Seward & Kissel LLP W ORK B OAT Professional Series FINANCING JONES ACT VESSEL ASSETS MARAD PROGRAM FINANCING STRUCTURES NON-CITIZEN LEASE FINANCING H.

Seward & Kissel LLP

WORKBOAT Professional Series

FINANCING JONES ACT VESSEL ASSETS

MARAD PROGRAM FINANCING STRUCTURES

NON-CITIZEN LEASE FINANCING

H. Clayton Cook, Jr. Seward & Kissel LLP

December 4, 2014 New Orleans, Louisiana

Seward & Kissel LLP


PRESENTATION AND INTRODUCTION

$50 MILLION OSV EXAMPLE

MARAD’s TITLE XI AND CCF PROGRAM FINANCING NAVY DUV AND NSRP 2007 AND 2008 WORKSHOPS $150 MILLION DUV EXAMPLE

NON-CITIZEN LEASE FINANCING AND 46 USC 12119 $300 MILLION TIV EXAMPLE

POINTS TO REMEMBER

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PRESENTATION

“By using MARAD programs a vessel purchaser can reduce the fully financed cost of a $50 million shipyard priced OSV from $66.3 million to $40.6 million, for a savings of $25.6 million (or over 38%). This presentation will offer case study examples in explaining the capital construction fund subject matter.”

WorkBoat Financing Panel Program Statement, September, 2014

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INTRODUCTION

The development of these MARAD Title XI and CCF structures for the Navy’s Dual Use Vessel (DUV) program and the National Shipbuilding Research Program (NSRP) 2007 and 2008 Workshops, and their use in Jones Act lease financing is explained in the MARINE MONEY article, Cook and Ogle, “Financing Jones Act Vessel Assets”, published in May 2010, that is a today’s WorkBoat financing panel handout.

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Table 1 illustrates the purchase of an OSV with a U.S. shipyard price of $50 million, and with what would be a “fully financed cost” (equity + principal + interest) of $66,257,902 using MARAD Title XI financing.

Table 2 shows the purchaser’s out-of-pocket “fully financed cost” as reduced to $40,646,540 by using a CCF Program structure that employed a tax sheltered receivables investment program carried out over the 20 year term of the Title XI financing.

This is a CCF Program produced savings of $25,611,362 or 38.65 percent for this $50 million vessel.



TABLES 1 & 2 MARAD TITLE XI & CCF PROGRAMS


Example No. 1, Table 1, MARAD Title XI Program

1. Shipyard Price $50,000,000

2. Total Title XI Capitalized Cost $51,877,297

Title XI Coupon Rate 3.01%

Effective Corporate Tax Rate 35.00%

3. Total Title XI Equity & Interest Payments $20,962,758

4. Total Title XI Fixed Principal Payments $45,295,758

5. Total Title XI Debt & Equity Cash Cost $66,257,902

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








5. Yield on CCF Investments 13.01%


7. Total CCF Contributions & Taxes on Withdrawals $19,683,782

8. Total Cash Cost of Vessel with Title XI & CCF $40,646,540

9. CCF Savings over Title XI alone (38.65 percent) $25,611,362


Example No. 1, Table 2, MARAD Title XI & CCF Programs


Here, the purchaser’s out-of-pocket “fully financed cost” was reduced to $40,646,540 by using a CCF Program structure that employed a tax sheltered receivables investment program carried out over the 20 year term of the Title XI financing.

This is a CCF Program produced savings of $25,611,362 or 38.65 percent for this $50 million vessel.


Example No. 1, TABLE 2, MARAD TITLE XI & CCF PROGRAMS

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FINANCING JONES ACT VESSEL ASSETS MARAD’s TITLE XI AND CCF PROGRAMS

The MARAD Title XI Program allows an owner to issue bonds to finance up to 87.5 percent of a vessel’s cost with a U.S. Treasury guarantee of the payment of principal and interest, in exchange for the owner’s payment of modest guarantee fees.

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, to defer tax on vessel operating and sales income, and on CCF portfolio investment income, under CCF Program agreements administered by MARAD.

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NAVY DUV AND NSRP 2007 & 2008 WORKSHOPS

The concept of “dual-use vessels” (DUV) is as old as the Republic itself, and was incorporated in the Merchant Marine Acts of 1920, 1936 and 1970.

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 prices for these Jones Act dual-use vessels could be reduced to commercially acceptable levels.

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The NSRP 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 private sector vessel purchaser’s “fully financed cost”, rather than the shipyard sales price, that would be used to test the vessel owner’s business plan.

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.

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The study found that by using the MARAD Title XI and CCF Programs together, significant reductions in vessel costs could be achieved.

This was accomplished by the CCF holder depositing additional equity in the vessel CCF Program account, that when invested in high interest debt, 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.

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The reduction in vessel cost would be the difference between the Title XI debt principal amount and the measure of the additional equity.

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

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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.

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1. Shipyard Price$150,000,000

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


Effective Corporate Tax Rate 35.00%


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

5. Total Cash Cost of Vessel$198,773,706

______________________________Method of Debt Financing: Title XI, fixed principal, 80% of capitalized cost, 20 year term, level principal payments.


NAVY DUV AND NSRP WORKSHOPS

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

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

5. Yield on CCF Investments 13.01%




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



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

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Here is a graphical representation of the CCF accounts deposits and withdrawals involved.

$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)

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This computer software was developed to meet NSRP program objectives, where it was needed to measure and optimize CCF program benefits, and provide the precision necessary for CCF Program use in vessel lease financing, to support financing for the commercial dual use vessels that the Navy needed.

FINANCING JOES ACT VESSEL ASSETS


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JONES ACT LEASE FINANCING

Lease financing was chosen for many U.S. flag vessel projects during the 1970s and 1980s. Leasing company affiliates of institutions like Bank of America, Bankers Trust Company, Citibank Leasing, GATX and GE Credit & Leasing provided an active market in U.S. citizen leasing equity.

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JONES ACT LEASE FINANCING

LEASE FINANCING DIAGRAM 1: 1970 Act program leasing with U.S. citizen owner-lessors and U.S. citizen operators in the 1970s and 1980s.

For example: U.S. citizen owner-lessor – Citibank Leasing or GE Credit & Leasing; and U.S. citizen operator – Keystone Shipping Company or Marine Transport Lines.

20 Year Demise Charter

§ 2 Leasing

Company

§ 2 Operator



LEASE FINANCING WITH MARAD PROGRAMS

Where the MARAD Programs were employed, the owner-lessor was able to: (i) use the Title XI Program to leverage its equity investment with low-cost long-term debt; and (ii) use the CCF Program to shelter its high-yield investment income.

MARAD Program use enhanced the owner-lessor’s return, providing benefits that might be shared with the operator, or with the operator and its customer, through reductions in demise charter and/or time charter hire charges.



§ 2Leasing

Company

§ 2 Operator

For example: U.S. citizen owner-lessor – Citibank Leasing or GE Credit & Leasing; and U.S. citizen operator – Keystone Shipping Company or Marine Transport Lines.

MARADTitle XI BondsCCF Tax Shelter


LEASE FINANCING WITH MARAD PROGRAMS

LEASE FINANCING DIAGRAM 2: 1970 Act program U.S. citizen leasing with MARAD programs.


FINANCING JONES ACT VESSEL ASSETS LEASE FINANCING WITH NON-CITIZEN OWNERS

The qualifications for Jones Act vessel owners were changed in 1996 and again in 2004. Now non-citizen financial institutions may function just as Citibank Leasing and GE Credit & Leasing served as vessel owners in Lease Financing Diagrams 1 and 2.

Ownership of Jones Act qualified vessels by non-citizen leasing companies is now allowed under section 12119 if the vessel is demise chartered to a section 50501 U.S. citizen operator for three years or more.______________________________

The codification of Title 46 U.S.C. was completed in 2006, and section 2 is now section 50501 and section 12106(e) is now section 12119.



LEASE FINANCING WITH NON-CITIZEN OWNERS

The potential importance section 12119 leasing is illustrated by the $1.2 billion Aker Philadelphia Shipyard Jones Act transaction with the Overseas Shipholding Group (OSG).

The vessels were built by a Norwegian managed shipyard and sold to a Norwegian controlled section 12119 leasing company, that demise chartered the vessels to OSG as the U.S. section 50501 citizen operator, for a term of 8 years. The initial OSG time charters were to United Kingdom and United Kingdom/Netherlands international oil companies.


LEASE FINANCING DIAGRAM 3: Section 12119 leasing with non-citizen owner-lessor; U.S. citizen operator; and non-citizen lender syndicate and time charterers.

Parents – Aker ASA & Aker Philadelphia Shipyard section 12119 owner lessor– Aker American Shipping (Oslo Exchange); U.S. citizen operator – Overseas Shipholding Group; and non-citizen lender group –DnB NOR Bank.


Time Charters

12119 Leasing

Company

50501 Operator

Non-citizen Users

Lender Group

Parents



LEASE FINANCING WITH NON-CITIZEN OWNERS

This Lease Financing Diagram 3 schematic might easily be adapted for a section 12119 non-citizen or hedge fund lease financing for an offshore wind farm $300 million turbine installation vessel (TIV) as displayed in this next Lease Financing Diagram 4.


LEASE FINANCING DIAGRAM 4: Leasing of TIV with section 12119 non-citizen owner-lessor; U.S. citizen operator; and turbine installation contract with non-citizen project manager.

Project Company

Non-citizen 12119 leasing company owner–lessor; U.S. Citizen Operator; and non-citizen project manager.

Demise Charter

Installation Contract

12119Leasing

Company

50501 Operator

Lender Group

Non-citizen Equity

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NON-CITIZEN LEASE FINANCING AND 46 USC 12119

$300 MILLION TIV EXAMPLE

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Working with a U.S. shipyard in 2012, we were asked to run examples of a “fully financed cost” for a $300 million TIV for use in U.S. East Coast offshore wind projects -- using the MARAD program financing structure that we had developed for the Navy NSRP 2008 Workshop.




We found that by using this MARAD financing structure, the purchaser would have been able to reduce its TIV “fully financed cost” (equity+debt+interest) of the $300 million TIV from $438,370,562 (which it would have been in a simple Title XI financing) to $299,999,995 (which it would have been once CCF use was added) achieving a savings of $138,370,567 or 31.35 percent.





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


Effective Corporate Tax Rate35.00%

3. Total Title XI Equity & Interest Payments$162,097,327



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



EXAMPLE No. 3, TABLE 1, MARAD TITLE XI FINANCING







6. Interest Rate on CCF portfolio investments 15.90%

7. Total CCF Contributions & Taxes on Withdrawals$137,853,529

8. Total Cash Cost of Vessel with Title XI & CCF$299,950,856

9. CCF Savings over Title XI alone (31.58%)$138,370,567

NON-CITIZEN LEASE FINNCING AND 46 USC 12119

$300 MLLION TIV EXAMPLE

EXAMPLE No. 3 TABLE 2 MARAD TITLE XI & CCF







6. Interest Rate on CCF portfolio investments 26.00%



9. CCF Savings over Title XI alone (38.37%) $168,208,575

NON-CITIZEN LEASE INANCING AND 46 USC 12119


EXAMPLE No. 3, TABLE 3 MARAD TITLE XI & CCF


First: The computer software employed for these transactions was developed to provide a methodology to optimize and measure CCF Program benefits, for use in multi-party commercial vessel lease financing transactions for dual-use vessels to meet Navy needs.

Second: The MARAD CCF Program benefits involved are internal to the leasing transaction itself, rather than depending upon the more customary sheltering of non-transaction associated income.


FIVE POINTS TO REMEMBER

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FIVE POINTS TO REMEMBER

Third: Because on this, these CCF Program benefits are available in 12119 leasing and other transactions in which the owner-lessor has no other U.S. income or income requiring shelter.

Fourth: While U.S. Patent No. US 8,010,431 B 1, protects some aspects of this software usage, the basic elements of this structure, MARAD’s CCF and Title XI Programs, are available for use by Jones Act operators in any CCF qualifying trade today.

Fifth: Many existing U.S. owner-operators have MARAD approved receivables investment programs today and are realizing some of these “NSRP 2008” savings today. Perhaps you should be realizing these benefits as well.


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THANK YOU ______________________________________________________

ADDITIONAL INFORMATION: For background and follow-on reading you may wish to refer to Cook & Ogle, “Financing Jones Act Vessel Assets,” Marine Money International, May 2010; and my article on the basics of the CCF Program: Cook, “Financing the US Market via MARAD’s “CCF” Program,” Marine Money International, October 2007.

H. Clayton Cook, Jr., Seward & Kissel LLP901 K Street, N.W., Suite 800, Washington, D.C. 20001Phone: 202 661 7185 Email: [email protected]

Seward & Kissel LLP W ORK B OAT Professional Series FINANCING JONES ACT VESSEL ASSETS MARAD PROGRAM FINANCING STRUCTURES NON-CITIZEN LEASE FINANCING H.

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