What is it and what does it do?
The Maritime Security Program (the “MSP”) is a U.S. government program under which a fleet of commercially viable, militarily useful merchant ships active in international trade, are readily available to support the U.S. Department of Defense during times of conflict or in other national emergencies. The MSP was established in 1996 as part of the Maritime Security Act under President Clinton, and continues today under the National Defense Authorization Act for Fiscal Year 2020.
Under the MSP, the United States government is authorized to enter into congressionally funded, long-term operating agreements with privately-owned U.S.-flag commercial vessels and their civilian U.S. citizen crews. The MSP program provides a retainer incentive to vessels in exchange for their availability during times of war or national emergency, at which time, the owner party to the operating agreement must make their ship and commercial transportation resources available upon request by the Secretary of Defense. The total annual stipend allocated to the MSP fleet, which shall not exceed 60 vessels in any given fiscal year, is current set at $5.3 million per ship for fiscal years 2023 through 2025; $5.8 million per ship 2026 through 2028; $6.3 million per ship for 2029 through 2031; and $6.8 million per ship for 2032 through 2035.
What types of vessels and owners are eligible to apply for the MSP?
From time to time, the U.S. Maritime Administration ("MARAD”) requests applications from qualified candidates to enter into MSP Operating Agreements by publishing a notice in the Federal Register. Qualified candidates own a U.S. documented vessel (which is not required to be a Jones Act vessel), or a vessel which the owner has demonstrated an intent to have documented under the U.S. flag (provided such vessel is less than 10 years of age). MSP vessels must also be less than 15 years of age, unless such vessel is a lighter aboard ship vessel, in which case the vessel may be 25 years of age or less. The types of vessels accepted include a broad range of ocean common carriers, and the current MSP fleet is made up of 18 roll-on / roll-off ships, 5 heavy lift ships, 28 container ships, 7 geared containerships, and 2 cable security ships.
In addition to submitting the above vessel-specific data, applicants must also submit a citizenship affidavit (MSP vessels must be owned and operated by a Section 2 Citizen, or Owned by a Section 2 Citizen or a US Citizen Trust and demise chartered to a non-Section 2 Citizen), financial information, copies of their bylaws or other governing instruments, and information regarding maritime related affiliations, bareboat charter arrangements, their intermodal network (i.e., its operating and transportation assets, including vessels, container stocks, trucks, railcars, terminal facilities, and systems used to link such assets together, the diversity of their trading patterns (i.e., a list of countries and trade routes serviced along with the types and volumes of cargo carried), and their military utility. Additionally, the priority with which the MARAD will award agreements based on application characteristics is publicly available.
What are some unique considerations for owners and investors?
When considering an application for participation in the MSP in the future or investing in a vessel owner with MSP vessels, among other things, owners and investors should note the following:
1. Foreign ownership possibility. One of the permissible citizenship structures for an MSP vessel allows for foreign investors or a foreign parent company to indirectly own an MSP vessel. In these situations, a “documentation citizen” can obtain a “registry” endorsement for the Vessel, allowing the Vessel to be eligible to trade internationally under the US flag, with US citizens controlling the owner by virtue of a demise charter to a “Section 2 citizen”, while ultimately owned by non-U.S. citizens. The MSP vessel would, of course, be required to be demise chartered to a Section 2 citizen. In such instances, income from the MSP Vessel could claim exemption from U.S. federal income tax under Section 883.
2. Flexibility to replace vessels. Owners should be aware that they may have the flexibility to replace an MSP vessel under an MSP Operating Agreement with another vessel that is eligible to be included in the MSP with government approval of the replacement vessel, e.g., when the MSP vessel “ages” out of the MSP.
3. Termination provisions. MSP Operating Agreements generally have owner-friendly termination provisions. In particular, owners have the right to terminate upon 60 days prior written notice, and material failures by an owner to comply with an MSP Operating Agreement are generally curable, with owners being provided a reasonable opportunity to comply with the MSP Operating Agreement before the government can terminate.
4. Impacts to their existing vessel operations. For instance, if an owner has already secured employment for a specific vessel, the owner may, by virtue of the terms of the awarded MSP Operating Agreement, be required to terminate an existing contract, depending on such MSP Operating Agreement’s restrictions on third party, long-term charters.
5. Debt Financings for MSP vessels. Lenders considering providing a loan secured by an MSP vessel and partly underwritten based on the subsidy provided under the MSP Operating Agreement for such MSP vessel should ensure they understand the impact of a vessel being subject to an MSP Operating Agreement, as well as their rights and enforcement abilities.
