired or paid on or before such

Termination Date, and not availed of as

a credit against any mandatory

redemptions otherwise required to be

made on or before such Termination

Date, shall be in excess of 75 or 871⁄2

percent (whichever is applicable) of the

Actual Cost or Depreciated Actual Cost

of the Vessel or Advanced or Modern

Shipbuilding Technology as finally

determined by the Secretary as of the

Termination Date, the Secretary shall

pay such excess to the Indenture

Trustee in accordance with the

provisions of the Documentation

relating to such payment. A written

notice from the Secretary and the

Obligor shall accompany such payment,

stating the Termination Date and

directing the Indenture Trustee to

redeem an equal amount of Obligations;

(2) From the balance remaining after

the deduction of the principal amount

of the Obligations to be redeemed, an

amount equal to interest accrued to the
21330 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

date fixed for redemption of the

principal amount of Obligations to be

redeemed shall be simultaneously paid

from the Escrow Fund by the Secretary

to the Indenture Trustee to be applied

to the payment of interest to the date to

be fixed for redemption. In the event the

balance remaining in the Escrow Fund,

after giving effect to paragraph (h)(1) of

this section, is insufficient to pay the

interest accrued to the date fixed for

redemption, such balance shall be paid

from the Escrow Fund to the Indenture

Trustee and the Obligor shall

simultaneously deposit with the

Indenture Trustee an amount equal to

the difference between the balance

being paid to the Indenture Trustee from

the Escrow Fund and the total amount

required for the payment of accrued

interest; and

(3) Any balance of the Escrow Fund

shall be paid to the Obligor.

(i) Investment and liquidation of the

Escrow Fund. The Secretary may invest

and reinvest deposits to the Escrow

Fund in securities which are obligations

of the United States and with maturities

such that sufficient cash will be

reasonably available to the Escrow Fund

as required to make periodic authorized

disbursements. The Secretary shall

deposit the Escrow Fund into a special

Treasury Department account with

instructions, pursuant to an agreement

with the Obligor, for the investment,

reinvestment and liquidation of the

Escrow Fund.

(j) Income Earned on the Escrow

Fund. If the Guarantees shall not have

become due, after receiving notice that

the Treasury Department has deposited

income earned on the Escrow Fund into

the special account, the Secretary shall

direct the payment of such income to

the Obligor. Income shall include the

excess of the cash received from the sale

of securities or the payment of securities

at maturity (less any losses from the sale

of securities not made up by payments

by the Obligor pursuant to provisions of

the Security Agreement) over the cost

thereof, and interest received with

respect to the securities.

(k) Redeposit. If, at any time, the

Secretary shall have determined that

there has been an improper

disbursement from the Escrow Fund,

the Secretary shall give written notice to

the Obligor of the amount improperly

disbursed, the amount to be redeposited

into the Escrow Fund on account

thereof and the reasons for such

determination. The Obligor shall

thereafter promptly redeposit such

amount into the Escrow Fund.

§ 298.34 Construction fund.

(a) Deposit. Where the Security

Agreement provides for an Escrow Fund

deposit, usually a provision shall also

be included therein for establishing

Construction Fund deposits. Under the

terms of this provision, at the time of

each sale of Obligations the Obligor

shall deposit with a Depository, in a

special account subject to the joint

control of the Obligor and the Secretary,

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 121⁄2 or 25 percent of Actual Cost or

Depreciated Actual Cost, as applicable

(whichever is payable under § 298.33(e)

of this part) which the Secretary

determines has been paid by or for the

account of the Obligor. 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. The Secretary shall,

subject to the satisfaction of any

applicable conditions contained in the

Security Agreement, periodically

approve disbursements from the

Construction Fund directly to the

Indenture Trustee or any Paying Agent

for the payment of interest on the

Obligations, for periods prior to Vessel

or Advanced or Modern Shipbuilding

Technology delivery, and to the

shipbuilder, the Obligor, or to any other

Person entitled thereto with respect to

costs included in Actual Cost. The

Secretary shall not authorize any

disbursement from the Construction

Fund unless payments have been made

by or for the account of the Obligor from

sources other than the Obligations, in

accordance with the requirements of

paragraphs (e) (2) and (3) of § 298.33.

(c) Redeposit. If, at any time, the

Secretary shall have determined that

there has been an improper

disbursement from the Construction

Fund, the Secretary shall give written

notice to the Obligor of the amount

improperly disbursed, the amount to be

redeposited into the Construction Fund

on account thereof and the reasons for

such determination. The Obligor shall

thereafter promptly redeposit such

amount into the Construction Fund.

§ 298.35 Reserve Fund and Financial

Agreement.

(a) Purpose. In order to provide

further security to the Secretary and to

insure payment of the interest and

principal due on the Obligations, the

Company shall be required to enter into

a Title XI Reserve Fund and Financial

Agreement (Agreement) at the first

Closing at which Obligations are issued.

The Secretary may waive or modify

provisions of the Agreement based on

an evaluation of the aggregate security

for the Guarantees.

(b) Financial Covenants for

Companies meeting primary financial

requirements. Covenants shall be

imposed on the Company which is

subject to compliance with the primary

financial requirements at Closing, set

forth in § 298.13(d), as follows:

(1) Continuous covenants. So long as

Guarantees are in effect the Company

shall not, without the prior written

consent of the Secretary, undertake any

actions prohibited by the

Documentation, which actions include

but are not limited to those of the

following nature:

(i) Enter into a service, management

or operating agreement with respect to

a Vessel or Advanced or Modern

Shipbuilding Technology financed with

the assistance of Title XI Guarantees;

(ii) Sell, transfer or demise charter the

Vessel or transfer the Vessel to a Related

Party under any form of charter or

contract,

(iii) Sell or transfer a substantial part

of its assets, enter into a merger or

consolidation, engage in new business

activities not directly connected with

marine operations or guarantee (or

otherwise be liable for) debts of other

Persons.

(iv) Pay any dividend except as may

be permitted by paragraph (b)(1)(iv) (A)

or (B) of this section. If the Company is

party to an operating-differential

subsidy contract, the payment of

dividends is subject to the provisions of

§ 298.35(g).

(v) Sell, transfer, or lease any Modern

or Advanced Shipbuilding Technology

financed with the assistance of Title XI

guarantees or transfer such technology

to a Related Party under any form of

contract.

(A) From retained earnings in an

amount specified in paragraph

(b)(1)(iv)(C) of this section providing

that the year in which the dividend is

paid there is no operating loss in the

current fiscal year to the date of the

payment of the dividend and

(1) There was no operating loss in the

immediate preceding three fiscal years,

or

(2) There was a one year operating

loss during the immediate preceding

three fiscal years and

(i) Such loss was not in the immediate

preceding fiscal year, and

(ii) There was positive net income for

the three year period.

(B) If dividends are not payable under

paragraph (b)(1)(iv)(A) of this section, a
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21331

dividend can be paid in an amount

equal to the total operating net income

for the immediate preceding three fiscal

year period provided that

(1) There were no two successive

years of losses,

(2) In the year in which the dividend

is paid there is no operating loss in such

fiscal year to the date of payment of the

dividend, and

(3) The dividend paid would not

exceed an amount specified in

paragraph (b)(1)(iv)(C) of this section.

(C) Dividends may be paid from

earnings of prior years in an aggregate

amount equal to:

(1) 40 percent of the Company’s total

net income after tax for each of the prior

years, less any dividends that were paid

in such years; or

(2) The aggregate of the Company’s

total net income after tax for such prior

years, providing that after the payment

of such dividend, the Company’s long

term debt does not exceed its net worth.

In computing net income extraordinary

gains, such as gains from the sale of

assets, etc., shall be excluded.

(2) Additional Covenants which may

become applicable. If the Company

shall at any time no longer satisfy the

primary financial requirements, or such

condition would occur after giving

effect to any of the proposed

transactions set forth below, the

Company shall not, without the prior

written consent of the Secretary,

undertake any actions prohibited by the

Documentation, which actions include

but are not limited to those of the

following nature:

(i) Withdraw or redeem capital, covert

capital into debt, make distributions, or

pay any dividends, provided, however,

if the Company is subject to an

operating-differential subsidy contract,

the dividend restriction shall be

governed by § 298.35(g);

(ii) Make loans, advances,

investments in or repayments of existing

debts to a Related Party, stockholders,

officers or directors;

(iii) Incur indebtedness or become

subject to any liens (except if necessary

in the ordinary course of existing

business); acquire fixed assets or

become liable (directly or indirectly)

under charters or leases (having a term

of six months or more) for the payment

of charter hire or rent on all such

charters or leases which have annual

payments aggregating in excess of an

amount specified by the Secretary in the

Agreement;

(iv) Pay salaries in excess of amounts

specified in the Agreement, pay

subordinated indebtedness or make

loans; or

(v) Invest in securities other than

those that qualify as eligible

investments under the Agreement.

(c) Financial Covenants for

Companies meeting the special

financial requirements. Covenants shall

be imposed on the Company which is

subject to the special financial

requirements at Closing, set forth in

§ 298.13(e), as follows:

(1) Continuous covenants. So long as

the Guarantees are in effect the

Company shall not, without the prior

written consent of the Secretary,

undertake any actions, prohibited by the

Documentation, which actions include

but are not limited to those of the

following nature.

(i) Enter into a service, management

or operating agreement for a Vessel or

Advanced or Modern Shipbuilding

Technology financed with the assistance

of Title XI Guarantees;

(ii) Sell, transfer or demise charter the

Vessel or transfer the Vessel to a Related

Party under any form of Charter or

Contract.

(iii) Sell or transfer a substantial part

of its assets, enter into a merger or

consolidation, engage in any new

business activities not directly

connected with marine operations or

guarantee (or otherwise become liable

for) debts of other Persons;

(iv) Incur indebtedness or become

subject to any liens (except if necessary

in the ordinary course of existing

business); acquire fixed assets or

become liable (directly or indirectly)

under charters or leases (having a term

of six months or more) for the payment

of charter hire or rent on all such

charters or leases which have annual

payments aggregating in excess of an

amount specified for the Secretary in

the Agreement;

(v) Make any loans or invest in any

securities other than Eligible

Investments for Title XI Reserve Fund;

(vi) Pay any subordinated

indebtedness other than in accordance

with a subordination agreement

approved by the Secretary; or

(vii) Sell, transfer, or lease any

Advanced or Modern Shipbuilding

Technology financed with the assistance

of Title XI guarantees or transfer such

technology to a Related Party under any

form of contract.

(2) Additional covenants which may

become applicable. If the Company

shall at any time no longer satisfy the

special financial requirement (after

including the annual financial liability

relating to the Obligations as a current

liability in computing Working Capital),

or such condition would occur after

giving effect to any proposed transaction

set forth below, the Company shall not,

without the prior written consent of the

Secretary, undertake any actions

prohibited by the Documentation,

which actions include but are not

limited to those of the following nature:

(i) Withdraw or redeem capital,

convert capital into debt, make

distributions, or pay any dividend,

provided however, if the Company is

subject to an operating-differential

subsidy contract, the dividend

restriction shall be governed by

§ 298.35(g);

(ii) Make loans, advances,

investments or prepayments of existing

debts to a Related Party, stockholders,

officers or directors, or invest in the

securities of any Related Party; or

(iii) Pay salaries in excess of amounts

specified in the Agreement.

(3) Covenants where Company’s

financial condition improves to meet

primary financial requirements.

Whenever the Company, based on a

review of its financial position,

determines that it meets the primary

financial requirements set forth in

§ 298.13(d), it may inform the Secretary

of this fact, and submit such financial

statements and all additional

information which the Secretary shall

consider necessary to verify compliance

with such financial requirements. With

the consent of the Secretary, the

Company may elect thereafter to be

subject to covenants applicable to a

Company which had satisfied the

primary financial requirements at

Closing.

(d) Title XI Reserve Fund Net Income.

The Agreement shall provide that

within 105 days after the end of its

accounting year, the Company shall

compute its net income attributable to

the operation of one or more Vessels

that were constructed, reconstructed,

reconditioned or refinanced with Title

XI financing assistance (Title XI Reserve

Fund Net Income). The computation

utilizes a ratio expressed as a

percentage, and applies this percentage

to the Company’s total net income after

taxes. The numerator of the ratio shall

be the total original capitalized cost of

all Company Vessels (whether leased or

owned) which were constructed,

reconstructed, reconditioned or

refinanced with the assistance of

Guarantees. The denominator shall be

the total original capitalized cost of all

the Company’s fixed assets. In the case

of Advanced or Modern Shipbuilding

Technology, the Agreement shall

provide that within 105 days after the

end of its accounting year, the Company

shall submit its audited financial

statements showing its net cash flow in

a manner acceptable to the Secretary, in

lieu of any other computation of Reserve
21332 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

Fund Net Income specified herein for

Vessels. The net income after taxes,

computed in accordance with generally

accepted accounting principles, shall be

adjusted as follows:

(1) The depreciation expense

applicable to the accounting year shall

be added back.

(2) There shall be subtracted:

(i) An amount equal to the principal

amount of debt required to be paid or

redeemed, and actually paid or

redeemed by the Company (other than

from the Title XI Reserve Fund) during

the year; and

(ii) The principal amount of

Obligations retired or paid (as defined

in the Security Agreement), prepaid or

redeemed, in excess of the required

redemptions or payments which may be

used by the Company as a credit against

future required redemptions or other

required payments with respect to the

Obligations.

(e) Deposits. Unless the Company, as

of the close of its accounting year, was

subject to and in compliance with the

primary financial requirements set forth

in § 298.13(d), the Company shall make

one or more deposits to a special joint

depository account with the Secretary

(the Title XI Reserve Fund) to be

established pursuant to an agreement in

writing (Depository Agreement) at the

time the first deposit is required to be

made. The amount of deposit as to any

year, or period less than a full year,

where applicable, shall be determined

as follows:

(1) If the Company is the owner of the

Vessel or Advanced or Modern

Shipbuilding Technology, an amount

(pro rated for a period of less than a full

year) that is equal to 10 percent of the

Company’s aggregate original equity

investment in the Vessel or Vessels or

Advanced or Modern Shipbuilding

Technology shall be deducted from Title

XI Reserve Fund Net Income.

(2) Fifty percent of the Title XI

Reserve Fund Net Income adjusted

where applicable, in accordance with

paragraph (e)(1) of this section shall be

deposited into the Title XI Reserve

Fund.

(3) There shall also be deposited any

additional amounts that may be

required, pursuant to provisions of the

Security Agreement or any other

agreement in the documentation to

which the Company is a party.

(4) Irrespective of the Company’s

deposit requirement, as stated in

preceding paragraphs (e) (1) through (3)

of this section, the Company shall not

be required to make any deposits into

the Title XI Reserve Fund if any of the

following events shall have occurred:

(i) The Company shall have

discharged the Obligations and related

Secretary’s Note and shall have paid

other sums secured under the Security

Agreement and Preferred Mortgage;

(ii) All Guarantees with respect to

outstanding Obligations shall have

terminated pursuant to the provisions of

the Security Agreements, other than by

reason of payment of the Guarantees; or

(iii) The amount in the Title XI

Reserve Fund, (including any securities

at market value), is equal to, or in excess

of 50 percent of the principal amount of

outstanding Obligations.

(5) In the case of Advanced or Modern

Shipbuilding Technology, unless the

shipyard as of the close of its accounting

year was subject to and in compliance

with the primary financial

requirements, the shipyard shall make a

deposit at two percent of its net cash

flow, as defined by GAAP, and as

shown on its audited financial

statements.

(f) Fund in lieu of Title XI Reserve

Fund. If the Company has established a

Capital Construction Fund (CCF),

pursuant to section 607 of the Act,

whether interim or permanent, at any

time when a deposit would otherwise be

required to be made into the Title XI

Reserve Fund, and the Company elects

to make such deposits to the CCF, the

Company shall enter into an agreement,

satisfactory to the Secretary, providing

that all such deposits of assets therein

shall be security (CCF Security Amount)

to the United States in lieu of the Title

XI Reserve Fund. The deposit

requirements of the Title XI Reserve

Fund and Financial Agreement shall be

deemed satisfied by deposits of equal

amounts in the CCF, and withdrawal of

the CCF Security Amount shall be

subject to the Secretary’s prior written

consent. If, for any reason, the CCF

terminates prior to the payment of the

Obligations, the Secretary’s Note and all

other amounts due under or secured by

the Security Agreement or Mortgage, the

CCF Security Amount shall be

deposited or redeposited in the Title XI

Reserve Fund.

(g) Dividend restrictions applicable to

companies who are parties to an

operating-differential subsidy contract.

[Reserved]

§ 298.36 Annual Guarantee Fee.

(a) Rates in general. For annual

periods, beginning with the date of the

Security Agreement and prior to the

delivery date of a Vessel or Advanced or

Modern Shipbuilding Technology, the

Secretary shall charge the Obligor an

annual fee (Guarantee Fee) at a rate of

not less than 1⁄4 of 1 percent and not

more than 1⁄2 of 1 percent of the excess

of the average principal amount of the

Obligations estimated to be outstanding

during the annual period covered by

said Guarantee Fee over the average

principal amount, if any, on deposit in

the Escrow Fund during said annual

period (Average Principal Amount of

Obligations Outstanding). For annual

periods beginning with the delivery date

of a Vessel or Advanced or Modern

Shipbuilding Technology, the Guarantee

Fee shall be imposed at an annual rate

of not less than 1⁄2 of 1 percent and not

more than 1 percent of the Average

Principal Amount of Obligations

Outstanding during the annual period

covered by the Guarantee Fee. The

Obligor shall be responsible for payment

of the Guarantee Fee.

(b) Rate calculation. The Guarantee

Fee rate generally shall vary inversely

with the ratio of Equity to Long Term

Debt of the Person considered by the

Secretary to be the primary source of

credit in the transaction (Credit Source),

e.g., the long term time charterer (where

the charter hire represents the source of

payment of interest and principal with

respect to the Obligations), the

guarantor of the Obligations, Obligor or

the bareboat charterer. Where the ratio

of Equity to Long Term Debt (Variable

Rate) is used, the Secretary may make

such adjustments to the computation of

Equity and Long Term Debt considered

necessary to reflect more accurately the

financial condition of the Credit Source.

The determination of Equity and Long

Term Debt shall be based on

information contained in forms or

statements on file with the Secretary

prior to the date on which the Guarantee

Fee is to be paid. With the consent of

the Secretary, there shall be included in

equity, but excluded from Long Term

Debt, any subordinated indebtedness

representing loans to the credit source,

evidence of which has been delivered to

the Secretary. The Secretary may

establish a fixed rate or other method of

calculation of the Guarantee Fee, upon

an evaluation of the aggregate security

for the Guarantees.

(c) Variable Rate prior to Vessel or

Advanced or Modern Shipbuilding

Technology delivery. For annual periods

beginning prior to the delivery date of

a Vessel or Advanced or Modern

Shipbuilding Technology being

constructed, reconstructed, or

reconditioned, the Guarantee Fee shall

be determined as follows:

(1) If the Equity is less than 15 percent

of the Long Term Debt, the annual

Guarantee Fee rate shall be 1⁄2 of 1

percent of the Average Principal

Amount of Obligations Outstanding

during the annual period covered by the

Guarantee Fee.
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21333

(2) If the Equity is at least 15 percent

of the Long Term Debt, but less than the

Long Term Debt, the annual Guarantee

Fee rate shall be 3⁄8 of 1 percent of the

Average Principal Amount of

Obligations Outstanding during the

annual period covered by the Guarantee

Fee.

(3) If the Equity is equal to or exceeds

the Long Term Debt, the annual

Guarantee Fee rate shall be 1⁄4 of 1

percent of the Average Principal

Amount of Obligations Outstanding

during the annual period covered by the

Guarantee Fee.

(d) Variable Rate after Vessel or

Advanced or Modern Shipbuilding

Technology delivery. For annual periods

beginning on or after the Vessel or

Advanced or Modern Shipbuilding

Technology delivery date, the Guarantee

Fee shall be determined as follows:

(1) If the Equity is less than 15 percent

of the Long Term Debt, the annual

Guarantee Fee rate shall be 1 percent of

the Average Principal Amount of

Obligations Outstanding during the

annual period covered by the Guarantee

Fee.

(2) If the Equity is at least 15 percent

of the Long Term Debt but less than 60

percent of the Long Term Debt, the

annual Guarantee Fee rate shall be 3⁄4 of

1 percent of the Average Principal

Amount of Obligations Outstanding

during the annual period covered by the

Guarantee Fee.

(3) If the Equity is at least 60 percent

of the Long Term Debt, but less than the

Long Term Debt, the annual Guarantee

Fee rate shall be 5⁄8 of 1 percent of the

Average Principal Amount of

Obligations Outstanding during the

annual period covered by the Guarantee

Fee.

(4) If the Equity shall equal or exceed

the Long Term Debt, the Guarantee Fee

rate shall be 1⁄2 of 1 percent of the

Average Principal Amount of

Obligations Outstanding during the

annual period covered by the Guarantee

Fee.

(e) Payment of Guarantee Fee. The

Guarantee Fee covering the full period

of the stated maturity of the Obligations

commencing with the date of the

Security Agreement shall be paid to the

Secretary concurrently with the

execution and delivery of said

Agreement. The project’s entire

Guarantee Fee payment shall be made

by the Obligor to the Secretary in an

amount equal to the sum of the present

value of the separate products obtained

by applying the Guarantee Fee rate to

the projected amount of the Obligations

Outstanding for each year of the stated

maturity of the Obligations. In

calculating the present value used in

determining the amount of the

Guarantee Fee to be paid, MARAD will

use a discount rate based on information

contained in the Department of

Commerce’s Economic Bulletin Board

quarterly rates. Under no circumstances

will the Secretary refund the Guarantee

Fee to the Obligor. A Guarantee Fee

paid pursuant to this section may be

included in Actual Cost and is eligible

to be financed.

(f) Proration of Guarantee Fee. The

Guarantee Fee shall be prorated where

a Vessel delivery is scheduled to occur

during the annual period with respect to

which payment of said Guarantee Fee is

being made, as follows:

(1) Undelivered Vessel. If the

Guarantee Fee relates to an undelivered

Vessel, the predelivery rate is applicable

to the Average Principal Amount of

Obligations Outstanding for the period

from the date of the Security Agreement

to the delivery date, and the delivered

Vessel rate is applicable for the balance

of the annual period in which the

delivery occurs.

(2) Multiple Vessels. If the Guarantee

Fee relates to more than one Vessel, the

amount of outstanding Obligations shall

be allocated to each Vessel in the

manner prescribed in § 298.33(d), and

an amount shall be determined for each

Vessel by using the rate that is

applicable under paragraph (c) or (d) of

this section and the proration as set

forth above. The Guarantee Fee shall be

the aggregate of the amounts calculated

for each Vessel.

§ 298.37 Examination and audit.

The Secretary shall have the right to

examine and audit the books, records

(including original logs, cargo manifests

and similar records) and books of

account, which pertain directly to the

project, of the Obligor, bareboat

charterer, time charterer or any other

Person who has control of or a financial

interest in a Vessel or Advanced or

Modern Shipbuilding Technology, as

well as records of a Related Party and

domestic agents connected with such

Persons, and shall have full, free and

complete access thereto at all reasonable

times. Also, the Secretary shall have

full, free and complete access at all

reasonable times to each Vessel or

Advanced or Modern Shipbuilding

Technology with respect to which

Guarantees or an insurance contract is

in force. When a Vessel is in port or

undergoing repairs, the Secretary may

make photostatic or other copies of any

books, records and other relevant

documents or papers being examined or

audited. Adequate office space and

other facilities reasonably required by

any representatives of the Secretary

engaged in an examination, audit or

inspection shall be furnished without

charge by the Person in control of the

premises where the examination or

audit is being conducted.

§ 298.38 Partnership agreements.

Partnership agreements shall be in

form and substance satisfactory to the

Secretary prior to any Guarantee

closing, especially relating, but not

limited to, four basis areas:

(a) Duration of the partnership,

(b) adequate partnership funding

requirements and mechanisms,

(c) dissolution of the partnership and

the withdrawal of a general partner and

(d) the termination, amendment, or

other modification of the partnership

agreement without the prior written

consent of the Secretary.

§ 298.39 Exemptions.

The Secretary may exempt an

applicant from any requirement of this

Part not required by law, in exceptional

cases, on written findings that:

(a) The case materially involves

factors not considered in the

promulgation of this part;

(b) (1) a national emergency makes it

necessary to approve the exemption or

(2) the financial liability of the United

States will be substantially relieved;

(c) the exemption will not

substantially affect effective regulation

of the Title XI program, consistent with

the objectives of this part; and

(d) exemption will not be unjustly

discriminatory. In the case of Eligible

Export Vessels, the Secretary may also

exempt an applicant from any

requirement of this part not required by

law if the Secretary makes a written

determination that such exemption

would assist in creating financing terms

that would be compatible with export

credit terms for the sale of vessels built

in shipyards other than those in the

United States.

Subpart E—Defaults and Remedies,

Reporting Requirements, Applicability

of Regulations

§ 298.40 Defaults.

(a) In General. Provisions concerning

the existence and declaration of a

default and demand for payment of the

Obligations (described in paragraphs (b)

and (c) of this section) shall be included

in the Security Agreement and in other

parts of the Documentation.

(b) Payment Default. In the case of

any default in the payment of principal

or interest with respect to the

Obligations (provided that the Secretary

shall not have, upon such terms as may

be provided in the Obligation or related
21334 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations

agreements, prior to that demand,

assumed the obligor’s rights and duties

under the Obligation and agreements

and shall have made any payments in

default), the following procedures shall

be applicable:

(1) No demand shall be made for

payment under the Guarantees unless

the default shall have continued for 30

days (Payment Default).

(2) After the expiration of said 30-day

period, demand for payment of all

amounts due under the Guarantees must

be made no later than 60 days thereafter.

(3) After demand for payment is made

by or on behalf of the Obligees, the

Secretary shall make payment under the

Guarantees, except if the Secretary

determines that a Payment Default has

not occurred or that such Payment

Default has been remedied prior to

demand being made.

(c) Security Default. If a default occurs

under the Security Agreement which is

other than a Payment Default (Security

Default), the Secretary, as provided in

section 1105(b) of the Act, shall have

the sole discretion to declare such

default a Security Default and may

notify the Obligee or agent of the

Obligee of such Security Default, stating

that demand for payment under the

Guarantees must be made no later than

60 days after the date of such

notification.

(d) Payment of Guarantees. If demand

for payment of the Guarantees is made,

the Secretary shall, no later than 30 days

after the date of such demand (provided

that the Secretary shall not have, upon

such terms as may be provided in the

Obligations or related agreements, prior

to that demand, assumed the Obligor’s

rights and duties under the Obligation

and agreements and shall have made

any payments in default), make

payment to the Obligees, Indenture

Trustee or any other agent of the unpaid

principal amount of Obligations and

unpaid interest accrued and accruing

thereon up to, but not including, the

date of payment.

§ 298.41 Remedies after default.

(a) In general. Provisions governing

remedies after a default, which relate to

rights and duties of the Obligor, the

Secretary and other Persons (where

appropriate), shall be included in the

Security Agreement or in other parts of

the Documentation.

(b) Action by Secretary. After a default

has occurred and is continuing and

before making payment required under

the Guarantees, the Secretary may take

the Vessel or Advanced or Modern

Shipbuilding Technology and hold,

lease, charter, operate or use the Vessel

or Advanced or Modern Shipbuilding

Technology, accounting only for the net

profits to the Obligor. After making

payment required under the Guarantees,

the Secretary may initiate or otherwise

participate in legal proceedings of every

type, or take any other action

considered appropriate, to protect rights

and interests granted to the Secretary by

sections 1105(c), 1105(e) and 1108(b) of

the Act, the Security Agreement or other

applicable provisions of law and of the

Documentation.

(c) Security proceeds to Secretary. The

Secretary’s interest in proceeds realized

from the disposition of or collection

with respect to security granted to the

Secretary in consideration for the

Guarantees (except all proceeds from

the sale, requisition, charter or other

disposition of property purchased by

the Secretary at a foreclosure or other

public sale, which proceeds shall belong

to and vest exclusively in the Secretary),

shall be an amount equal to, but not in

excess of, the sum of (in order of

priority of application of the proceeds):

(1) Guarantee Fees, if any, due the

Secretary under the Security

Agreements;

(2) All moneys due and unpaid and

secured by the Mortgage or Security

Agreement;

(3) All advances, including interest

thereon, by the Secretary, pursuant to

the Security Agreement and all

reasonable charges and expenses of the

Secretary;

(4) The accrued and unpaid interest

on the Secretary’s Note;

(5) The accrued and unpaid balance of

the principal of the Secretary’s Note;

and

(6) To the extent of any collaterization

by the Obligor of other debt due to the

Secretary from the Obligor under other

Title XI financings, such other Title XI

debt.

(d) Security proceeds to Obligor. The

Obligor shall be entitled to the proceeds

from the sale or other disposition of

security, described in paragraph (c) of

this section, if and to the extent that the

proceeds realized are in excess of the

amounts described in paragraphs (c) (1)

through (6) of this section.

§ 298.42 Reporting requirements—

financial statements.

The financial statements of the

Company shall be audited at least

annually, in accordance with generally

accepted auditing standards, by

independent certified public

accountants licensed to practice by the

regulatory authority of a State or other

political subdivision of the United

States or, licensed public accountants

licensed to practice by the regulatory

authority or other political subdivision

of the United States on or before

December 31, 1970. In the case of

Eligible Export Vessels, the accounts of

the Company shall be audited at least

annually, and the Secretary may require

that the financial statements be in

accordance with generally accepted

accounting principles, by accountants as

described in the first sentence of this

section or by independent public

accountants licensed to practice by the

regulatory authority or other political

subdivision of a foreign country,

provided such accountants are

satisfactory to the Secretary. The

accountants performing such audits may

be the regular auditors of the Company.

(a) Reports of Company and other

Persons. Except as otherwise required

by the Secretary, the Company shall file

a semiannual financial report and an

annual financial report, prepared in

accordance with generally accepted

accounting principles, with the

Maritime Administration as specified in

the Documentation. Included shall be

the balance sheet and a statement of

paid-in-capital and retained earnings at

the close of the required reporting

period, a statement of income for the

period and any other statement that the

Secretary shall consider necessary to

accurately reflect the Company’s

financial condition and the results of its

operations. By letter to the Company,

the Secretary shall specify the form

required for reporting and the number of

copies to be submitted. The Secretary

may, by notice to the Company, also

require the Company to submit financial

statements of any other Person, directly

or indirectly participating in the project,

if the financial condition of that Person

affects the Secretary’s security for the

Guarantees. The required financial

report for the annual period shall be due

within 105 days after the close of each

fiscal year of the Company, commencing

with the first fiscal year ending after the

date of the Security Agreement. The

required semiannual report shall be due

within 105 days after each semiannual

period, commencing with the first

semiannual period ending after the date

of the Security Agreement. The annual

report shall be accompanied by the

public accountant’s report based on an

audit of the company’s financial

statements. An audit by the public

accountants of the financial statements

contained in the company’s semiannual

report may be required by the Secretary.

Certification of the semiannual report by

the accountants may be required by the

Secretary. Where independent

certification is not required, a

responsible corporate officer shall attach

a certification that such report is based
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules and Regulations 21335

on the accounting records and, to the

best of that officer’s knowledge and

belief, is accurate and complete.

(b) Leveraged lease financing. If the

method of financing involved is a

leveraged lease financing, or a trust is

the owner of the Vessels, the

requirements for annual and semiannual

accounting reports of the Obligor may

be modified accordingly by the

Secretary.

(c) The Company shall furnish, along

with its semi-annual report, a letter of

confirmation issued by its insurance

underwriter(s) or broker(s) that the

Company has paid premiums on

insurance applicable to the

preservation, protection and operation

of the asset, which information shall

state the term for which the insurance

is in force.

§ 298.43 Applicability of the regulations.

The regulations in this part shall be in

effect as to all Letter Commitments,

commitments to guarantee Obligations

and Guarantees of Obligations made,

issued or entered into after the effective

date hereof pursuant to section 1104(a)

of the Act, and all mortgages and loans

covered thereby. These regulations

supersede those issued under part 298

of this title (43 FR 60912) as of the

effective date hereof, but shall not affect

any Letter Commitments, commitment

for Guarantees, Guarantees or contracts

of insurance in existence on the

effective date of these regulations. The

regulations in this part may be

amended, but said amendments shall

have no effect upon any existing Letter

Commitments, guarantees, insurance

contracts, commitments for Guarantees

or Documentation.

Subpart F—Administration [Reserved]

Dated: May 2, 1996.

By order of the Maritime Administrator.

Joel C. Richard,

Secretary, Maritime Administration.

[FR Doc. 96–11289 Filed 5–8–96; 8:45 am]

BILLING CODE 4910–81–P