Government Financing Guarantees Stir Interest In U.S. Ship Construction
The loan guarantee program for export ships (Title XI) authorized by the National Shipbuilding and Shipyard Conversion Act of 1993 offers significant advantages to shipowners in the market for new construction. Provided is a brief picture of the program status and summary of relevant provisions applicable to loan guarantee. Government Efforts to Develop Commercial Work U.S. Navy shipbuilding during the 1980s averaged 20 ships annually producing an annual average of $4.1 billion in shipbuilding contracts to U.S. shipyards. With the downturn in force requirements, Navy shipbuilding needs have been drastically cut back and construction orders will likely run at the rate of only 5 to 7 ships annually during the secjnd half of the 1990s. Recognizing the need to maintain a shipbuilding industrial base, the government has initiated a major program to provide a commercial workbase to U.S. shipbuilders. The new ship export guaran- tee program is the major component of this initiative to help transition to the commercial business base.
Under the new Title KI program, owners can obtain 25-year financing for 87.5 percent of the cctual cost of constructng a ship for export — at a fixed interest rate apilicable to debt secured by the full credit of the U.S. Treasury. These fi- nancing terms are much better than the standard OECD terms and match r exceed the best terms available through negoiation with Asian and European shipbuilders. MA is now involved in several ship construction projects where Title XI financing is the prime icentive for considering U.S. yards for ship conduction. An owner simply can't get 25-year fiancing with 12.5 percent down anywhere else. Pending Applications There has been great interest in the loan guarantee program. Title XI applications on file as of mid- October are listed in the accompanying table. However, this list tells only a small part of the story, as there are many other applications for loan guarantees that have not been formally filed with the Maritime Administration (MarAd). Our understanding is there are at least two dozen additional applications in various stages of formulation — and building contracts are expected to begin flowing into U.S. shipyards by early November.
Provisions Applicable to Loan Guarantees In mid-September MarAd issued its final ruling on regulations and procedures applicable to the loan guarantee program.
This ruling incorporates comments received on the interim ruling and provides the final say on how the program is to be administered. Some of the more relevant provisions are summarized below.
• Letters of interest - MarAd has been asked to issue letters of interest to shipbuilders that could be used as marketing documents with which to compete for international orders. The letter would indicate MarAd's interest in a proposed financing for a pre-approved ship design.
It was requested that the agency be able to issue letter commitments within 30 days — and complete full application processing within 60 days. MarAd's response has been to consider such requests for letters of interest and attempt to meet the 60-day deadline for full processing.
• Eligible export ships - Export vessels of all sizes can be financed under Title XI. These include ships constructed, reconstructed or reconditioned in the U.S. to be used in worldwide trade under foreign documentation. Funds flowing through DOD appropriations will be used to guarantee export ships 5,000 gt and over. Guarantees of vessels under 5,000 gt will be funded through DOT appropriations.
• Confidentiality of information - While subject to provisions of the Freedom of Information Act, MarAd will refuse to disclose information in financing applications that would likely cause substantial harm to the competitive position of the company from whom it was obtained. MarAd officials are subject to the Trade Secrets Act, which makes it a criminal act for a government employee to release financial inform a t i o n such as a company's balance sheet, bids or other proprietary information.
• Citizenship - Continuing long-standing policy, ships built with Title XI to be documented in the U.S. must be owned by U.S. citizens. However, export ships and shipyards receiving Title XI guarantees can be owned by U.S. or foreign citizens. • Domestic content - Components of the hull and superstructure in eligible export vessels can be fabricated outside the U.S., but the cost of these components cannot be included in the amount to be guaranteed. The value of such components can be used as owner furnished equipment in meeting the equity requirements. Unshaped, unmolded and unpunched steel from foreign sources can be included in the actual cost to be guaranteed as these items are not considered to be components of the hull or superstructure.
There are no restrictions on the source of machinery and other nonhull or superstructure related components. • Classification - Over the opposition of ABS, MarAd reconfirmed that export ships guaranteed by Title XI can be classed by any member of International Association of Classification Societies (LACS). The vessel does not need to comply with all U.S. laws and regulations, but must be constructed in accordance with IMO requirements in force at the time of the vessel's delivery. • Transfer of guarantee - A shipyard can apply for a loan guarantee and transfer the Title XI obligation before or after delivery to a qualified purchaser. However, building a ship solely on speculative hope that it can be sold will not qualify for a guarantee. The yard must demonstrate that it has an economically sound use for the ship.
• Supporting data - Applicants for Title XI must submit supporting data for the construction contract so that MarAd can determine that: (1) soft costs are not being improperly guaranteed; (2) subsequent changes and extras are fair and reasonable; and (3) the contract price reflects the fair and reasonable cost of the ship.
• Subordinated debt - Supplier credit and other forms of subordinated debt can be used as equity under the Title XI program. This can be a significant selling point for a maj o r systems s u p p l i e r or shipbuilder. It will not be surprising to see ships built in the U.S. with a combination of Title XI guarantee and supplier credit that eliminate t h e need for equity on the p a r t of the owner.
• Collateral - Under normal circumstances the financial vessel will be adequate security for the guarantee. However, in order to exercise its fiduciary responsibility to ensure the government receives sufficient security for its loan guarantee, MarAd may require additional collateral if the mortgage is not sufficient to provide adequate security. • Equity requirement - The law permits guarantees in an amount up to 87.5 percent of the actual cost of the ship. In determining the amount of equity required from an applicant, MarAd will consider: (1) export credit terms offered by foreign governments; (2) the convertibility of for- ^ eign currency; (3) foreign sovereign guarantees; (4) corporate parent g u a r a n t e e s ; and (5) other c r e d i t enhancements. • Export creditworthiness - MarAd will determine the creditworthiness based on the country in which the s h i p o w n e r and its charterers have their chief executive offices and have located a substantial portion of their assets. Criteria will include: (1) convertibility and stability of currency; (2) political risk; (3) enforceability of contract rights; and (4) the existence of lien filing and bankruptcy systems.
• OECD guidelines - The U.S. is not a party to the OECD Understanding on Export Credit for Ships, and consequently is not limited to the current guideline of 80 percent financing over 8.5 years at a minimum interest rate of eight percent.
However, should the OECD agreement on shipbuilding subsidies negotiated on July 17,1994 be ratified and go into force, MarAd says the terms of the Title XI program will be modified to conform. Assuming ratification, this could produce a relatively short window of opportunity forthis attractive financing program. • Legal opinion - Independent legal counsel is required to give an opinion that documents comprising the guarantee transaction have been duly authorized, executed and delivered and constitute a valid, legally binding and enforceable obligation. Opinion of in-house counsel will not be sufficient.
IMA Associates can financially engineer complex ship construction projects in the U.S. using a combination of government financing guarantees and supplier credit. For more details, contact Jim McCaul in Washington, D.C. at tel: (202) 333 8501; fax: (202) 333-8504, or Pei Mender orAme Thingstad in Oslo Norway at tel: +47 22 43 62 11; fax +47 22 43 03 08.