Refund Guarantee: The Critical Protection in Newbuild

While a vessel is being built at a yard, the owner carries yard risk on every milestone paid. What if the yard goes bankrupt, fails to deliver, or breaches the contract? Refund guarantee is the answer. It is non-negotiable in the newbuild world.

What this guide covers

What a refund guarantee is and how it works
Which bank issues it
Typical terms + scope
How owners and lenders use it
Turkish vs. international yards

Note: This page is educational. We do not recommend specific banks, amounts or fee levels — every project + yard + financing combination is different.

What is a refund guarantee?

A refund guarantee — also called an advance payment guarantee — is a promise from the yard's bank to the owner:

"If the yard fails to meet its contractual obligation, I will refund the advance you paid."

This brings the owner's risk down: instead of losing the money outright, the bank refunds if the yard fails.

How it works

Typical flow:

Contract signature → price + milestone payments defined
Refund guarantee draft → coordinated with the yard's bank
Before the first milestone: the yard's bank issues a refund guarantee letter to the owner
Owner pays the milestone → funds released to the yard
Before each subsequent milestone: the refund guarantee is renewed / amount increased
If the yard fails: owner calls on the bank → the bank refunds the paid amount
If delivery happens: the refund guarantee is released (vessel now exists)

Who issues it?

The refund guarantee is issued by the yard's bank — not the owner's bank. The logic:

The owner is already paying the yard
The bank knows the yard (years of credit relationship, credit standing)
The bank secures its exposure against the yard's balance sheet

Typical issuers:

Chinese yards: China Exim Bank, Bank of China, ICBC, etc.
European yards: KfW IPEX (Germany), DnB (Norway), HSBC, BNP Paribas
Turkish yards: Turkish banks (project by project) or internationally backed structures
Superyacht yards: often a general bank + class society alignment

Typical terms

1. Amount

Usually the full paid advance + sometimes interest
In some structures, a defined percentage of contract price

2. Tenor

Renewed by the bank with each milestone payment
Total duration: contract + delivery + grace period
Closed once delivery is approved

3. Call conditions

When the owner can call on the refund:

Yard goes bankrupt
Yard fails to deliver by the contract date (outside force majeure)
Yard materially breaches the contract
Pre-delivery build materially fails to meet spec

4. Quality of the issuing bank

Critical for the owner: the issuing bank must be strong. A weak bank local to the yard → recovery is hard in a crisis. An international investment-grade bank → safe.

How owners and lenders use it

Owner perspective

No milestone paid without a refund guarantee in place
Issuing bank quality checked
Letter terms (scope, call conditions) reviewed
Renewal check before each milestone

Financing bank perspective

The bank lending to the owner also takes the refund guarantee as collateral:

Refund guarantee is assigned by the owner to the bank
If the yard fails → the bank calls on the refund directly
This structure protects the bank from yard credit risk
The bank's residual exposure drops to owner credit risk only

Turkish vs. international yards

Chinese / Korean yards

Very strong refund guarantee culture
State banks (Exim Bank etc.) are standard players
Letter structures well-understood; financing banks familiar
Less common on the yacht side, dominant on commercial tonnage

European yards

Professional refund guarantee structures
Investment-grade banks issue them
Standard on superyacht and bespoke projects

Turkish yards

Refund guarantee possible, but structure is project-specific
Coordinated with Turkish banks
With international financing: Turkish bank + international reinsurance structure possible
Project size + yard track record → drives bank appetite

Common pitfalls

Weak bank issuing the refund → recovery is hard in a crisis
Narrow letter scope → owner is right but cannot collect
No renewal plan → guarantee tenor expires while a milestone is being paid
Ambiguous call conditions → yard defends, legal process eats years
Lender refuses assignment → owner carries the structure (incomplete)

FAQ

Who pays the refund guarantee fee?

The yard pays it — to its own bank. The owner doesn't pay directly, but the fee is reflected in the contract price.

Can a newbuild contract be signed without a refund guarantee?

In professional projects, no — risk is too high. In small projects, either the owner accepts the risk or an escrow + bond structure is used.

How long does it take to collect on a refund guarantee?

Depends on letter terms. On-demand guarantee: owner submits a demand, the bank pays within 30 days. Conditional guarantee: dispute, arbitration, months / years.

Critical for owners: an on-demand guarantee should be preferred.

Does the refund guarantee cover all milestones?

Typically yes — each paid milestone is added. But every project differs; some structures cover only certain milestones. Read the letter and confirm.

If I build at a Turkish yard, does a Turkish bank issue the refund guarantee?

Yes, but the structure is project-specific. If the yard has a credit relationship with a Turkish bank, that bank issues it; with international financing, it is integrated into that structure. Work with a financing advisor before the project.

Talk to us about your project: let us plan the refund guarantee structure + financing coordination together. Reach out via the contact form.