A private credit fund's SPV facility lends against the loans themselves. The base moves with every mark, default and concentration breach, and it is easy to overstate.
Value each eligible loan at the lower of par and its mark, strip out ineligible loans and any excess over the concentration limits, multiply each bucket by its advance rate and add cash. For an illustrative direct lending portfolio worth 801.6, that gives a borrowing base of 494.4, an effective advance rate of 61.7 per cent, and 54.4 of headroom on 440 drawn. Applying the advance rates to par, non-accrual loans included, would overstate it by 41.6.
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 →
Many private credit funds borrow through asset-based facilities: the fund puts its loans into a special purpose vehicle, and a bank lends to the vehicle against them. Unlike a subscription line, which lends against investors' uncalled commitments, this facility lends against the portfolio itself, so the borrowing base moves every time a loan is marked down, defaults or grows too large. The terms below are illustrative; each facility's eligibility criteria and advance rates are negotiated.
| Collateral | Par | Mark | Advance rate |
|---|---|---|---|
| First lien loans, excluding the largest obligor | 540 | 99% | 70% |
| First lien loan to the largest obligor | 60 | 100% | 70% |
| Second lien loans | 100 | 95% | 35% |
| Recurring revenue loans | 80 | 100% | 50% |
| Loans on non-accrual | 30 | 40% | ineligible |
| Cash in the collection account | 20 | 100% |
Single obligor limit: 5 per cent of aggregate eligible collateral value. Facility commitment 500, drawn 440.
Eligibility criteria typically exclude loans that are in default or on non-accrual, loans to obligors outside permitted jurisdictions or industries, and loans that fail minimum size or covenant tests. Each exclusion removes a loan from the base entirely, whatever its mark.
Assigned value = MIN(par, par × mark), eligible loans only
First lien excluding the largest obligor: 540 × 99% = 534.6. The largest obligor: 60.0. Second lien: 95.0. Recurring revenue: 80.0. The non-accrual loans, worth 12 at their mark, drop out entirely. Aggregate eligible value: 769.6.
Limit = 5% × 769.6 = 38.48; excess = 60.0 − 38.48 = 21.52
The excess is still in the vehicle and still pledged, but it earns no advance. Eligible first lien value falls to 534.6 + 60.0 − 21.52 = 573.08.
| Bucket | Eligible value | Advance rate | Contribution |
|---|---|---|---|
| First lien, after excess | 573.08 | 70% | 401.2 |
| Second lien | 95.0 | 35% | 33.25 |
| Recurring revenue | 80.0 | 50% | 40.0 |
| Cash | 20.0 | 100% | 20.0 |
| Borrowing base | 494.4 |
In Excel, with assigned values in C2:C5, excess in D2:D5 and advance rates in E2:E5: =SUMPRODUCT(C2:C5-D2:D5,E2:E5). Availability is the lower of the base and the commitment: 494.4, so headroom on 440 drawn is 54.4. The base is 61.7 per cent of the 801.6 the portfolio is worth, while the facility is drawn to 54.9 per cent of it.
| Scenario | Concentration excess | Borrowing base | Headroom |
|---|---|---|---|
| Base case | 21.5 | 494.4 | 54.4 |
| First lien marks 5 points lower | 20.0 | 474.5 | 34.5 |
| Two first lien loans of 15 go on non-accrual | 23.0 | 472.6 | 32.6 |
| Single obligor limit 10% | 0.0 | 509.5 | 60.0 |
| Marks 8 points lower and 45 on non-accrual | 21.2 | 432.4 | -7.6 |
Two loans going on non-accrual cost more base than their own advance: 30 of par removes 21.8 of base, against 20.8 for the loans alone at a 99 per cent mark and a 70 per cent advance, because the shrinking pool tightens the concentration limit on the largest obligor, whose excess rises from 21.5 to 23.0. A looser obligor limit adds 15.1 of base but only 5.6 of headroom, because at 509.5 the 500 commitment binds instead.
In the combined stress, with first lien marks at 91 and 92 per cent and three loans of 15 on non-accrual, the base falls to 432.4 and the vehicle is 7.6 short. The facility will require that deficiency to be cured within a short period, typically by repaying debt, adding collateral or contributing cash. Adding first lien loans at a 91 per cent mark and a 70 per cent advance takes 12.0 of par; an equity contribution from the fund takes 7.6. The arithmetic of curing a subscription line deficiency is in how big a capital call cures a borrowing base deficiency.
Marks drive this base, and in many facilities the lender, not the fund, sets or can challenge them. A facility where the lender marks the loans moves faster in a downturn than one using the fund's quarterly valuations.
Applying the advance rates to par across the whole portfolio. On par, with the non-accrual loans in the first lien bucket and no concentration excess, the base reads 536.0, overstating capacity by 41.6 and turning 54.4 of headroom into 96.0. The three adjustments that matter are the ones that bite in a downturn: lower of par and mark, removal of defaulted loans, and concentration excess. A sizing model that leaves any of them out will tell the fund it has room exactly when it has none. For a facility that lends against a fund's NAV rather than its loans, see how to calculate a hybrid facility's borrowing base.
Here the base is 494.4, an effective 61.7 per cent of value, and it can disappear in one bad quarter of marks and defaults. Model the base scenario by scenario, not the headline advance rate. The Fund Finance Professional covers subscription lines, NAV facilities, hybrid structures and private markets financing, and the free workbooks for the book show why a borrowing base is not availability.
They are negotiated by asset type and vary with the market. Illustrative levels: around 70 per cent for first lien loans, 35 for second lien and 50 for recurring revenue loans, with cash at 100 and defaulted loans at zero. On the illustrative portfolio these give a base of 494.4, 61.7 per cent of value.
The part of a single obligor's loans above the facility's concentration limit. It stays pledged but earns no advance. With a 5 per cent limit on 769.6 of eligible value, a 60.0 loan has 21.52 of excess. A shrinking pool tightens the limit, so defaults elsewhere raise the excess.
Typically within a short cure period, by repaying debt, adding eligible collateral or contributing cash. In the illustrative stress the vehicle is 7.6 short: the fund can contribute 7.6 of equity, or add 12.0 of par in first lien loans marked at 91 per cent with a 70 per cent advance.
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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