Construction Milestone Financing: Structure, Drawdown, Risk Management

In a newbuild project, financing is not disbursed in one shot as it would be for a purchase. Through the construction process, drawdowns happen milestone by milestone. This structure manages risk for the bank and optimises cash flow for the owner. This guide walks through construction milestone financing.

What this guide covers

The core logic of newbuild financing
The relationship between milestone payments and drawdown
The role of refund guarantee on the financing side
Owner equity vs. debt structure
Post-delivery conversion (transition to term loan)

Note: This page is educational. We do not quote specific interest rates, fees, or typical milestone percentages — every project, bank and yard combination is different.

The core logic

In a second-hand purchase, classic loan: cash disbursed once at closing, mortgage perfected, single drawdown.

Newbuild is different: the vessel does not yet exist. During construction:

Mortgage cannot be perfected (collateral doesn't exist yet)
Owner is paying milestones step by step
Bank disburses against each milestone
Bank's security on each drawdown: refund guarantee (issued by the yard's bank)

After delivery the vessel exists → mortgage is perfected → structure converts to a classic term loan.

Milestone payments + drawdown schedule

Typical structure (example):

| Phase | Milestone payment | Drawdown source | Bank security | |---|---|---|---| | Contract signature | 10–20% | Owner equity (typically) | – | | Steel cutting | 10–20% | Bank drawdown #1 | Refund guarantee | | Keel laying | 10–20% | Bank drawdown #2 | Refund guarantee | | Launching | 10–20% | Bank drawdown #3 | Refund guarantee | | Delivery | 20–40% | Bank drawdown #4 + final | Mortgage perfection |

The owner typically pays the first milestone from equity (bank takes no risk, yard risk sits with the owner). Subsequent milestones are drawn from the loan facility.

Refund guarantee on the financing side

Refund guarantee is not just an owner-protection tool — it's critical on the financing side as well:

The bank requires the refund guarantee to be assigned to it before each drawdown
If the yard fails → the bank calls on the refund (drawn amount is returned)
This structure protects the bank from yard credit risk

For depth: Refund guarantee

Owner equity vs. debt structure

Typical LTV (Loan-to-Value) in newbuild financing:

Yacht newbuild: 50–65% debt, rest in owner equity
Commercial ship newbuild: 60–75% debt (higher with a charter contract)
Superyacht: variable, depends on owner profile

Equity-first model: the owner funds the first milestones from equity, then the bank loan engages. This signals "the owner is serious" to the bank.

Construction loan features

1. Interest structure

During construction, typically PIK (payment-in-kind) — interest accrues, not paid; added to principal
Or interest-only — interest paid monthly, principal at delivery
Classic amortisation begins after delivery

2. Tenor

Construction period + post-delivery operating period
Typical total tenor: 7–15 years
Construction 1–3 years + post 5–12 years term loan

3. Fee structure

Commitment fee (pre-drawdown)
Arrangement fee (pre-contract)
Drawdown fee (on each drawdown)

4. Covenants

Owner net worth covenants
Yard performance covenants
Class society continuity

Post-delivery conversion

At delivery, the financing structure converts:

Final drawdown (often the largest tranche of the loan)
Mortgage perfection (the vessel now exists)
Refund guarantee is released (collateral is now the vessel mortgage)
Term loan structure activated (monthly instalment, maturity set)
Insurance policy loss-payee assigned to the bank

This conversion happens in a single day (closing day). Preparation starts well before.

Typical financing coordination steps

Pre-contract: bank pre-approval (indicative offer) obtained
Contract signature: financing structure finalised in parallel
First drawdown: steel cutting + progress report from the yard
Intermediate drawdowns: at each milestone, OR report + class society + refund guarantee updated
Pre-delivery: post-sea-trial preparation for delivery
Delivery: final drawdown + mortgage + conversion

Common pitfalls

Drawdown without refund guarantee — full yard risk on owner + bank
Insufficient owner equity — banks reject
Yard credit rating poor — finding a refund-issuing bank is hard
Variation orders not built into financing — surprise financing need
Currency mismatch — yard invoices €, loan in $ → FX risk

FAQ

Is newbuild financing more expensive than purchase financing?

Typically slightly higher. Reason: during construction there is no collateral (mortgage), only the refund guarantee. The bank takes more risk and seeks more return.

Does yard selection affect financing?

Directly. The bank evaluates yard credit, delivery history, and refund-guarantee-issuing bank. Institutional yard + strong refund bank → financing gets easier.

Can I get financing approval before contract signature?

You can get an indicative offer. Firm approval is usually post-signature, because the exact loan structure depends on contract terms (milestone percentages, delivery date, refund guarantee).

Can financing be obtained with less than 30% owner equity?

Hard. Typical bank requirement is minimum 30–40% equity. If there is also a charter contract (post-delivery revenue evidence), equity can be lower.

Do I choose the post-delivery term loan tenor?

Negotiable. The bank suggests a range (5–12 years), and it crystallises based on the owner's cash flow plan. On superyachts, typically 7–10 years.

Talk to us about your project: let us plan the newbuild financing structure, milestone drawdown schedule and post-delivery conversion together. Reach out via the contact form.