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
FINANCING JONES ACT VESSEL ASSETS
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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FINANCING JONES ACT VESSEL ASSETS
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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FINANCING JONES ACT VESSEL ASSETS
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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FINANCING JONES ACT VESSEL ASSETS
$50 MILLION OSV EXAMPLE
TABLES 1 & 2 MARAD TITLE XI & CCF PROGRAMS
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.
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FINANCING JONES ACT VESSEL ASSETS
$50 MILLION OSV EXAMPLE
Example No. 1, Table 1, MARAD Title XI Program
1. Shipyard Price
$50,000,000
2. Total Title XI Capitalized Cost
Title XI Coupon Rate
Effective Corporate Tax Rate
3. Total Title XI Equity & Interest Payments
4. Total Title XI Fixed Principal Payments
5. Total Title XI Debt & Equity Cash Cost
$51,877,297
3.01%
35.00%
$20,962,758
$45,295,758
$66,257,902
Method of Debt Financing: Title XI, fixed principal, 20 year term, level principal
payments.
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$50 MILLION OSV EXAMPLE
Example No. 1, Table 2, MARAD Title XI & CCF Programs
1. Shipyard Price
$50,000,000
2. Total Title XI Equity & Interest Payments
$20,962,758
3. Total Title XI Fixed Principal Payments
$45,295,144
4. Total Title XI Debt & Equity Cash Cost
$66,257,902
5. Yield on CCF Investments
13.01%
6. Total Title XI Equity & Interest Payments
$20,962,758
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
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$50 MILLION OSV EXAMPLE
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.
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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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FINANCING JONES ACT VESSEL ASSETS
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 invitationonly 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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FINANCING JONES ACT VESSEL ASSETS
NAVY DUV AND NSRP 2007 & 2008 WORKSHOPS
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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FINANCING JONES ACT VESSEL ASSETS
NAVY DUV AND NSRP 2007 & 2008 WORKSHOPS
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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FINANCING JONES ACT VESSEL ASSETS
NAVY DUV AND NSRP 2007 & 2008 WORKSHOPS
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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FINANCING JONES ACT VESSEL ASSETS
NAVY DUV AND NSRP 2007 & 2008 WORKSHOPS
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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FINANCING JONES ACT VESSEL ASSETS
NAVY DUV AND NSRP WORKSHOPS
EXAMPLE NO. 2, TABLE 1, MARAD TITLE XI FINANCING
1. Shipyard Price
$150,000,000
2. Total Title XI MARAD “Capitalized Cost”
$159,631,891
Title XI Coupon Rate
Effective Corporate Tax Rate
3. Total Title XI Equity & Interest Payments
4. Total Title XI Fixed Principal Payments
5. Total Cash Cost of Vessel
______________________________
3.01%
35.00%
$62,888,274
$135,887,274
$198,773,706
Method of Debt Financing: Title XI, fixed principal, 80% of capitalized cost, 20 year term,
level principal payments.
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FINANCING JONES ACT VESSEL ASSETS
NAVY DUV AND NSRP WORKSHOPS
EXAMPLE No. 2, TABLE 2, TITLE XI & CCF FINANCING
1.
2.
3.
4.
5.
6.
Shipyard Price
Total Title XI Equity & Interest Payments
Total Title XI Fixed Principal Payments
Total Title XI Debt & Equity Cash Cost
Yield on CCF Investments
Total Title XI Equity & Interest Payments
$150,000,000
$62,868,274
$134,885,432
$198,773,706
13.01%
$61,388,274
7. Total CCF Contributions & Taxes on Withdrawals
8. Total Cash Cost of Vessel with Title XI & CCF
$60,951,346
$123,939,620
9. CCF Savings over Title XI alone (37.55 percent)
$74,634,086
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FINANCING JONES ACT VESSEL ASSETS
Here is a graphical representation of the CCF accounts
deposits and withdrawals involved.
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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FINANCING JOES ACT VESSEL ASSETS
NAVY DUV AND NSRP WORKSHOPS
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.
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FINANCING JONES ACT VESSEL ASSETS
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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FINANCING JONES ACT VESSEL ASSETS
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.
§2
Leasing
Company
20 Year
Demise Charter
§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.
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FINANCING JONES ACT VESSEL ASSETS
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.
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FINANCING JONES ACT VESSEL ASSETS
LEASE FINANCING WITH MARAD PROGRAMS
LEASE FINANCING DIAGRAM 2: 1970 Act program U.S. citizen
leasing with MARAD programs.
§2
Leasing
Company
Title XI Bonds
CCF Tax Shelter
20 Year
Demise
Charter
MARAD
§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.
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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.
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FINANCING JONES ACT VESSEL ASSETS
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.
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LEASE FINANCING DIAGRAM 3: Section 12119 leasing with noncitizen owner-lessor; U.S. citizen operator; and non-citizen lender
syndicate and time charterers.
Parents
12119
Leasing
Company
8 Year
Demise
Charter
50501
Operator
Time Charters
Lender
Group
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.
Noncitizen
Users
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FINANCING JONES ACT VESSEL ASSETS
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.
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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.
Noncitizen
Equity
12119
Leasing
Company
Demise
Charter
Lender
Group
Non-citizen 12119 leasing company owner–lessor;
U.S. Citizen Operator; and non-citizen project
manager.
50501
Operator
Installation
Contract
Project
Company
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FINANCING JONES ACT VESSEL ASSETS
NON-CITIZEN LEASE FINANCING AND 46 USC 12119
$300 MILLION TIV EXAMPLE
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NON-CITIZEN LEASE FINANCING AND 46 USC 12119
$300 MILLION TIV EXAMPLE
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.
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NON-CITIZEN LEASE FINANCING AND 46 USC 12119
$300 MILLION TIV EXAMPLE
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.
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NON-CITIZEN LEASE FINANCING AND 46 USC 12119
$300 MILLION TIV EXAMPLE
EXAMPLE No. 3, TABLE 1, MARAD TITLE XI FINANCING
1. Shipyard Price
$300,000,000
2. Total Title XI Capitalized Cost
Title XI Coupon Rate
Effective Corporate Tax Rate
3. Total Title XI Equity & Interest Payments
4. Total Title XI Fixed Principal Payments
5. Total Title XI Debt & Equity Cash Cost
___________________________________
$315,740,839
4.16%
35.00%
$162,097,327
$276,273,234
$438,370,562
Method of Debt Financing: Title XI, fixed principal, 20 year term, level
principal payments.
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NON-CITIZEN LEASE FINNCING AND 46 USC 12119
$300 MLLION TIV EXAMPLE
EXAMPLE No. 3 TABLE 2 MARAD TITLE XI & CCF
1. Shipyard Price
$300,000,000
2. Total Title XI Equity & Interest Payments
$162,097,327
3. Total Title XI Fixed Principal Payments
$276,273,234
4. Total Title XI Debt & Equity Cash Cost
$438,370,562
5. Total Title XI Equity & Interest Payments
$162,097,327
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
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NON-CITIZEN LEASE INANCING AND 46 USC 12119
$300 MILLION TIV EXAMPLE
EXAMPLE No. 3, TABLE 3 MARAD TITLE XI & CCF
1. Shipyard Price
$300,000,000
2. Total Title XI Equity & Interest Payments
$162,097,327
3. Total Title XI Fixed Principal Payments
$276,273,234
4. Total Title XI Debt & Equity Cash Cost
$438,370,562
5. Total Title XI Equity & Interest Payments
$162,097,327
6. Interest Rate on CCF portfolio investments
26.00%
7. Total CCF Contributions & Taxes on Withdrawals
$108,064,660
8. Total Cash Cost of Vessel with Title XI & CCF
$270,161,987
9. CCF Savings over Title XI alone (38.37%)
$168,208,575
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FINANCING JONES ACT VESSEL ASSETS
FIVE POINTS TO REMEMBER
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.
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FINANCING JONES ACT VESSEL ASSETS
FIVE POINTS TO REMEMBER
Third: Because on this, these CCF Program benefits are available
in 12119 leasing and other transactions in which the ownerlessor 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 LLP
901 K Street, N.W., Suite 800, Washington, D.C. 20001
Phone: 202 661 7185 Email: [email protected]
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