Chapter 11 + Title XI + September 11 = Bad News for the Marine Industry

Friday, December 14, 2001
The recent confluence of three events, all strangely relating to the number 11, is presenting the U.S. shipbuilding industry with challenges greater than seen in many decades. American Classic Voyages (AMCV), owned by Chicago billionaire Sam Zell, is the nation's largest provider of Inland River and Hawaiian Island overnight cruises. In mid October, the company declared Chapter 11 bankruptcy and that action has led the Maritime Administration (MARAD) to cancel its Title XI loan guarantee on the $1 billion construction program. Called Project America, the program would have built two 1,900-passenger cruise vessels for the Hawaiian Islands tourist market. With the financing guarantee cancelled, the shipyard has permanently stopped working on the two cruise vessels. Cruise cancellations after the September 11 terrorist attack are blamed by AMCV for pushing an already troubled project over the brink into bankruptcy, although operational and financial problems prior to September 11 may have led to the bankruptcy anyway without fallout from the terrorist attack.

The impact of this bankruptcy plus loan guarantee cancellation is both immediate and long term. It has thrown 2,150 AMCV employees out of work and forced shipbuilder Northrup Grumman Corp. to reassign most of the 1,250 workers on the project to other jobs at company facilities in Gulfport, Miss., New Orleans, La., and Pascagoula, Miss., where the two cruise ships were being built. In the longer term this disaster may spell big trouble for the entire Title XI program as Congress has been vocally questioning the value of the program for the past several months. Calling Title XI a floating pork barrel and other less flattering names, the "knives" are out to kill it unless some 11th hour miracle salvages AMCV's "Project America". And even if some miracle happens with these two cruise ships, Title XI is sure to be damaged and future funding very likely to fall short of the $100 million that was recently allocated to the program by Congress despite the Bush Administration's objections.

Up to now, MARAD's biggest problem was a $54 million loan guarantee to reopen a Quincy, Mass. shipyard that went bad in 1997. Pretty small potatoes in comparison to the AMCV mess. These recent events may also permanently end any plans to build American flagged cruise ships at U. S. shipyards. Project America was about a lot more than AMCV's two boats. It was to signal the return of American flagged cruise ship construction bringing with it American shipyard jobs and American-crewed vessels not to mention the passenger safety inherent in USCG regulations and American health standards for food preparation. In the world of boat building financing, no program has meant more to the marine industry than the MARAD Title XI program. It is to boat building what FHA is to residential home construction.

Title XI has always had its critics, especially among legislators in land locked states, but the overall power of the marine industry in Congress, especially the Transportation Institute of Washington, D.C., has always come to the rescue and bailed it out. Title XI is a loan guarantee program, assuring participating financial institutions that the full faith and credit of the U.S. government would stand behind up to 87.5% of the debt. Almost any commercial vessel is eligible for this financing as long as it is built in a U.S. shipyard. Reconstructed or reconditioned vessels can also be included in the program. Even vessels destined to work in foreign countries and some vessels owned by non-U.S. citizens are eligible. The loan program is also designed to assist U.S. shipyards upgrade their facilities to enhance the productivity and the quality of the product. "Since 1993, (and until July 2000) the Maritime Administration (MARAD) has approved 77 projects worth over $6 billion for financing 410 vessels," according to John Graykowski, former Deputy Administrator for MARAD. Most of these 410 vessels would not have been built without the title XI loan guarantee.

For example a group of investors wanted to build a unique type of cruise vessel, based on two inline barges pushed by an existing towboat. The $18.3 million project, called River Barge, received a $15.9 million loan guarantee from MARAD in 1997. "Likely that vessel would not have been built without the Title XI loan guarantee," said Charles Burrell, sales manager for LEEVAC Shipyard LLC, builder of the vessel. "Title XI has allowed us and other Louisiana shipyards to build vessels that could not have been built any other way," Burrell added.

In 2000 alone, MARAD approved 12 applications for loan guarantees worth $885.7 million. Many of these were large projects such as a $155 million semi-submersible drilling rig being built by AMFELS in Brownsboro, Texas. Halter's car/truck carrier for a Hawaiian firm for $80 million also received a MARAD loan guarantee. But also in the mix is another AMCV project caught in the bankruptcy.

That would be an $80 million guarantee for two 300-foot long 226-passenger coastal steamers, Cape May Light and Cape Cod Light being built by Atlantic Marine. The first of these vessels opened in April 2001 and the second was scheduled to debut in August 2001, but was delayed until April 2002. Industry gossip is that the vessel was complete for its original delivery date in August, but AMCV's ongoing money problems forced the delay.

MARAD has been moving fast in 2001 with loan guarantee approvals. Through September 27, 2001 MARAD had approved 11 projects (another number 11) worth $801 million with $668 million in loan guarantees. Included in these projects is another AMCV vessel now snared in the bankruptcy web. The Columbia Queen, a 161-passenger overnight vessel that was working on the Pacific Northwest river system, but is now tied up along with two of the company's three authentic paddlewheel steamboats, the coastal steamer Cape May Light and both Hawaiian Island cruise ships. Today the only remnant of this once proud company that is still sailing is the venerable Delta Queen that will complete its 2001 cruise schedule on the inland waterways. It seems that the Columbia Queen can't win for losing. Built in 1996 as a gaming vessel for Missouri, the firm was turned down for a gaming license and the vessel sat completed but unused at LEEVAC Shipyard LLC until AMCV bought her and converted the boat to an overnight cruise configuration. That loan guarantee is for $35 million.

To permit AMCV to more profitably compete for Hawaiian cruise business, the U.S. Congress allowed AMCV to purchase a foreign flag vessel from Carnival Cruise Lines for $114 million and reflag it as an American ship. That vessel, renamed the Patriot, joined with the Independence to offer cruises between the major Hawaiian Islands until the two new ships could take over their routes. AMCV is on the hook for a $40 million mortgage on the vessel. Carnival is expected to take the ship back.

AMCV was using the MARAD loan guarantee program as early as 1995 when itreceived a $60 million loan guarantee for a $69 million project to build a third steam-powered paddle wheeler, the American Queen for service on the Mississippi and other inland rivers. It is important to note that it was not only the problems with the loan guarantees on the two big cruise ships that got AMCV in trouble. It has also been the accumulation of debt on four other new vessels going back to 1995. That total is $182 million, according to John Swank, public affairs officer with MARAD. It appears that AMVC went to the "well" once too often to finance their vessels.

So in summary, AMCV will probably be reduced to a two-vessel company. MARAD will own and dispose of the first of the two cruise boats that is approximately 40% finished along with the two Delta Queen Coastal Steamers, the steamboat American Queen and the Columbia Queen, the vessel that operates in the Pacific Northwest. AMCV is currently operating the Delta Queen and next year may be able to put the Mississippi Queen back into service…the two vessels on which there is not a mortgage or a Title 11 loan guarantee. AMCV's Hawaiian cruise business is essentially dead. As noted above, Carnival will no doubt repossess the Patriot and the Independence is basically an old vessel that has limited use and will be sold.

The fallout from this bankruptcy and MARAD's action to cancel the loan guarantees will certainly leave the Title XI program in deep trouble. Currently there are 26 projects pending final approval for MARAD Title XI loan guarantees. These projects have a loan value of $5.0 billion. Only a few of these projects would be approved under the best of circumstances. The real question is will MARAD shy away from making new loan guarantees because of this disaster regardless of the merits of the projects in line for approval? MARAD Public Affairs Officer Swank indicated that one pending application has been approved since Sept. 11. "The loan guarantee was for covered hopper barges with a loan guarantee for $38.4 million," Swank said. "Other approvals may follow," Swank added.

The unknown element in this equation is Congress. They have the power to cut Title XI loan guarantees off at the knees. It is for sure that the AMCV bankruptcy and MARAD's action will shine a new, more intense spotlight on the entire Title XI program. Certainly the anti-Title XI forces on the Hill that have been vocal in their dissatisfaction with the program in the past now have a new whipping boy in AMCV. Foes of the program include powerful Republican Senator John McCain of Arizona who wrote to President Bush when the first hint of trouble with AMCV emerged. McCain urged the president to slash funding for Title XI. McCain was beaten back, but no doubt feels vindicated with the recent turn of events and will press on in his attack.

There may well be hearings on Capitol Hill where the entire financing mess will be on display in the worst possible light. It's not the 70 plus projects that have been successfully financed with Title XI loan guarantees that will matter…it's the spectacular failures such as AMCV that will get the headlines and the Congressional attention. The marine industry will have to muster all of the support they have in Congress to save Title XI.

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