debt amortization at a rate that reflects the cost of capital or opportunity costs (the rate of return available through other investments). The shipowner will usually consider the alternative with the lowest NPV to be the most favorable. Typically, the lowest NPV is associated with financing that allows the shipowner to borrow the greatest percentage of the price, to be repaid over the longest period of time, at the lowest available interest rate and origination cost. At this time, U.S. Title XI loan guarantees can offer the best terms available worldwide, with loans of up to 87.5 percent of acquisition cost for as long as 25 years at fixed interest rates closely approaching those of U.S. Treasury bonds. It is expected that this competitive advantage will disappear when the recently announced financing agreement of the Organization for Economic Cooperation and Development (OECD) is fully implemented.

While at first glance the alternative with the lowest NPV is the best, there are other considerations. Beyond price and delivery, they include interest during construction, owner's supervision and plan review, attendant legal and underwriting costs, and other expenses included in the owner's total acquisition cost (capitalized cost).

Cash Flows

Cash flow considerations can lead a shipowner to select a financing scheme that does not have the lowest NPV. For example, if all debt repayments are delayed for three years, the shipowner may prefer this alternative (particularly if buying in a "down market"), even though total payments will be greater over time. The owner will consider manner of debt amortization, whether in equal annual principal amounts; "level debt" payments (like a typical home mortgage); or low amortization in the early years with a "balloon" payment at the end of the financing term.

Collateral Requirements

The collateral required of the shipowner by the lender will also be a major consideration in evaluating financing alternatives. One lender might require detailed financial information on all the owners of a vessel and personal as well as extensive corporate assurances or guarantees. Assignment of revenue streams from charters or other vessel-employment arrangements might also be required. Another lender may be satisfied simply with the ship as collateral for the loan, with few additional requirements. The potential variations and permutations are endless and play an important part in the shipowner's evaluation process.

Concluding Comments

This appendix has briefly considered a few aspects of ship financing. There are certainly more considerations, including the tax structure of ship financing,



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