How Newbuilding Financing Works: From Budget Planning to Bank Deals

Davide Ramponi
20. Feb.
5 Min. Lesezeit

My name is Davide Ramponi, I’m 20 years old and currently completing an apprenticeship as a shipping agent in Hamburg. On this blog, I take you with me into the exciting world of shipping – sharing my personal experiences, lessons from the industry, and insights as I move toward becoming a specialist in Sale & Purchase – the trading of ships.

Newbuilding financing scene with ship blueprint, contracts, and advisors discussing funding as a vessel is built in the background.

One of the most fascinating (and complex) aspects of the shipping world is how shipowners finance the construction of new vessels. Behind every gleaming new tanker, container ship, or offshore vessel lies a carefully orchestrated financial structure that brings steel and design to life.

But how exactly does this financing process work? What do banks expect from shipowners? What risks are involved – and what successful models exist to learn from?

In this post, I’ll give you a deep dive into the financing of newbuildings – a topic that’s as strategic as it is essential for the future of global shipping.

Step 1: Project Development and Budget Planning

Before any bank or investor gets involved, shipowners must start with solid project development. This is the foundation on which financing – and ultimately, the ship itself – will rest.

A Clear Vision for the Vessel

The owner defines the purpose of the ship:

Will it be a container ship, a bulk carrier, or an LNG tanker?
Will it operate in a specific region or under special regulations (e.g. Arctic routes or environmental compliance)?

This phase often includes:

✔ Selecting a ship design

✔ Consulting classification societies

✔ Engaging a shipbroker who specializes in newbuildings

Budget Planning

Next, a detailed cost estimate is prepared. This includes:

Shipyard costs (the largest portion)
Design and engineering fees
Financing and legal costs
Supervision and project management during construction
Contingency buffer for delays or price adjustments

💡 Pro tip: Many projects also calculate the Total Cost of Ownership (TCO) over 10–15 years to evaluate long-term viability.*

Once this groundwork is laid, the owner can begin looking for the capital to bring the plan to life.

Step 2: Identifying Sources of Financing

Newbuildings are capital-intensive. Depending on the type and size, costs can range from USD 15 million for a small feeder vessel to over USD 250 million for a large LNG carrier. Very few shipowners can pay this out of pocket – which means external financing is a must.

Here are the most common sources:

1. Bank Loans (Senior Debt)

This is the traditional route. Banks provide the majority of the financing – often 60–80% of the vessel’s cost – in exchange for collateral (usually the ship itself).

Requirements for bank financing:

A detailed business plan
Ship valuation
Evidence of charter contracts or market demand
Equity contribution from the owner

2. Equity Capital

The shipowner or investor group contributes their own capital – often 20–40% of the total budget. This is essential to show commitment and reduce risk for banks.

Sources can include:
Corporate funds
Private investors
Joint ventures

3. Export Credit Agencies (ECAs)

If the ship is being built in countries like South Korea, China, Japan, or Norway, their ECAs often provide support – especially if key equipment is locally sourced.

Example: Korea’s KEXIM Bank or China Exim Bank may provide attractive financing terms tied to domestic shipyards.

4. Leasing and Sale-Leaseback

Some shipowners enter into leasing agreements where the lessor funds the newbuilding and leases it back for long-term operation.

This structure allows flexibility and may appear off-balance sheet, which appeals to certain types of investors.

Step 3: Structuring the Deal and Signing Contracts

Once sources of capital are identified, it’s time to structure the actual financing package and finalize agreements. This is often the most complex phase – and where experienced brokers, lawyers, and financial advisors come into play.

The Key Contracts

Shipbuilding Contract (SBC) – Between the owner and the shipyard. Sets payment terms, specifications, milestones, penalties, and delivery conditions.
Loan Agreement – Between the shipowner and the bank. Sets out repayment terms, interest, collateral, and covenants.
Shareholder or Joint Venture Agreements – If equity is raised via multiple parties.
Charter Agreements (if pre-arranged) – These can significantly influence financing terms if a charter is secured in advance.

Payment Schedule

Typically, the shipyard requires payment in milestones:

10% upon contract signing
10–20% during construction phases (e.g., steel cutting, keel laying)
60–70% upon delivery

The loan is often disbursed in parallel with these milestones, based on verified progress.

What Banks Require from Shipowners

Banks don’t just hand out loans. Their decisions are based on risk assessments, track records, and financial strength. Here are typical requirements:

1. Equity Contribution

Shipowners must contribute a significant portion of the budget – typically 20–30% – from their own funds or via investors.

2. Credit Rating and Reputation

Banks favor owners with:

A solid history of operations
Proven ability to manage ships efficiently
Transparent financial reporting

New or smaller owners may struggle unless they offer additional security (e.g., parent company guarantees).

3. Detailed Business Plans

The bank wants to know:

What is the ship’s projected income?
Are there charter contracts in place?
How volatile is the segment (e.g., tankers vs. offshore)?
What’s the break-even rate?

The more robust the financial projections, the more confidence the lender will have.

Risks in Newbuilding Financing

Both banks and shipowners face real risks during newbuilding projects.

For Banks:

Asset Depreciation: Ships can lose value quickly, especially in downturns.
Market Risk: If freight rates fall, the ship may not earn enough to cover debt service.
Default Risk: If the owner defaults, repossessing and selling the ship can be costly and time-consuming.

For Shipowners:

Cost Overruns: Delays or design changes can increase expenses.
Overcapacity: Too many ships ordered at once can depress charter rates.
Regulatory Changes: Emission rules or safety standards can make a new vessel outdated before it’s delivered.

Risk management is therefore a central part of financing negotiations – and why lenders insist on careful structuring and compliance with covenants.

Examples of Successful Financing Models

Let’s look at a couple of real-world models that show how creative financing can lead to successful newbuilding projects:

Case 1: LNG Carrier Backed by ECA and Charter

A European owner wanted to build an LNG carrier in South Korea.

They secured a 15-year charter contract with a major energy company.
The deal was financed by a consortium of banks and KEXIM Bank.
80% of the financing was debt, with the remaining 20% in equity from a private investor group.

Result: The vessel was delivered on time, fully financed, and immediately profitable due to the fixed charter.

Case 2: Green Ferry via Leasing

A Norwegian company aimed to operate a zero-emission electric ferry.

They worked with an Asian leasing company that funded the full cost of construction.
The owner leased the vessel for 10 years with a purchase option at the end.
The structure also qualified for EU green incentives.

Result: Low upfront investment, access to new technology, and strong ESG profile that attracted additional charters.

Conclusion: Newbuilding Financing is the Bridge Between Vision and Reality

Building a ship isn’t just about steel and engines – it’s also about strategy, negotiation, and financial structuring.

From project planning and capital sourcing to loan contracts and delivery milestones, the process of financing a newbuilding is complex but essential. Shipowners must meet bank requirements, manage risks, and stay adaptable in a volatile market. But with the right partners and a sound business case, they can turn an idea into a ship that sails the world’s oceans.

I hope this post has helped you understand how newbuilding financing works – and maybe even sparked your interest in exploring this side of the shipping industry further.