As a spread of 12 percent the economic loss for this 5-year period would be $750,000, a sizable sum in any case.

With the provisions of S. 1457 enacted into law, the shipowner would have no reluctance to invest this money in ships immediately, knowing that these ships could be mortgaged at a later date to provide funds necessary to proceed with his shipbuilding program.

By creating more flexibility in financing, the provisions of S. 1457 make possible substantial other advantages. For example, if this bill were enacted into law, a shipowner would not be forced to obtain borrowed capital at the time a ship is delivered to him by a shipyard as he must at present. With the financing flexibility afforded by this bill, he could postpone his borrowing until market conditions or interest rates were more favorable, thus enhancing the possibility of reducing the cost of his borrowings. By depositing any such borrowings in the reserve funds, the Government would be assured that the borrowed moneys would be used solely for the construction of new vessels or for the other purposes authorized by law. Under the bill, reductions in the interest cost of borrowed money such as occurred in the first 4 months of 1958 would create opportunities for a shipowner to mortgage existing units of his fleet at lesser rates of interest, possibly saving large sums of future interest and making the entire venture more attractive from the financial point of view. Government exposure under the title XI guarantees would also be reduced. Another important feature of the bill is that it makes more feasible the underwriting and public offering of bonds covering a group of freighters.

In simple terms, the additional flexibility extended under the bill would enable management to maintain access to practically all of our capital markets and strengthen the ability to undertake debt financing at a time and place of their own choosing.

This bill is in the interest of the entire merchant marine since

(1) It puts a subsequent borrower on the same basis as an initial borrower;

(2) It enables shipbuilding capital to be conserved by reducing debt expense;

(3) By permitting mortgages to be placed on existing vessels to aid in the construction of new vessels, it assures fulfillment of the Government-industry vessel-replacement program;

(4) Flexibility permits more realistic negotiation by the shipowner on interest rates and terms, enhancing financial prospects. This fact and the delayed issuance of mortgage guarantees reduces exposure of the Government.

In support of Mr. Piper, chairman of the Finance Committee of CASL, and as chairman of the Vessel Replacement Committee of CASL, I should like to record our strong endorsement of this bill.

Mr. Chairman, if you have any questions, we will be glad to answer them now or later.

Senator ENGLE. Thank you very much, Mr. Nemec, for that statement; and we will proceed with the statement by Mr. Porter.

Mr. Porter, we are glad to have you here and we are pleased to have your statement.

Mr. PORTER. Thank you, sir.

Senator ENGLE. I observe that it, too, is rather short and I suggest you proceed to read it.

Mr. PORTER. Thank you.

STATEMENT OF ROBERT C. PORTER, PARTNER, F. EBERSTADT CO.

Mr. PORTER. My name is Robert C. Porter. I appear today at the request of the Committee of American Steamship Lines. I am a partner of F. Eberstadt & Co., an investment banking firm in New York City. F. Eberstadt & Co. is active in the ship-financing field.

My purpose in testifying today is to explain how, from the standpoint of the investment banker, the enactment into law of S. 1457, amending title XI of the Merchant Marine Act of 1936, will aid shipowners in financing the replacement fleet.

One of the purposes of title XI insurance is to permit the shipowners to obtain their financing from private sources rather than directly from the Government as was the case under title V. However, title XI, as now written, does not give the shipowners the same flexibility in arranging their financing as other industries enjoy. Title XI requires that the financing be done at or before the time of delivery of the vessel or not at all. This means that, contrary to other industries, the shipping industry must do its financing at a specific time whether or not it needs the money at that time, whether or not moneymarket conditions are favorable, and whether or not the amount to be borrowed for the new vessel is sufficiently large to permit the financing to be arranged on the most favorable terms.

Essentially S. 1457 will provide shipowners with a degree of flexibility, which is unavailable to them under the present law, both as to the timing of title XI ship-mortgage financing and as to the method by which such financing may be accomplished.

Mr. Piper and Mr. Nemec have pointed out that many shipowners have adequate cash reserves to cover the initial phases of their vesselreplacement programs.

From the standpoint of the investment banker, such companies should be free to determine the timing of their financing based on financial considerations rather than the delivery date of a particular ship. They should not be required to incur the additional cost of borrowing money substantially in advance of the time when they will need it.

They should be free to select the timing of their financing based on the condition of the money market. They should not be forced to go into the money market in times of tightening credit or rising interest rates.

The past 6-year period is a graphic example of how widely interest rates can fluctuate within short periods of time. During this 6-year period interest rates on taxable long-term Treasury bonds have varied as follows: Interest rates declined from approximately 3% percent in mid-1953 to 22 percent by mid-1954. They then gradually increased with minor fluctuations to 334 percent in late 1957, after which they decreased to 234 percent in mid-1958. In the succeeding 9 months these rates have increased about 14 percent to their present level of approximately 4 percent.

The prediction of interest rates is not an exact science; however, the ability to be in a position to take advantage of money-market fluctuations over a period of years could result in substantial interest savings.

Earlier I said that passage of S. 1457 will give shipowners a greater flexibility as to the method of title XI ship-mortgage financing. I refer here especially to the financing of freighter or similar type ships where the amount to be borrowed with respect to a single new ship would be approximately $4 million.

Basically there are two methods for the sale of title XI ship mortgages. One is through an underwritten offering to the public and the other is through a private placement of the securities with a limited number of institutional investors such as insurance companies. Both of these methods have their advantages depending to a large extent on the particular business situation of the issuer. However, a public offering of title XI bonds by the underwriter of $10 million or over will normally command a lower interest cost than will a private placement of the same securities. This saving in interest cost is generally on the order of one-fourth of 1 percent to threeeighths of 1 percent and is the result of the publicly offered securities having a marketability factor which enables investors to resell their bonds. A public issue also reaches different classes of investors who are generally willing to purchase smaller amounts at lower interest

rates.

Under the present law a shipowner is, for all practical purposes, restricted to a private placement for a small to medium size ship. This is due to the relatively small size of the individual ship mortgage which may range from $2 million to $5 million. An underwritten public offering of such a small amount of mortgage bonds would be impractical for the following reasons:

(1) The direct costs of a public offering in printing expenses, legal fees, and underwriting charges are generally prohibitive for offerings of less than $9 million to $10 million.

(2) The indirect costs of the time spent by company personnel on preparing for a public offering would be excessive in relation to the size of the issue.

(3) Public offerings of small amounts of debt securities require greater proportionate underwriting charges than do larger offerings because small issues generally involve as much if not more risk and require as much time to sell as do substantially larger issues.

(4) The interest rate for a small size issue would approximate that of a private placement of the equivalent amount of securities since a public offering of such limited size would not develop an afterissue trading market of enough scope to be attractive to many investors who regard liquidity as an important factor. S. 1457, by permitting title XI insurance beyond the delivery date, will enable the shipowner to finance a group of small to medium size vessels from his reserves over a period of time with the objective of combining the group of vessels in a single public offering when the total amount of money to be raised would make a public offering feasible.

In general, as I previously mentioned, a public offering will result in an interest rate of one-fourth of 1 percent to three-eighths of 1 percent below that of a private placement of similar size. For example, an interest saving of one-fourth of 1 percent on a public offering of $10 million of 20-year bonds which have a sinking fund

resulting in an average life of about 12 years would amount to approximately $300,000.

In summary, it is my opinion as an investment banker that the enactment of S. 1457 will give to the shipping industry the same flexibility in financial planning now available to other private industries and thus enhance its ability to finance the replacement fleet on more economical terms.

Senator ENGLE. Mr. Porter, do you have any preference between these two bills from the standpoint of financing?

Mr. PORTER. Well, I am not prepared to comment on the Department's bill. I haven't studied it. I understand from talking to counsel for the committee that if the various technical amendments that he is going to suggest are carried out it would accomplish the same objectives and I believe from a financing standpoint, if those changes are made, would be just as satisfactory. But I have not made any detailed study of the other bill.

Senator ENGLE. May I ask if there are any ship operators who are prepared to take advantage of either bill as soon as either one of these bills is enacted? Do any of you know?

Mr. EWERS. It would be just a short time before Moore-McCormack would, Mr. Chairman. Outside borrowing is not definite because of a number of outside factors. I would say probably within a year Moore-McCormack may have to avail itself of legislation such as this. Senator ENGLE. May we have your full name and title for the record, please?

Mr. EwERS. Ira L. Ewers, I am a senior partner of Ewers & Duff, attorneys at law, 1000 16th Street, Washington, D.C., appearing on behalf of Moore-McCormack Lines, Inc., 5 Broadway, New York 4. Senator ENGLE. Thank you very much Mr. Ewers.

Mr. NEMEC. In addition, Mr. Chairman, there are other lines which will be using it but more importantly the financing of a ship-replacement program such as we are now commencing takes a great deal of forward planning. Plans which are established now will shape the method of arranging financing 2, 3, 4, and 5 years from now.

In other words, being able to rely on the provisions of this bill, we could now undertake certain steps which, if the bill were not enacted, would be risky and which would require reconsideration, I think, by many companies as to their current financing programs, so it becomes a matter for each company to shape its own financing but in reliance on this bill, it could undertake a course of action which otherwise it could not undertake. That is the important reason for pressing for enactment now.

Senator ENGLE. Now Mr. Countryman has a statement which he does not desire to read but he desires to have made a part of the record. Is that correct?

Mr. PURDON. I think he would like to comment on a couple of the most important parts and then submit the rest for the record.

Mr. COUNTRYMAN. That is correct, Mr. Chairman. My statement dealing with proposed technical amendments, some 11 in number to the Commerce Department bill, and 3 to our own bill, is necessarily lengthy because of the complexity of the subject matter. I would not propose to take the committee's time to read it. I would like to have it incorporated in the record. I would, if the committee please, like to speak

briefly to one point of difference between the two bills which we believe rises above the level of a technical difference.

Senator ENGLE. You may proceed and, without objection, your prepared statement will be made a part of the record immediately following your extemporized remarks.

STATEMENT OF VERN COUNTRYMAN, SPECIAL COUNSEL TO COMMITTEE OF AMERICAN STEAMSHIP LINES

Mr. COUNTRYMAN. Thank you, Mr. Chairman.

S. 1434, the Commerce Department bill, unlike S. 1457, the industry bill, would not authorize the use of a standby mortgage on one vessel to finance the construction or reconditioning of another vessel or vessels. It is confined to new construction. In this respect the availability of the insured standby mortgage would be more restricted than is the availability of other insured mortgages under the present provisions of title XI which authorized the use of insured mortgages not only for new construction but for reconstruction and reconditioning. We know of no reason for introducing such a restriction on the standby mortgage feature.

We believe, on the contrary, that standby mortgages should be available to facilitate the private financing of reconstruction and reconditioning which in many cases will involve substantial amounts, particularly in the case of passenger vessels and in instances where containerization or roll-on, roll-off features are to be added to cargo vessels. We have accordingly proposed-and the detail is in my written statement-an amendment to the Commerce Department bill which would extend its provisions to cover not only new construction but also reconstruction and reconditioning.

(The complete statement of Mr. Countryman is as follows:)

STATEMENT OF VERN COUNTRYMAN, SPECIAL COUNSEL TO COMMITTEE OF

AMERICAN STEAMSHIP LINES

The Committee of American Steamship Lines fully endorses the purpose of S. 1457 and S. 1434, which is to authorize the insurance under title XI of the Merchant Marine Act, 1936, of a standby mortgage on an existing vessel to finance additional construction.

We believe that the plan of S. 1457, which incorporates the standby mortgage feature into the present structure of title XI, is preferable to that of S. 1434, which undertakes to deal comprehensively with all aspects of the standby mortgage in a single new section to be added to title XI. Such separate treatment of the standby mortgage feature may, we believe, be productive of internal inconsistencies within title XI and of difficulties in administration which cannot be anticipated in advance.

There are, in any event, certain technical deficiencies in S. 1434 which should be corrected if it is to authorize a workable and feasible system for insuring standby mortgages. In detail:

(1) Title XI now authorizes, in section 1106 (3), the insurance of a mortgage to refinance or refund a previously insured mortgage. If the standby mortgage authority were now to be added to title XI in the manner contemplated by S. 1457, this would be sufficient, in our opinion, to authorize insurance of a mortgage on an existing vessel both (a) to refinance a previously insured mortgage on that vessel and (b) to finance additional construction. S. 1434, in the new section 1107 to be added to title XI, undertakes to deal not merely with standby measure but also with the refinancing feature when combined with the standby feature. As indicated below, this raises questions as to the availability of the refinancing feature and imposes limitations upon its availability which do not now exist and which would not exist under S. 1457.

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