A Checklist: What to Expect When Financing Vessel Construction

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When seeking construction financing for a proposed newbuilding, shipowners should understand and be prepared to address the particular concerns that lenders have in assessing risk and documenting vessel construction projects.

When deciding whether to approve a construction financing loan, lenders focus on certain key factors:

• Does the shipyard have the requisite experience, manpower and financial wherewithal to complete the project? To address this concern, shipowners should deal only with established builders with proven records of successfully completing vessel construction projects, preferably involving the type of vessel to be financed.

What is the credit strength of the shipowner? If the lender will not be financing the entire cost of construction, the shipowner must be able to show that it can fund any unfinanced portion of the cost as well as any owner furnished equipment. As with any loan, the financial strength and operating experience of the shipowner also will be important to the lender’s assessment of the shipowner’s ability to operate the vessel profitably and make debt service payments.

• Is the shipowner overpaying for the vessel? Shipowners should be prepared to demonstrate that the construction cost is in line with vessels of similar type. Prudent lenders consult with appraisers to help them evaluate the cost.

• How strong will the market demand for the vessel be? As with any business loan, the lender will want to see realistic and verifiable projections of the vessel’s earning potential after construction. In optimal cases, a ship is constructed for a specific customer of the shipowner and committed under long term services agreements or charters with firm competitive terms...

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