The U.S. Maritime Administration is facing the biggest loan default in its history -- one that would cost the taxpayers $220 million -- as the result of a bankruptcy filing this week by one of the nation's largest oil-drilling firms, company and federal officials said yesterday.
Citing last week's drop in oil prices, Global Marine Inc. of Houston confirmed it would default on government-guaranteed bonds that financed the construction of 12 oil-drilling vessels. The ships were built under a controversial federal ship-financing program that already has been been devastated by a spate of risky investments and the worldwide shipping slump and now is facing a new wave of bankruptcies as a result of the plunge in oil prices.
Federal officials said that, after the Global Marine default, they will have paid out a record-breaking $865 million on hundreds of shipping bankruptcies over the last 3 1/2 years. Because the agency's reserve fund to cover defaults ran dry last spring, $675 million of those payouts is coming directly from the U.S. Treasury.
The Global Marine collapse is considered the first major domestic casualty of last week's drop in oil prices. The company, which launched a major $1.5 billion debt-financed expansion after the oil boom of 1979, has been crippled by a continuing slide in oil prices that has sharply contracted the market for drilling rigs. The company, which lost $220 million last year on $379 million in revenue, began meeting with its bankers and other creditors in May to work out a rescheduling agreement and stopped making payments on all its debts -- except for loans backed by the Maritime Administration -- in late July.
Jerry Martin, Global Marine's senior vice president and chief financial officer, said yesterday that the firm had no choice but to throw in the towel and file for bankruptcy-law protection once oil prices plunged below $20 a barrel last week.
"That was the straw that broke the camel's back," Martin said. "We needed to see that the market was going to get better, but that the drop in oil prices just pushed back that day even further."
Martin said he notified the Maritime Administration, the company's largest single creditor, on Monday that Global no longer would meet any payments on its federally backed loans of $220 million, and that the agency would be liable for paying bondholders. Technically, these loans will not be in default until the bondholders demand payment, but Martin made it clear that this is inevitable.
"I certainly expect that's going to happen," Martin said. "They're not going to get their money from us."
In addition, Martin said the firm's unpaid creditors include government agencies in Canada, Singapore, Finland and France that had extended similar concessionary financing to build oil rigs in their countries. The largest of these is the Economic Development Corp. of Canada, which had directly lent Global Marine $100 million.
Given the dire straits of the oil-drilling business, the Global Marine default also could be the beginning of a string of similar events. Starting with the oil boom of the 1970s, the Maritime Administration began using its Title 11 program to promote the construction of offshore drilling rigs and service vessels at U.S. shipyards. Today, nearly one-third of the $6.5 billion in outstanding loan guarantees under the program is for such projects, including 62 drilling rigs, and 3,552 other vessels, tugs and barges.
Maritime Administrator John Gaughan said that "the bulk of my problem" lies with loans to oil-related drilling rigs, supply vessels and inland barges, all of which are undergoing a "basic restructuring."
"My agency needs to recognize that we are going to have additional parts of our portfolio at risk," Gaughan said. "It is tough to have any kind of magic wand to solve it."
Gaughan said the spate of defaults "clearly diminishes support for the program," but that he would not "second guess" decisions made years ago.