The U.S. Department of Transportation's Maritime Administration (MARAD) in December issued a final rule updating its financial requirements for the Federal Ship Financing Program, commonly referred to as Title XI. While the move applies to the U.S. maritime industry as a whole, it is seen as especially helpful for players looking to serve the U.S. offshore wind sector.
Designed to promote the growth and modernization of the U.S. merchant marine and U.S. shipyards, Title XI provides for a full faith and credit guarantee by the U.S. government. The program essentially aims to encourage U.S. shipowners to obtain new vessels from U.S. shipyards cost effectively through long-term debt repayment guarantees. It can also be utilized by U.S. shipyards to help modernize their facilities for both vessel repair and new construction.
Charlie Papavizas, partner and chair of the maritime practice at law firm Winston & Strawn, explained, “Title XI refers to the title with number in the Merchant Marine Act, 1936 whereby the U.S. government, as amended in 1972, offered to guarantee the private financing of vessels built in the United States meeting certain conditions. In 2019, MARAD converted the program to a government loan program with the Federal Financing Bank as the lender.”
The repayment term and interest rates available under the program and generally better than those available from the commercial lending market. “The main advantages of government financing are a favorable interest rate, the potential to cover up to 87.5% of the vessel costs and a potentially long period of loan amortization extending to the life of the vessel,” Papavizas said.
But there are also drawbacks. Papavizas said, “The main disadvantage of the program is the substantial application processing time. MARAD’s website indicates, for example, that ECO Edison, LLC submitted an application that was accepted by MARAD in September 2022 for a service operation vessel (SOV) that has been approved but has not yet closed.”
As of early February, the status of ECO’s $90 million loan request is listed as "letter commitment issued; awaiting guarantee closing".
Companies within the offshore wind sector that have applications completed and currently under review include Windea CTV ($104 million for 10 crew transfer vessels (CTV)), Great Lakes Dredge & Dock ($215,862,500 for a subsea rock installation vessel (SRIV)), and Offshore Wind Support, LLC [Edison Chouest] ($95,156,250 for an SOV). Crowley’s application is listed as submitted and under deficiency review ($146,475,743 for an SOV). Title XI applications have also been submitted for several other non-wind vessels and shipyard upgrade programs.
Recent changes
The recent final rule, which became effective 30 days after publication in the Federal Register (docket number MARAD-2023-0086), “establishes modern financial performance as well as initial and continuing creditworthiness criteria for Title XI loan guarantees”, MARAD said, noting that the rule will also provide applicants with more flexible repayments terms, aligning program regulations with the best practices of maritime industry lending and federal credit.
Philip Lewis, director of research at business intelligence and consulting firm Intelatus Global Partners, said, "The amendments respond to concerns that previous terms acted as a barrier to some companies seeking to apply for Title XI support. In short, the tests that measure that the borrower has ‘a reasonable prospect’ of repaying the debt have been updated to align with other federal programs and general industry practice."
Papavizas said the move addresses the issue of rigid financial qualification criteria. “In particular, pre-existing MARAD regulations require borrowers to have no more than a two to one long term debt to equity ratio,” he said. “MARAD determined that these criteria were not in line with criteria utilized in other federal financing programs and has replaced them with the requirement that a borrower ‘must demonstrate financial performance that supports a reasonable prospect of repayment taking into account foreseeable negative economic conditions’. Moreover, MARAD would not have had discretion to consider certain subordinated debt as equity whereas now it will have that ability.”
By introducing greater flexibility to the regulations governing the Title XI program, MARAD said it will be able to adapt the terms of new loan guarantees according to the risk profiles of particular projects. MARAD believes the changes will help “attract a higher volume of high-quality applicants and mitigate risk to the U.S. government”.
Offshore wind
The Title XI program is of particular importance for the U.S. offshore wind industry. In June 2022, MARAD designated vessels used in construction, service and/or maintenance of offshore wind facilities as "vessels of national interest", giving these applications processing priority for Title XI support.
“Designated vessels are supposed to receive loan processing priority,” Papavizas said. “Since Title XI depends on appropriations to fund MARAD’s loan reserves and those appropriations are limited, such priority can be meaningful.”
While the Title XI update could be a boost for offshore wind vessel construction, at the end of the day, the market is still waiting for projects to move forward before ordering ships. “As a result of the amendments, there is hope that the conditions exist for additional domestically built offshore wind vessels to be committed,” Lewis said. “However, vessel owners are often waiting for project developers to make final investment decisions and offer owners mitigation for vessel redeployment risk.”