when we got that idea across, and it was difficult to get it across, then we were able to expand the market for these bonds, and instead of selling these bonds almost on a mortgage basis, with high interest rates that mortgages produce, just as savings banks and some of the major life insurance companies, we found we were able to bring in small State funds, pension funds, college funds, church funds. We haven't yet reached the point, and I hope one day we will, that we will be able to have individual investors buy $1,000 or $2,000 worth or of bonds, but we have broadened the market tremendously during the last 5 or 6 years as a result of the amendments which Mr. Kominers mentioned. Senator BARTLETT. Why has it not yet been possible to go to the small bondholder? Mr. SCHULTE. It is purely a matter of education, and I think that we are getting that. Mr. KENNEY. You don't want to issue them at 25 face value? Mr. KENNEY. I am intrigued to learn that you can buy a 100 percent guaranteed bond at 4.20 interest rate, instead of a savings bond that only pays 3.75. Mr. SCHULTE. That is right. I think, if I remember correctly, that the last issue that was placed prior to the amendments which have just been described were placed at a little over 5 percent Then the first issue publicly in a matter which I have described came out at 4.20 percent. The last one which my firm managed was one at 43% percent. Now, I don't know what the next one will be, but I do believe, if there is again a question in the minds of the investing public on these bonds, the interest rates will soar. I would like to say also, if I may, to paraphrase what you said before, the trustees will feel-pension funds and State funds will feel that there are too many bonds on the market, about which they can be sure to run any risk, and I think also that it is very important that this legislation be passed because of the very fact that it is being considered, if not passed, might lead people to believe that the Senate and the House support the position of the court of appeals in the Westhampton case. I think that must be dispelled. Senator BARTLETT. What if Mr. Kenney were to write over to Lehman Bros., and say, "I understand Lehman Bros. is going to have something to do with issuance of some bonds for APL, and I would like $10,000 worth of the bonds"? You don't deal with the $10,000 man yet, but hopefully someday; is that it? Mr. SCHULTE. Oh, yes, we would be very glad to sell them. Senator BARTLETT. You will probably get the letter tonight. [Laughter.] Mr. SCHULTE. I will even be glad to raise a smaller denomination. Mr. KENNEY. I would need that. Senator BARTLETT. He was talking about $25. In your opinion, Mr. Schulte, what if Government were to withdraw entirely from this field, there would be no Government guarantees and no Government insurance, no Government assistance of any kind, would these bonds be salable? Mr. SCHULTE. No. Categorically, no. Mr. SCHULTE. Because a vessel is a very special purpose object and if the bonds were in default, and the vessels had to be foreclosed, it would be very hard to find a market for them. Senator BARTLETT. Mr. Foster? Senator BARTLETT. Mr. Kenney? Mr. KENNEY. One other thing, Mr. Schulte: On page 2 of your statement you indicate that failure to enact the bill may restrict the market for title XI bonds and may impose an unnecessarily high contingent liability upon the Federal Government. I don't understand how this would affect the contingent liability of the Government, which is 100 percent. Mr. SCHULTE. Because the Government guarantees the interest as well as the principal on these bonds, and if the bonds have to be sold at a 6-percent interest instead of 4 Mr. KENNEY. I see. Thank you. Senator BARTLETT. If this news ever gets out, I don't think there will be any trouble selling the bonds. Thank you very much. Mr. SCHULTE. Thank you. Senator BARTLETT. Mr. Schreiner. Mr. SCHREINER. Mr. Chairman and members of the committee, my name is George H. Schreiner. I am vice president and treasurer of American President Lines, Ltd., 601 California Street, San Francisco, Calif. I appear here on behalf of the Committee of American Steamship Lines which represents 14 American-flag steamship companies who have operating-differential subsidy agreements with the United States. I am here to recommend passage of S. 2118, and in particular, to urge prompt passage. Legislation seems the only timely and complete remedy available in the situation created by the decision of the Fourth Circuit Court of Appeals in the Westhampton case. American President Lines, Ltd. finds itself first among CASL companies, since the Westhampton decision, who wish to enter the marketplace with a new issue of merchant marine bonds. On December 31, 1964, American President Lines, Ltd., contracted with Ingalls Shipbuilding Corp. at Pascagoula, Miss., and the Maritime Administration for the construction of four modern freighters. Construction is now in progress. We will require proceeds of the bond issue to meet commitments under the construction contract. Up to 75 percent of our cost for each vessel may be paid from bond proceeds, but we must provide the remaining 25 percent from other funds on hand. Half of the 25 percent payable from other funds on hand must first have been expended before any bond proceeds can be used. Based on shipyard estimates, I believe that bond proceeds can first be used in November 1965. Under the contemplated financing arrangements, the merchant marine bonds will be offered to the public. When the bonds are issued, the proceeds will be deposited in escrow for disbursement by the Secre tary of Commerce when authorized for progress payments to the shipyard. The bonds are secured by the unexpended amount in escrow and a Government insured chattel mortgage on the ship under construction. The chattel mortgage is supplanted by a Government insured first preferred ship mortgage on delivery of the completed ships. Our investment bankers advise that the public offering should be made as soon as possible. When this recommendation was first made to us in March 1965, we immediately began to prepare the necessary documents for approval by the Maritime Administration. The Westhampton decision of April 5 caused us to delay a bit but the papers were delivered to the Maritime Administration in early May. American President Lines, Ltd., is anxious to proceed with an offering to the public, but of course it is unwise to seek commitments from lenders without the necessary approval of the Maritime Administration assuring title XI insurance coverage. Amid uncertainty as to the broad legal implications of the Westhampton decision, time passes while the need to sell bonds becomes more urgent. Quite justifiably, in the unsettled circumstances resulting from the court decision, the Maritime Administration must delib erate before proceeding with the necessary approvals which will enable us to offer the bonds to the public. Amid uncertainty, I am reluctant to approach the marketplace, yet my company soon will need funds. Prompt passage of S. 2118 seems the only timely way to dispel uncertainty. Other CASL companies desire to issue merchant marine bonds also, one before December 1965, to finance ship construction under their mandatory replacement programs. They have found merchant marine bonds the only means of raising private capital for such purposes at reasonable interest rates. The interest rates are acceptable to lenders principally because of the characteristics of the bonds and the security offered. In the opinion of the CASL companies, continuation of the present uncertainty will jeopardize the market acceptance of future issues at reasonable in terest rates. American President Lines, Ltd., is also confronted with another problem because of the Westhampton decision. Once again, it will be first among the CASL companies required, sinces the Westhampton decision, to deliver a first preferred ship mortgage as security for merchant marine bonds now outstanding. The bonds were issued on August 27, 1963, and at present they are secured by bond proceeds in escrow and chattel mortgages on three ships now under construction by National Steel & Shipbuilding Co. at San Diego, Calif. When each ship is delivered by the yard, we must deliver a first preferred ship mortgage to the trustee for the bondholders in substitution for the security of the chattel mortgage on the ship. It is currently estimated by the shipbuilder that the first of the ships will be delivered on October 11, 1965. On that date the validity of the first preferred ship mortgage which we propose to deliver may be questioned unless prior action is taken to dispel the uncertainty. In summary, CASL companies who issue merchant marine bonds will encounter situations similar to those which confront American President Lines, Ltd. My company faces a need to issue new merchant marine bonds within a relatively short span of time and before November 1965. Also, on October 11, 1965, or whenever the first ship is delivered, my company must deliver a valid first preferred ship mortgage to the trustee for bondholders under an already outstanding issue of merchant marine bonds. The cloud raised by the Westhampton decision cannot be dissipated completely before those dates except by legislation such as S. 2118. On behalf of the Committee of American Steamship Lines, I appreciate the opportunity to be heard on this urgently needed legislation. Senator BARTLETT. Thank you. Mr. Foster? Mr. FOSTER. No questions. Senator BARTLETT. Mr. Kenney? Mr. KENNEY. Can you give us a quick indication of what it really means to APL in terms of dollars, for instance, if we don't act on this bill? Is there a convenient measure of what you think it is going to cost you? Mr. SCHREINER. Yes, sir. We expect, it is our program, to borrow about $5 million per ship. There are four ships currently under the contract. As a matter of fact, we have an option to add a fifth ship to that contract, so it is between $20 and $25 million that we are talking about at this time. Mr. KENNEY. It isn't that the failure of the passage of the bill won't cost you $20 or $25 million? Mr. SCHREINER. It won't cost you that. Mr. KENNEY. It affects your financing? Mr. SCHREINER. It affects us as far as I understand it, from counsel I have had, it affects seriously our ability to obtain that kind of money in the market. Mr. KENNEY. Thank you. Senator BARTLETT. The yard might not deliver the ships? Mr. SCHREINER. That gets into issues- Mr. Davis, will you return for a minute? I think the record ought to contain some information as to the experience of the Government, its financial experience under title XI. Has the Government lost money, has the Government made money, what are the facts? If you don't have all the answers readily available, you may submit it in writing. Mr. DAVIS. I think it would be best if we submitted a statement to that, Senator, and we will be happy to do so. Senator BARTLETT. Fine. Thank you. (The statement follows:) STATEMENT OF MARITIME ADMINISTRATION'S EXPERIENCE UNDER TITLE II, MERCHANT MARINE ACT, 1936, AS AMENDED The history of the Maritime Administration's Federal ship mortgage insurance program (title XI) shows a sustained congressional intent to implement the provisions of title XI, first enacted in 1938, so as to provide Government insurance to a degree necessary to assure private financing of the construction, reconstruction, or reconditioning of U.S. flag merchant vessels. This congressional intent is evidenced by a succession of liberalizing amendments to title II, culminating in 100-percent insurance of the unpaid mortgage principal, and interest, payable in cash upon the occurrence of specified defaults in the shipowners' mortgage obligations and the assignment of the mortgage by the mortgagee to the United States. Until the 100-percent insurance provision was incorporated in title XI, the program failed to attract private capital to the ship mortgage field as only two insurance contracts, aggregating approximately $2,400,000, were approved. Under the impetus of the 100-percent insurance in 1956 and the subsequent amendments to title XI which stimulated the sale of title XI insured bonds to the public, the program has grown to a total of 96 ships, representing ship con struction costs in excess of $1 billion, and title XI insured obligations of almost $600 million for the following: Total ships 44 31 10 11 96 16 11 17 79 The mortgage on the tanker Gold Stream of Red Hills Corp., was foreclosed and $3,410,495.37 was paid to the mortgagee. This ship was sold to the Penntrans Co. for $2,112,000. The mortgage on the Carib Queen of TMT Trailer Ferry, Inc., was foreclosed and the Government paid $4,087,292 to the mortgagee. This ship, renamed the USNS Taurus, is on loan to the Navy Department, without charge, and is being operated by the MSTS as a roll-on, roll-off ship for military vehicles, filling a vital role for defense purposes. The mortgage on the freighter Coast Progress of Coastwise Line was foreclosed, involving total obligations to the title XI fund of approximately $1,200,000. This ship was sold for $751,500 to Matson Navigation Co. The mortgage on the tanker Titan of Overseas Oil Transport Corp., was foreclosed and $11,945,282 was paid the mortgagee. The ship was sold to Globe Seaways, Inc., for $8,325,000. Upon assignment of the mortgage on the roll-on, roll-off vessel MV New Yorker of Containerships, Inc., $3,253,086.85 was paid to the mortgagee. Foreclosure has been averted by successive charters, extending until 1975, which provide revenues more than sufficient for mortgage debt service. The mortgage on the passenger ship Leilani of Hawaiian-Textron, Inc.. was foreclosed involving total obligations to the title XI fund of approximately $5 million. This ship has been sold to American President Lines for $3,200,000, renamed the SS President Roosevelt, and after undergoing extensive reconversion work, is now an addition to the American transpacific passenger service, financed once again under title XI. Additional defaults were averted by temporary financial assistance in the form of advances and deferments of principal payments, shown on exhibits A and B, respectively. The outstanding obligations for the 79 ships currently under title XI approximate $425 million. In addition applications are pending for title XI insurance on 31 ships with an estimated total cost, excluding construction-differential subsidy, of $132,283,900 with potential insured mortgages of $99,213,500. With the Government's prompt fulfillment of the pledge "of the faith of the United States to the payment of interest on and the unpaid balance of the principal amount" (sec. 1103 (e) of the Merchant Marine Act, 1936, as amended) in the six mortgage defaults referred to above, title XI, insured obligations have attained a very high degree of acceptability in the financial community and with the investing public. As the program has grown in favor, the title XI insured obligations have come to be considered almost comparable in security to U.S. Government bonds and the interest rates are only slightly in excess of Government bonds of like maturities. In addition, the title XI program has obviated the need for direct Government financing which would involve the appropriation of hundreds of millions of dollars; it has lent essential support to the large ship replacement program made necessary by the overage factor in the American merchant marine and the need for efficient ships to serve the commercial and national defense needs of the United States; it has created and encouraged a greater interest in the American merchant marine; and by producing lower interest rates for ship mortgage obligations it has lowered the cost of ownership and operation of vessels under U.S. flag. minimizing the Government's liability for title XI insurance and improving the general economy of the United States. The Federal ship mortgage insurance revolving fund, from which title XI mortgage insurance obligations are paid, has an annual gross income of approximately $3 million from investigation fees and insurance premiums. The fund has a retained income or net worth of approximately $10 million (derived solely |