Every dollar called from investors repays the subscription line and also removes the uncalled commitment that secured it.
A capital call cures a subscription line borrowing base deficiency only partly, because each dollar called repays the loan and also removes the uncalled commitment that was securing it. The call needed is the deficiency divided by one minus the weighted advance rate on the commitments called. In an illustrative fund, a 25.0 deficiency at a 71.0 per cent weighted advance rate needs a capital call of 86.2, not 25.0: 3.45 times the shortfall.
Worked in full in The Fund Finance Professional by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
An illustrative closed-ended fund has a 400 subscription facility drawn to 380. The borrowing base applies an advance rate to each group's uncalled commitment. Figures in millions.
| Investor group | Uncalled | Advance rate | Base |
|---|---|---|---|
| Group A, rated institutions | 350 | 90% | 315.0 |
| Group B, designated investors | 200 | 65% | 130.0 |
| Group C, non-eligible | 50 | 0% | 0.0 |
| Total | 600 | 445.0 |
With 380 drawn, the fund has 65.0 of headroom. Then one Group A investor with 100 of uncalled commitment suffers an exclusion event, a downgrade below the rating threshold, say. Its commitment drops out of the base: 100 at 90 per cent is 90.0, the base falls to 355.0, and the fund is 25.0 over it.
Concentration limits are left out to isolate the mechanism. Where a cap binds, an exclusion and every dollar called also move the caps of the other investors, so the call has to be solved on the full register rather than with one weighted rate; the closed form below is the version without caps.
The fund calls capital pro rata from the 500 of remaining uncalled commitment, assuming conservatively that the excluded investor does not fund. Every dollar called repays one dollar of loan, and removes from the base the advance rate on the dollar called.
Weighted advance rate on the call = (250 × 90% + 200 × 65% + 50 × 0%) / 500 = 355.0 / 500 = 71.0%
Cure condition: drawn − X ≤ base − 0.71 × X
Call needed X = deficiency / (1 − weighted advance rate) = 25.0 / (1 − 0.71) = 86.2
In Excel, with the deficiency in C3 and the uncalled and advance-rate columns in D6:D8 and E6:E8: =C3/(1-SUMPRODUCT(D6:D8,E6:E8)/SUM(D6:D8)).
| Investor group | Share of call | Base removed |
|---|---|---|
| Group A, remaining 250 | 43.1 | 38.8 |
| Group B, 200 | 34.5 | 22.4 |
| Group C, 50 | 8.6 | 0.0 |
| Total | 86.2 | 61.2 |
After the call, drawn and base are both 293.8 and the deficiency is cured exactly. Of the 86.2 called, only 25.0 closes the gap; the other 61.2 replaces collateral the call itself destroyed. Only Group C's contribution is pure cure, because its commitment was never in the base.
A treasurer who calls exactly the deficiency, 25.0, repays 25.0 of loan and loses 17.8 of base. The loan falls to 355.0 and the base to 337.2: still 17.8 over, and now with the cure period running down. A second call of the same kind has the same problem in smaller form. The closed form gives the whole answer in one notice.
If the excluded investor still pays its pro rata share, its cash repays the loan without reducing the base, because its commitment no longer counts. The call is then spread over all 600 of uncalled commitment, the base lost per dollar falls to 0.59, and the cure needs 61.2, or 2.45 times the deficiency.
The better the investor base, the more expensive the cure. Call needed for the same 25.0 deficiency by weighted advance rate on the called commitments:
| Weighted advance rate | Call per 1.00 of deficiency | Call for a 25.0 deficiency |
|---|---|---|
| 50% | 2.00 | 50.0 |
| 60% | 2.50 | 62.5 |
| 70% | 3.33 | 83.3 |
| 80% | 5.00 | 125.0 |
| 90% | 10.00 | 250.0 |
A fund whose investors are all highly rated at 90 per cent needs a call of ten times the deficiency. That is the counter-intuitive cost of a strong base: a large borrowing base made of high advance rates is also a base that a capital call erodes almost as fast as it repays. A cash prepayment of 25.0 cures the same deficiency with no erosion at all, which is why a modest cash buffer is worth more to a heavily drawn fund than it looks.
The mistake is treating a capital call as cash that simply reduces the loan. It is an exchange: uncalled commitment, partly counted in the base, becomes cash, fully used to repay. The second mistake is timing. A call needs the notice period the LPA sets, ten business days in this illustration, and the cure period in the credit agreement may be shorter; the size of the call matters less than whether it lands in time. Size it with the formula, check the notice period against the cure period, and confirm whether the agreement counts called but unfunded capital in the base during the notice period.
Divide the deficiency by one minus the weighted advance rate on the commitments called: 25.0 / 0.29 here, a call of 86.2. The book's Northbridge facility, which loses its largest investor and cures the deficiency with a call, is worked in the free workbooks for this book. For how the base itself is built, including the concentration caps and the deficiency an exclusion creates before any cure, see how to calculate a subscription line borrowing base, and for the cost of carrying the line, the all-in cost of a subscription line.
Because calling capital converts uncalled commitment, which is collateral, into cash that repays the loan. Calling 25.0 in the illustrative fund repays 25.0 but removes 17.8 of borrowing base at a 71.0 per cent advance rate, leaving a deficiency of 17.8 after the call.
Yes. If the excluded investor pays its pro rata share, its cash repays the loan without removing any borrowing base, since its commitment no longer counts. The illustrative cure call falls from 86.2 to 61.2, or 2.45 times the deficiency instead of 3.45.
Dollar for dollar, yes: cash already held repays the deficiency of 25.0 with no loss of collateral, against a call of 86.2. Most funds hold little cash, so the practical choice is between a larger call, an amendment adding eligible investors, or a temporary reduction in the facility.
This article is one calculation from The Fund Finance Professional. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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