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Ships under construction

Construction finance for ships

The larger, post-Panamax-sized container ships costs around € 100 million to build. For this reason, secured external funding is often already needed during the construction phase of a sea-going vessel. Not only the client ordering the ship needs to borrow – the wide-ranging expenses to be borne by a shipyard carrying out the construction work also have to be prefinanced by a bank. Thus, long-term ship financing is, as a general principle, preceded by ship construction loans with shorter lives which vary depending on the type of vessel and on the shipyard’s productivity and sequential stages.


Collateralization through mortgages over ships under construction


The claims resulting from the financing during construction can be collateralized via a mortgage in respect of the ship under construction. The German Ship Rights Act (SchiffsRG) refers to a ship under construction as the “ship undergoing construction in a shipbuilder’s yard” (§ 76 (1) SchiffsRG). The mortgage over the new ship under construction can be created as the ship under construction materializes, i.e., pursuant to § 76 (2) SchiffsRG, as soon as the keel has been laid down, and the ship under construction has been clearly and permanently marked by a name or a number applied to a part of the keel that is to remain visible until the ship is launched.

The mortgage over the ship under construction covers the state of construction of the new vessel at any given time. As considerable payments have to be prefinanced not only for shipyard operations but also to purchase materials, the mortgage, moreover, covers the structural components on hand at the shipyard which are to be built into the ship under construction and which have been duly marked as such.

For a mortgage to be created in respect of the ship under construction, the vessel in question must be entered in the register of ships under construction (§ 77 SchiffsRG). This is done according to the provisions of § 65 ff of the Code on Ship Registers.

Determining the value of the collateral

If the loan claim which is secured by a mortgage in respect of the ship under construction is to serve as cover for a Ship Pfandbrief according to § 21 ff of the Pfandbrief Act, the status value of the ship under construction has to be calculated as the basis for determining the ship mortgage lending value. The ship MLV corresponds to the state of construction, and must be determined in accordance with the provisions of the Regulation on the Determination of the Mortgage Lending Value of Ships. In many cases, however, the ship is not included in cover until construction has been completed.

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