MarAd Hits Insurer on Completion Bond

Friday, March 15, 2002

Reprinted from Tradewinds, March 15, 2002--The US Maritime Administration (MarAd) is jumping to the defence of its embattled Title XI loan-guarantee programme in a Mississippi courtroom even as budget-cutters sharpen their axes back in Washington.

MarAd is joining a shipowner's lawsuit over the aborted construction of a car carrier at bankrupt Halter Marine.

MarAd is trying to head off another embarrassing default scenario in which it would be left holding the financial bag on loans. Such blemishes have contributed to efforts by the Bush administration to strip funding for Title XI in the next federal budget.

In this case, MarAd seeks to force the Travelers Casualty and Surety company to honour a $70.15M performance bond supporting construction of the carrier for Pasha Hawaii Transport Lines (PHTL), a partnership of California-based Pasha and Van Ommeren Shipping of Connecticut.

Delivery had been scheduled for this summer.

"Both the shipbuilding contract and the vessel constitute collateral for MarAd's Title XI guarantee and have been put at risk by Travelers' delay," wrote attorneys for the US Justice Department.

"Further, Travelers' refusal to honour its bond obligation has increased MarAd's risk of financial loss and is frustrating the purposes of the Title XI program administered by MarAd," according to the complaint filed in a federal court in Mississippi.

Within the past two years, MarAd has seen defaults on both the American Classic Voyages (AMCV) $200M cruise project at Ingalls Shipbuilding and on efforts to revive the Fore River Shipyard in Quincy, Massachusetts.

With a congressional battle brewing over its budget allocation and Bush officials branding Title XI "corporate welfare", MarAd and Title XI hardly need another bloody lip.

The partially completed PHTL vessel has been sitting in limbo at the Mississippi shipyard since last July, when Travelers discontinued interim financing of the project. Halter had filed for Chapter 11 bankruptcy protection last April.

In its own lawsuit, PHTL contends Travelers is required to do one of four things: arrange for funds to complete the contract; undertake to complete the project itself; pay PHTL to complete the vessel; or deny liability and explain its reasoning.

To date, Travelers has merely offered to refund the payments PHTL has made thus far -- around $36m -- in return to possession of the hull and title to the vessel.

The offer does not meet its obligations, according to PHTL and MarAd.

Van Ommeren's general counsel, John Love, notes that PHTL is not in default of its own obligations. He adds that critics of Title XI should take heart in MarAd's intervention here.

"MarAd is doing exactly what they're supposed to be doing in compelling the insurer to keep its promises under Title XI," he said. "That's the way the program is supposed to work, and I have no doubt they'll get the money."