By Tom Ewing 

NOAA Revisits Vessel Funding Loan Program

 

January 1, 2019



On November 2 the National Oceanic and Atmospheric Administration (NOAA) proposed a change within the National Marine Fisheries Service (NMFS) that would allow the Fisheries Finance Program to provide loans for new or reconstructed fishing vessels. NOAA writes that this change could provide needed new capital to help replace and rebuild aging fishing vessels. Bigger picture, the change could “help preserve the economic benefits the nation derives from its commercial fishing fleets.”

New investment is needed. The vessels in the North Pacific Fleet, based in Washington, are 40 years old, on average, according to a report from the McDowell Group, a consultancy that worked on a 2016 analysis for the Port of Seattle and the Washington Maritime Federation. Amazingly, this includes six vessels built between 1910 and 1919 – the same number built between 2010 and 2016! McDowell defines the North Pacific Fleet as containing 414 federally permitted vessels of more than 58 feet in length. Most vessels – 175 – were built between 1970 and 1979.


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Currently, with one regional exception, the Federal Fishing Program (FFP) provides direct loans to fishermen, but not for vessels. If the proposed rule is adopted, vessels would be brought into the loan program but only for vessels working in fisheries “subject to managed limited access systems that are neither overfished or subject to overfishing.” There would be no other changes to FFP’s Fishing Vessel, Fishing Facility and Individual Fishing Quota Lending Programs.

In 2016, the Coast Guard Authorization Act provided new financing authority for FFP for construction or reconstruction “of fishing vessels in a fishery that is managed under a limited access system.” Limited access offsets at least some concerns about new vessels and over-fishing.

The regional exception is important for Northwest fishermen because the Magnuson-Stevens Fishery Conservation and Management Act already allows vessels of more than 165 feet in length in Pacific Northwest fisheries to be considered for construction loans. If NOAA’s idea is adopted loan availability would extend nationwide and it would expand in the Northwest because vessels of less than than 165 feet could benefit. In fact, one of NOAA’s open questions is what time-frames should be expected for the construction of a new fishing vessel of fewer than 100 feet, or more than 100 feet?

NOAA is proposing the rule because of concerns within commercial fisheries that private commercial markets improperly evaluate the risk associated with capital needs of the fishing industry, leading to onerous payback periods and interest rates. The FFP’s authorized annual lending is $100 million and limited by statute to a total outstanding principal balance of $850 million.


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NOAA’s funding-loan proposal is not exactly new. This isn’t the first time such a loan program was formally proposed. A similar program change was published in June 2014 as an “advance” notice of proposed rulemaking. After a public comment period, however, the idea languished. There are many similarities between the older idea and newer proposals. The newer document, however, is more developed and more specific, although many issues still await final decisions.

One important issue, for example, is how NOAA might best structure loan financing. In a section called “vessel construction borrowing opportunities” NOAA presents two ideas:

• Direct construction financing. FFP would provide up to 80 percent of the cost of financing a new fishing vessel during its construction. The vessel owner would commit 20 percent to the project and keep a reserve of as much as thirty (30) percent of the estimated cost to cover potential cost overruns. Or, in lieu of a reserve account, the vessel owner would be responsible for securing a completion bond or insurance, as approved by the FFP. The program would make periodic payments to the shipyard as key milestones were met. This would necessitate the vessel owner closing multiple loans (with closing costs) over the construction period and accruing interest. Vessel construction would have to be completed and funded within five years.


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• Take-out financing. FFP would evaluate a new vessel construction project and, based on that evaluation, make a commitment to refinance non-FFP construction loans after completion of the construction. With take-out financing, the vessel owner could secure prime-rate construction financing in the private sector. Once the vessel was successfully completed (including sea trials), fully licensed and permitted in its intended fishery and the vessel owner was in compliance with all loan terms, NMFS would disburse funds to the construction financing lender. There would be just one closing, which would refinance up to 80 percent of the eligible costs of construction. Agency staff writes that project risk with this option would be lower than direct construction financing.

Another set of issues and questions revolves around replaced vessels. NOAA seeks comments on whether a replaced vessel should be allowed to operate in the same federally managed fishery or a different fishery or whether it should be scrapped altogether, which, in a way, means a vessel has zero “trade-in” value. As proposed, NOAA would not allow a replaced vessel to be transferred to a non-regulated fishery.

Within the fishing industry there is support for NOAA’s expanded funding. In response to NOAA’s 2014 notice the Washington State Department of Commerce and the Port of Seattle wrote that they strongly supported “the change to federal policy to support loans and loan guarantees for construction and reconstruction of commercial fishing vessels.”

State and Port officials are taking a close look at NOAA’s new proposal. “We look forward to looking into the details of the (new) Proposed Rule Making to ensure that sustainable fisheries can access crucial financing mechanisms,” Washington State officials said through a spokesperson. Shipbuilding is big business in Washington, of course. Officials estimate the value of new construction to be $785 million over the next 5-8 years. The North Pacific Fishery is estimated to have a $10 billion overall economic impact in Washington. Bottom line: officials would welcome a federal partnership to alleviate the major barrier of accessing financing.

Brian Pawlak is with NOAA’s Fisheries Management and Budget Office. He was asked why this idea is being revisited now. He noted there is no required time frame after an initial Notice of Proposed Rulemaking to promulgate rulemaking. He cited significant support from industry for this type of financing, and, just as important, the proposed rule supports the Administration’s economic goals.

The Freezer Longline Coalition, based in Seattle, was among the industry groups who commented on NOAA’s 2014 proposal. In remarks by Chad See, FLC’s Executive Director, See wrote that the “FLC strongly supports proposed actions to facilitate new and expanded financing opportunities for commercial fishing vessels in US fisheries.”

See was asked for his take on NOAA’s newer proposal, particularly the “direct” and “take-out” financing ideas. Again, it is overall supportive, although NOAA’s newer proposal is still under review.

See said that FFP’s annual $100 million authorization “will be helpful in moving new projects forward.” Regarding the two financing ideas See likes NMFS’ intent to provide borrowers with “multiple financing options” but specifics are still under review “to understand how they work and determine if there are improvements we would recommend to NMFS’ proposal.”

His conclusion: “This funding opportunity will provide an additional tool for our members to afford the costs of modernizing our fleet. It will help FLC members to better manage the financial commitments required.”

Tom Ewing is a freelance writer specializing in energy, environmental and related regulatory issues.

 
 

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