U.S. DEPARTMENT OF TRANSPORTATION MARITIME ADMINISTRATIOIN NATIONAL MARITIME STRATEGY SYMPOSIUM: CARGO OPPORTUNITES AND SEALIFT CAPACITY REDUCING VESSEL

U.S. DEPARTMENT OF TRANSPORTATION

MARITIME ADMINISTRATIOIN

NATIONAL MARITIME STRATEGY SYMPOSIUM: CARGO OPPORTUNITES AND SEALIFT CAPACITY

REDUCING VESSEL COSTS WITH MARAD’s CCF

JANUARY 14, 15 & 16, 2014 H. Clayton Cook, Jr. Seward & Kissel LLP

© 2014 Seward & Kissel LLP


INTRODUCTION

MARAD’s CCF PROGRAM

DUAL USE VESSELS & AMERICA’S MARINE HIGHWAYS

NATIONAL SHIPBUILDING RESEARCH PROGRAM

CCF STRUCTURERD FINANCING

FINANCING EXAMPLES

CONCLUSIONS


INTRODUCTION

The concept of dual use vessels is as old as the Republic itself, and was incorporated in the Merchant Marine Acts of 1920, 1936 and 1970


The 1970 Act authorized a Capital Construction Fund (“CCF”) tax deferral program that was to be available to all owners and operators of U.S. vessels operated in qualifying trades, under CCF Program contracts and regulations to be issued and administered by MARAD.



The Congressional sponsors believed the CCF provisions to be the most important provisions on the 1970 Act.

"This authority will do more than any other provision of the bill to build ships in United States Shipyards to be operated under the American flag."

Merchant Marine Act of 1970, P.L. 91-469 Senate Report No. 91-1080 at p 4213



Perhaps the “Gold Standard” of 1970 Act program CCF transactions was the construction by General Dynamics of eight 125,000 cu. m. LNG vessels under a U.S. citizen group response to a request for proposals for an Indonesia to Japan move under a 20 year transportation agreement in a lease financing arranged by CitiCorp Leasing.


DUAL USE VESSELS & AMERICA’S MARINE HIGHWAYS

NATIONAL SHIPBUILDING RESEARCH PROGRAM 2007 & 2008 WORKSHOPS

The Navy’s current DUV program was initiated in 2005. Reacting to operator concerns about U.S. shipyard prices, the Navy held invitation-only National Shipbuilding Research Program (“NSRP”) Workshops in 2007 and 2008 to address means by which the shipyard costs of Jones Act dual-use vessels could be reduced.


DUAL USE VESSELS & AMERICAN’S MARINE HIGHWAYS

NSRP 2007 & 2008 WORKSHOPS

The 2007 Workshop was directed to methods for reducing shipyard costs and the anticipated follow-on reductions in shipyard sales prices.

But, of course, it would be the vessel purchaser’s “fully financed cost”, rather than the shipyard sales price, that would be used to test the vessel owner’s business plan.

REDUCING VESSEL COSTS WITH MARAD’s CCF DUAL USE VESSELS & AMERICA’S MARINE HIGHWAYSNSRP 2007 & 2008 WORKSHOPS

A study of commercially available financing alternatives and of

MARAD Title XI and CCF Program use was undertaken to provide the

for a “cost-of-financing” presentation for the 2008 NSRP Workshop.

REDUCING VESSEL COSTS WITH MARAD’s CCF DUAL USE VESSELS & AMERICA’S MARINE HIGHWAYS NSRP 2007 & 2008 WORKSHOPS

A Seward colleague and I were responsible for the study.

For our example model, we used a $150 million Jones Act vessel,

with an 80/20 debt to equity ratio. We then examined and compared

the costs of commercially available and MARAD Title XI and CCF

Program financings.

FINANCING THE AMH & DUV PROGRAMS

DUAL USE VESSELS & AMERICA’S MARINE HIGHWAYSNSRP 2007 & 2008 WORKSHOPS

The study showed that in a financing with the MARAD Title XI and CCF programs used together, significant cost reductions could be achieved by depositing additional equity in the CCF program account, that when invested and compounded over a 20 year term, would produce investment income, which when combined with the additional equity, would be sufficient to retire the entire Title XI debt.


DUAL USE VESSELS & AMERICAN’S MARINE HIGHWAYS

NSRP 2007 & 2008 WORKSHOPS

In the examples on the two slides that follow, the first slide shows a DUV/AMH vessel with a $150 million shipyard financing with Title XI alone, and the second this same financing with the addition of the CCF Program sinking fund.


DUAL USE VESSELS & AMERICA’S MARINE HIGHWAY’S

CCF STRUCTURED FINANCING

You will see that for this $150 million vessel, the fully financed cost would be $198.8 million with Title XI financing, and $123.9 million using Title XI with the addition of the CCF Program sinking fund.

1. Shipyard Price $150,000,000

2. Total Title XI MARAD “Capitalized Cost” $159,631,891

Title XI Coupon Rate 3.01%

Effective Corporate Tax Rate 35.00%

3. Total Title XI Equity & Interest Payments $62,888,274

4. Total Title XI Fixed Principal Payments $135,887,274

5. Total Title XI Debt & Equity Cash Cost $198,773,706

Method of Debt Financing: Title XI, fixed principal, 80% of capitalized cost,

20 year term, level principal payments.


EXAMPLE NO. 1, TABLE 1, MARAD TITLE XI FINANCING





5. Yield on CCF Investments 13.01%


7. Total CCF Contributions & Taxes on Withdrawals $60,951,346

8.Total Cash Cost of Vessel with Title XI & CCF $123,939,620

9. CCF Savings over Title XI alone (37.55 percent) $74,634,086


EXAMPLE No. 1, TABLE 2, TITLE XI & CCF FINANCING

REDUCING VESSEL COSTS WITH MARAD’s CCF CCF STRUCTURED FINANCING

The next slide provides a graphical representation of the CCF

deposits and withdrawals for a typical CCF structured finacing



$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

$40,000,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Term of Debt Financing (Years)

We developed computer software for this 2008 NSRP work in order to make our financing study comparisons and so that we could measure the CCF Program benefits with the precision necessary for use in DUV vessel lease financing.

While the software has not yet been commercially employed, it has obvious commercial applications. U.S. Patent No. US 8,010,431 B 1, which protects this software usage, was issued on August 30, 2011.

REDUCING VESSEL COSTS WITH MARAD’s CCF CCF STRUCTURED FINANCING

Seward & Kissel LLP1818

Working with a U.S. shipyard customer in 2010, we were asked to run examples of a “fully financed cost” for a $300 million Turbine Installation Vessel (“TIV”) for use in U.S. East Coast offshore wind projects -- using the MARAD program financing structure that we had developed for the NSRP Workshop in 2008.




We found that by using this NSRP financing structure, the purchaser would have be able to reduce its TIV fully financed cost (equity+debt+interest) for the $300 million TIV from $438,370,562 (which it would have been in a simple Title XI financing) to $270,161,987 (which it would have been once CCF use was added) achieving a savings of $168,208,575 or 38.37 percent.





2. Total Title XI Capitalized Cost $315,740,839

Title XI Coupon Rate 4.16%

Effective Corporate Tax Rate 35.00%




Method of Debt Financing: Title XI, fixed principal, 20 year term, level principal payments.


EXAMPLE No. 2, TABLE 1, MARAD TITLE XI FINANCING



2. Total Title XI Equity & Interest Payments $162,097,3273. Total Title XI Fixed Principal Payments $276,273,2344. Total Title XI Debt & Equity Cash Cost $438,370,5625. Total Title XI Equity & Interest Payments $162,097,3276. Interest Rate on CCF portfolio investments 18.00% 7. Total CCF Contributions & Taxes on Withdrawals $108,064,6608. Total Cash Cost of Vessel with Title XI & CCF $270,161,987

9. CCF Savings over Title XI alone (38.37%)

$168,208,575


EXAMPLE No. 2, TABLE 2, MARAD TITLE XI & CCF FINANCING



CCF STRUCTURERD FINANCING

While the measure of CCF benefits will vary from one situation to another and depend upon factors that include the portfolio yields and tax situations of the individual vessel owner, we believe that cost reductions in excess of 40 per cent in vessel fully financed vessel costs can sometimes be achieved.

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The news clips of October 11, 2013 carried a story . . .

"Malaysia's national oil company, Petronas, has ordered four 150,000 cu.m. Moss type LNG carriers from Hyundai Heavy Industries . . . The contract, signed yesterday . . . includes options for four more ships and is worth $850 million. . . . The shipbuilder says Moss type LNG carriers are the preferred choice . . . where harsh sea conditions are a significant factor."

MARINE LOG, October 11, 2013

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REDUCING VESSEL COSTS WITH MARAD’s CCFCCF STRUCTURED FINANCING

CONCLUSIONS & A SPECULATION

Of course the Quincy LNGs were Moss system. And a U.S. shipyard would not have difficulty in building to the Moss system today. Then, if the transportation costs could be reduced with lease financing of the CCF type used for the Quincy LNGs, it might be possible to obtain U.S. Government action to require that some portion of our LNG exports to be in U.S. built vessels.

And, if this could be done, our U.S. shipyards would be back in the LNG business.

Cook memorandum to files, October 13, 2013

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REDUCING VESSEL COSTS WITH MARAD’s CCFCCF STRUCTURED FINANCING

Can the MARAD 1970s LNG CCF successes be replicated?

Perhaps that is why we are here today?

THANK YOU

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U.S. DEPARTMENT OF TRANSPORTATION MARITIME ADMINISTRATIOIN NATIONAL MARITIME STRATEGY SYMPOSIUM: CARGO OPPORTUNITES AND SEALIFT CAPACITY REDUCING VESSEL