Programme financing for the EU defence industrial base: what banks need to lend

Europe's defence industrial base is in the middle of a scale-up that no participant in it has run before. McKinsey's recent estimate puts the total capital requirement at roughly €1 trillion over the coming decade. Oliver Wyman's complementary work sets the operational challenges out in similar order of magnitude. National defence budgets, when consolidated across the EU and the UK, will cover a meaningful share of that capital. They will not cover the whole. The balance has to come from private banks, and that requires a set of structural conditions that, until 2024, were not consistently in place.

This note sets out what those conditions are, where they stand, and what they imply for any party — sovereign, prime, or upstream supplier — that needs to convert a strategic-register concept into a bankable project.

What has held bank lending back

European banks have not been categorically unwilling to lend to defence. Several have maintained defence-prime exposure for decades. What has been weak is the willingness to scale that exposure into industrial-base expansion at the pace and across the breadth that the current scale-up requires. The reasons divide into three.

The first is ESG classification. The EU Taxonomy and the various sustainable-finance regulations have, in their drafting, not been explicit on the treatment of defence and dual-use industrial activity. Some banks have inferred from the silence that defence lending sits outside the activities they can fund under their sustainable-finance commitments; others have made the opposite inference. The result is inconsistent treatment across institutions and a chilling effect on lending that the regulatory framework did not, in fact, intend.

The second is political-risk tenor mismatch. Defence industrial-base projects often require eight-to-fifteen-year amortisation profiles. The political budgeting cycles in most EU member states are five years, frequently shorter in practice. A bank lending against a national procurement contract has historically had to assume that some portion of the projected revenue is exposed to a future government's right to renegotiate. The risk premium that builds in is the difference between a bankable deal and an unbankable one.

The third is the absence of price discovery on inputs. For the new upstream segments of the European industrial base — cotton linters for propellant, energetic stabilisers, secure rare-earth and precursor chemistry — there is no liquid market price. The bank's credit committee has no benchmark against which to test the project's economics, and the conservative default is to decline.

The bank's willingness to fund the project is a function of three things: how the regulatory framework treats the activity, how durable the offtake commitment is, and how visible the input pricing is.

The frameworks that have changed

Through 2024 and 2025, each of the three problems has begun to move.

On regulatory classification: the European Commission's 2024 European Defence Industrial Strategy explicitly affirms defence industrial-base activity as strategically necessary and compatible with EU policy. The EBA's 2025 follow-up provides supervisory clarity on bank treatment of defence exposure. Several major European banks have, in the months following, formalised internal policies that permit defence industrial-base lending at scale, with appropriate exclusions for prohibited categories. The ESG ambiguity has not fully resolved, but the trajectory is clear.

On tenor and political risk: the EDIRPA programme, the European Defence Fund, and the SAFE instrument now provide co-investment structures that distribute political risk across multiple member states and the Commission. NSPA-routed procurement, where applicable, gives the offtake a NATO sponsorship structure that is more durable than any single national contract. The EBF's 2025 paper is unusually specific on the contractual features banks need to see for these structures to work: multi-year volume commitments, indexation clauses for raw-material cost, take-or-pay provisions where the project economics require them.

On input price discovery: the underlying problem has not gone away, but the bridge to it has improved. ECAs are increasingly willing to take a senior risk position on the upstream-input segment of a defence project where the strategic case is documented, which gives the funding bank a credit-enhanced exposure rather than an unenhanced one. Sovereign-sponsored offtake at the input level — where it exists — has the same effect.

What a bankable defence industrial-base project actually looks like

A project that meets the bank's threshold in 2026 will typically present five characteristics.

It will have multi-year offtake from a contractually capable counterparty. The counterparty should be a national ministry, a multilateral procurement vehicle such as NSPA, or a tier-one industrial prime acting under back-to-back national orders. The tenor of the offtake should match the financing tenor; the volumes should be binding rather than indicative.

It will have raw-material supply security. The inputs to the offtake should be sourced from jurisdictions the bank can defend at credit committee, with multi-year supply agreements that the bank can verify. For projects in the energetics chain, this specifically means linter supply or pulp substitution agreements with named counterparties.

It will have explicit regulatory alignment. The project should be compatible with the European Defence Industrial Strategy and, where applicable, eligible for EDIRPA, EDF or SAFE co-investment. The compliance with EU dual-use and export-control regimes should be documented on the front end.

It will have an appropriate guarantee structure. For most projects, this means an ECA wrap from a European agency — UKEF, Bpifrance Assurance Export, Euler Hermes (Allianz Trade), Sace, EKF — that takes a defined share of the political risk and brings the loan to a credit-enhanced rating. For larger projects, multiple ECAs may co-cover.

It will have transparent economics. The cost basis on inputs, the pricing structure with the offtaker, the indexation mechanism, and the amortisation profile should all be visible to the bank from term sheet through closing. Hidden assumptions are how diligence stalls.

What this means for the advisor

A boutique advisor working on European defence industrial-base mandates in 2026 will operate principally at the structuring layer. The strategic case is rarely the difficult part; it has usually been articulated by the time the project reaches financing. The financing case is the difficult part. It requires the sequence of contractual signals above to be assembled in the right order: regulatory alignment first, offtake commitment second, raw-material supply third, financing structure fourth, ECA wrap last.

Each of those steps has parties who do not, by default, talk to each other. The Commission and the supervising authority work on the regulatory layer; the ministries and NSPA work on the offtake layer; the primes and the upstream suppliers work on the production layer; the banks and ECAs work on the financing layer. The advisor's role is to sequence the conversations and the contracts so that each layer's commitment unlocks the next.

The work is not glamorous. It is paper and meetings and contract drafting. It is also what the difference between an announced project and a funded project is made of, and what the European industrial base most needs in the next twenty-four months.