Coast Guard issues lease-financing rule

Rulings by the Coast Guard and the Maritime Administration affecting foreign lease financing of vessels in domestic coastwise trade have both sides of the issue pleased, but for different reasons.

In early February, the Coast Guard issued a final rule, effective immediately, that regulates documentation of U.S. vessels under lease-financing arrangements. The rule says owners or related parties must derive 50 percent of their revenue from financial operations to comply, with restrictions placed on the eligibility of owners directly involved in vessel operations.

Vessels currently operating under approved lease-financing arrangements may continue to operate if there are no material changes to the documentation.

Also in February, the Coast Guard and Marad issued a proposed rule that would, if adopted, amend the final lease-financing rule issued by the Coast Guard. Proposed amendments include whether the Coast Guard should prohibit or restrict the chartering back of a vessel to the parent company of the vessel owner or affiliate of the parent, the establishment of a three-year limit on coastwise endorsements issued before Feb. 4, 2004, and  whether applications for an endorsement under the lease-financing provisions should be reviewed and approved by an independent third party, such as Marad.

At issue, according to Bob Alario, outgoing president of the Offshore Marine Service Association, Harahan, La., is whether the ruling weakens the Jones Act. “The Coast Guard put some reasonable guidance into the questions, and they’re consistent to what we wanted. There is no weakening of the Jones Act,” he said.

The Coast Guard Authorization Act of 1996, approved by Congress, eased regulations spelled out in the 1916 Jones Act, which, in part, mandates that vessels engaged in the domestic trade be U.S. built, owned and crewed. In broad terms, the 1996 Act allowed exemptions to the ownership requirement to help boost foreign investment in the U.S. shipbuilding industry. For example, Congress relaxed the 75 percent vessel ownership requirement for lending institutions or leasing companies as long as the vessels were chartered to an operator that is 75-percent U.S. owned.

“But what has happened,” Alario said, “is that there is a handful of companies involved that are not bona fide lending institutions. They are actually vessel operators or affiliates who have distorted the intent of the Jones Act. When you have a company that is not in the lease-financing business that overnight becomes an operator, we get suspicious.”

Alario cited the deal announced last year between the French company Groupe Bourbon and New Orleans-based Rigdon Marine. The French company is providing $125 million in lease financing to Rigdon to build up to 10 deepwater supply vessels for the Gulf of Mexico. Alario said Groupe Bourbon is not a bona fide lending institution as defined by the regulations, so the deal skirts the 1996 Act.

Company president Larry Rigdon said he will sell the vessels back to a U.S. company and lease them back under a demise charter. He would then time charter the vessels out, perhaps to Groupe Bourbon. Similar arrangements have been approved in the past, he said.

Rigdon said he is OK with the Coast Guard ruling, but feels “it’s very unusual the way they wrote it. They have stretched the law. It is unusual that they are seeking an expanded period for public comment.

“They tried to do everything they could for the opponents, but I meet the rule. It could wind up in court. Overall, we’re happy about it. Our general questions have been answered. In the end the Coast Guard went as far as they could with the opposition, but our transaction is going forward. We’re pleased.”                  —Steve Heddericg

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