"(8) the mortgaged vessel is in as good condition as it would have been in if it had been mortgaged immediately after delivery by the shipbuilder (and remained subject to such mortgage until the date of execution of this mortgage) and such mortgage had been insured by the Secretary of Commerce, and all requirements of the Secretary of Commerce with respect to a vessel on which he has insured the mortgage had been complied with." Senator ENGLE. In our hearing today we will consider two bills, S. 1457 and S. 1434, that would amend title XI of the Merchant Marine Act of 1936. Either bill is designed to provide additional flexibility for the shipping industry in securing financing from private resources for ship construction, reconstruction, and reconditioning. As the law now stands, the ship operator must take out his insured mortgage before the delivery to him of the vessel built or improved. All too frequently this forces him to borrow money at interest rates higher than the considerations of prudent and efficient management would indicate. These two bills we are considering allow the shipowner to defer the placing of this insured mortgage until such time as interest rates are more favorable. The funds so secured can only be applied to further vessel replacement or improvement. Let me emphasize the timeliness of this legislation. The Government and the shipping industry have entered a virtual partnership to relieve the problem of bloc obsolescence now facing the American merchant marine. For the efficient and economic operation of the vessels so constructed, the bills considered today are highly desirable. In a time of national self-consciousness over Government expenditures, it deserves mention that these bills neither increase the Federal risk nor contemplate the spending of any more money. In fact, through subsidy recapture, they may save the taxpayer money. We have with us this morning Mr. Clarence Morse, the Chairman of the Federal Maritime Board, Maritime Administrator, speaking on behalf of the Department of Commerce and the Maritime Administration. Mr. Morse, we will be glad to hear you at this time. Mr. ACKERSON. My name is Mr. Ackerson from Mr. Morse's office. Mr. Morse had an engagement at 9:30 on the House side. He expected to be over here promptly but he has not arrived as yet. Senator ENGLE. We will be glad to put Mr. Morse at the end of the schedule and give him a chance to arrive. I know how difficult it is for people to be in two places at once around here. I have tried it myself. In the temporary absence of Mr. Morse, we will call the industry witnesses, who will be introduced by Mr. Alex Purdon, the executive director of the Committee of American Steamship Lines. Mr. Purdon, do you desire to come forward and introduce your witnesses? Mr. Purdon, we are glad to have you here and you may proceed in your own fashion. Mr. PURDON. Thank you, Mr. Chairman. For the record, my name is Alexander Purdon, executive director of the Committee of American Steamship Lines, 1000 Connecticut Avenue, Washington, D.C. The Committee of American Steamship Lines is an organization of 14 of the steamship lines holding operating differential subsidy contracts with the U.S. Government. Under these operating diffierential sub sidy contracts we are required to replace our ships as they become 20 years of age, and we have embarked on a building program over the next 10 to 13 years which is estimated to cost $4 billion. It is because of our contractual obligation as well as our natural desire to replace our fleets that we appear before you to speak in favor of this legislation. The purpose of the legislation is quite simple. It is to extend the provisions of title XI so that we will have more flexibility in our financing arrangements. Essentially, it means that when we have the cash to pay for a ship we can pay in full for the ship and mortgage it later in order to get funds for subsequent replacements. You have before you, sir two bills. S. 1457 is a bill which was introduced in the Senate last year and passed the House last year. This I would say is the industry-supported bill. You also have S. 1434, which is the Commerce Department version. Both bills attempt to reach the same objective but by different routes. There is no difference in objective or principle between the two. The industry bill reaches its end by amending the pertinent sections of title XI. The Commerce bill reaches a similar end by adding a whole new section. We will present our witnesses in support of S. 1457 and we will also for the committee indicate what, in our view, should be done to the Commerce bill in order to make it comparable to the industry bill. In other words, we will suggest some amendments. We will also suggest a couple of minor technical amendments to our own which have occurred to us most recently. The differences, I would emphasize, are technical. I would now like to introduce to you Mr. Burke Piper, who is vice president of Grace Line, New York, and chairman of our finance committee. He will address himself to the bill and if I might introduce, Senator, all of the witnesses at once, they can go right into their portions of the testimony without my breaking in. Would that be preferable, sir? Senator ENGLE. That would be perfectly all right. Mr. PURDON. Mr. Burke Piper is chairman of our finance committee. The second witness will be Mr. Frank Nemec, senior vice president of Lykes Bros. Steamship Co., of New Orleans, who is here in his capacity as chairman of our vessel replacement committee. The third witness is Mr. Robert C. Porter, a partner in F. Eberstadt & Co., of New York, a company which has had considerable experience in ship financing. Then we will present Mr. Vern Countryman, who is acting as special counsel to our committee for this purpose and he will address himself to the technical amendments to which I have referred. Finally, sir, if time permits, Mr. Ira Ewers is here and would like to make a short statement with reference to the importance of this to the Moore-McCormack Lines, of New York, of which he is counsel. Mr. Piper. Mr. PIPER. Mr. Chairman, I have a brief prepared statement, if you would like for me to read that first. Senator ENGLE. Yes. If you will wait just a minute, Mr. Piper, Mr. Morse has just come in. Do you have a few minutes? If so, we will hear these other witnesses first. Senator ENGLE. Mr. Piper, we are happy to have you here and to have your testimony. I assume you are not a relative of the Piper of Piper Aircraft. Mr. PIPER. That is correct, sir. Senator ENGLE. Very well, you may proceed and, without objection, you may present your statement without interruption. STATEMENT OF B. G. PIPER, CHAIRMAN, FINANCE COMMITTEE OF COMMITTEE OF AMERICAN STEAMSHIP LINES Mr. PIPER. My name is Burke G. Piper, I am a vice president and treasurer of Grace Line, Inc., a subsidized American-flag steamship operator with its principal office in New York City. In addition, I am chairman of the Finance Committee of the Committee of American Steamship Lines, in which capacity my testimony is presented today in support of S. 1457. As you know, under existing provisions of title XI of the Merchant Marine Act an operator has to mortgage each new vessel as it is delivered in order to obtain Government insurance. Elimination of this requirement through passage of the amendment under consideration would, in the judgment of the Finance Committee of CASL, give the industry greater flexibility in planning their replacement programs and should permit substantial savings in the cost of debt financing while concurrently reducing the Government's exposure to risk as guarantor of the mortgages. The savings in the cost of debt financing through allowing the operator to select the most opportune time to assume mortgage debt can be shown in the following example: Grace Line, Inc., is presently earning 3.39 percent on its reserve fund investments. Concurrently, including title XI mortgage insurance premiums, the company is paying an interest rate of approximately 4.73 percent upon its recent $18 million issue of merchant-marine bonds. Based upon our own projections we were forced under existing legislation to borrow this $18 million at least 22 years before the funds were required under our ship-replacement program. Since the annual yield on our investments is approximately 1.34 percent less than the cost of borrowed money we will be forced to incur an additional borrowing expense of approximately $600,000 during the next 21⁄2 years ($18 million times 1.34 percent times 2.5 years). Passage of S. 1457 should develop a further area of savings. Financing could be arranged so that a group of ships delivered to the operator over a period of several years could be mortgaged at the same time. This method could materially shorten the time consumed in arranging financing and could substantially reduce the cost of legal fees and executive time per dollar of borrowings. Further, because of the larger amounts involved in a combined financing it is expected that underwriting and trustee fees would be reduced as a percentage of the financing proceeds. Another consideration is the fact that under existing legislation an operator may be forced to borrow money on a long-term basis at a time when interest rates are at a peak. Present legislation allows the operator no flexibility in determining when to borrow. Passage of S. 1457 would enable the shipowner to utilize his own funds to the extent available and to determine within the limits of his own resources the best time to seek external financing. For example, an operator who has a firm ship-construction obligation under his operating subsidy contract might find it desirable to finance the future costs of ships to be built by borrowing money on ships already built in advance of the placing of construction contracts for the new ships. Finally the bill under consideration tends to reduce the Government's risk. By limiting the amount of insured mortgages to 75 percent of the vessel's depreciated cost it is evident that deferral of mortgage financing until actually needed would both reduce the amount and the time period of the Government exposure as mortgage guar antor. In summary, therefore, because passage of S. 1457 would permit a shipowner to reduce the cost of borrowing money, while assisting the fulfillment of the Government industry vessel replacement program, I as chairman of the finance committee would like to record CASL's strong endorsement of this bill. That completes the prepared portion of my statement. I would be happy to answer any questions now or it might be desirable if the chairman desires to have the testimony of the other witnesses, at least Mr. Nemec and Mr. Porter. Senator ENGLE. Thank you very much, Mr. Piper. We would be glad to proceed with Mr. Nemec's testimony. I observe, Mr. Nemec, that your statement is five pages long which is relatively short. You can insert it in the record or read it, as you wish. Mr. NEMEC. At your pleasure, Mr. Chairman. Senator ENGLE. To the extent that it is repetitious, if it is, of Mr. Piper's testimony, it will not be necessary to read it. Are these statements to any extent repetitious? Mr. NEMEC. They do overlap in some unavoidable details, there is no question about that. Senator ENGLE. Probably the fastest method would be for you to go ahead and read it. Mr. NEMEC. All right, sir. STATEMENT OF FRANK A. NEMEC, CHAIRMAN, VESSEL REPLACEMENT COMMITTEE OF COMMITTEE OF AMERICAN STEAMSHIP LINES Mr. NEMEC. My name is Frank S. Nemec. I am a senior vice president of Lykes Bros. Steamship Co., Inc., of New Orleans, La., and appear here today as chairman of the Vessel Replacement Committee of CASL in support of S. 1437. Mr. Piper, chairman of the Finance Committee of CASL, has preceded me and has explained the importance of certain phases of the bill. Accordingly, I would like to outline rather briefly the underlying purposes and merits of S. 1457, particularly as they make more feasible the long-range ship-replacement program of our companies. The bill which is before you is intended to permit title XI mortgages to be placed on vessels after they have been delivered to the owner. In simple terms, this bill will (1) Permit a shipowner to employ his own financial resources to the fullest extent by avoiding unnecessary borrowing, thereby reducing interest costs and debt charges; (2) Enable the shipowner later to place Government-guaranteed mortgages on vessels already delivered provided the proceeds are used for shipbuilding or similar purposes; (3) Reduce Government exposure by minimizing the amount of ship-mortgage guarantees outstanding at a particular time; (4) Provide additional financing flexibility by enabling a shipowner to borrow money at a time and place of his own choosing; (5) Facilitate public financing and distribution of ship bonds; and (6) Reduce the cost of freighter-bond financing by permitting a number of ships to be grouped under a single public issue. Under the present law, guaranteed mortgages must be placed at the time ships are delivered by a shipyard or the guarantee privilege is lost. In substance, the present bill permits guarantee mortgages to be placed after delivery of the ship to the owner, provided the proceeds are dedicated to new construction, reconstruction, or the other purposes of the act. This is an important change, and one which will assist our industry in fulfilling its vast ship-replacement obligations. At the present time, all members of CASL have ship-replacement funds on deposit in statutory reserve funds. The yield on investment of these funds in about 1142 percent less than the cost of borrowing money even with the aid of Government-guaranteed mortgages. This means that if a shipowner borrows mortgage money to finance his ships rather than using his own money, he suffers an economic loss of about 1142 percent on the funds he borrows. Let me illustrate this with an example: A shipowner has $10 million in reserve funds which can be invested immediately in freighter tonnage now under construction by paying for some units in full, or, alternatively, withheld to insure the necessary downpayments on another group of ships to be constructed 5 years later. It appears to the owner that if all goes well, depreciation and other sources of money should be sufficient to meet the necessary downpayments on the group which is still 5 years away. However, if loss years intervene and he does not earn depreciation, he will be unable to finance these downpayments unless he keeps cash available. Under these circumstances-and without the ability to get mortgage money under title XI on the ships which will be fully paid-he probably will withhold some or all of this $10 million. The results of this follow: (a) Interest cost on $10,000,000 for 5 years at assumed rate of 51⁄2 Economic loss to the shipowner--- Interest cost $2,750,000 1,750,000 1, 000, 000 |