One capital call, a ten-business-day notice period and a facility that has to bridge it, computed as the deal team assumed and as the lender computes.
Yes, wherever the credit agreement makes a pending transfer an exclusion event, as many do: until the transfer is effective and the transferee accepted, the investor's unfunded commitment is ineligible, so the borrowing base loses that commitment times the advance rate. In an illustrative fund, excluding one investor's 1,900,000 of unfunded commitment at a 65 per cent advance rate cuts availability from 7,077,000 to 5,842,000, against 6,260,000 of cash needed: a shortfall of 418,000 on a deal the team believed the facility could bridge.
Worked in full in The Private Markets COO by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Northbridge Fund II, the fictional fund of The Private Markets COO, must fund a follow-on investment on 18 September. The investment committee approved it on 1 September; the administrator's cutoff for the event was 4 September; the final funding instructions arrived on 8 September. Investor funds cannot arrive in time, so the plan is to draw on the subscription facility and repay it from the call. One investor, LP-207, has signed a transfer of its interest that was not yet effective at the cutoff. The figures below are the illustrative inputs of the companion workbook.
| Investor | Commitment | Contributed | Unfunded | Facility status |
|---|---|---|---|---|
| LP-201 | 30,000,000 | 18,600,000 | 11,400,000 | Eligible |
| LP-202 | 20,000,000 | 12,400,000 | 7,600,000 | Eligible |
| LP-203 | 12,000,000 | 7,440,000 | 4,560,000 | Eligible |
| LP-204 | 10,000,000 | 6,200,000 | 3,800,000 | Eligible |
| LP-205 | 8,000,000 | 4,960,000 | 3,040,000 | Eligible |
| LP-206 | 6,000,000 | 3,720,000 | 2,280,000 | Eligible |
| LP-207 | 5,000,000 | 3,100,000 | 1,900,000 | Transfer pending |
| GP-200 | 2,000,000 | 1,240,000 | 760,000 | Never eligible |
| Total | 93,000,000 | 57,660,000 | 35,340,000 |
The facility is a 25,000,000 commitment, 15,400,000 drawn, with an advance rate of 65 per cent on eligible unfunded commitments. The cash needed on the funding date is 6,260,000: 6,050,000 for the investment and 210,000 of expenses.
The instructions came after the cutoff, so the notice cannot go out before the administrator's one business day of processing: 9 September. The partnership agreement requires 10 business days' notice, so investor money is due on 23 September, 3 business days after the funding date. Nothing in the operating model can shorten a notice period the agreement fixes. The facility is the bridge, and the question is whether it is wide enough.
Borrowing base = advance rate × eligible unfunded commitments
Available = MIN(facility commitment, borrowing base) − drawn
Excel: =MIN(25000000,0.65*SUMIFS(F:F,G:G,"Eligible"))-15400000
| Line | Transfer included | Transfer excluded |
|---|---|---|
| Eligible unfunded commitments | 34,580,000 | 32,680,000 |
| Borrowing base at 65% | 22,477,000 | 21,242,000 |
| Available after 15,400,000 drawn | 7,077,000 | 5,842,000 |
| Cash needed on the funding date | 6,260,000 | 6,260,000 |
| Shortfall | 0 | 418,000 |
The general partner's 760,000 is out of both columns: the GP is not a borrowing base investor. The only difference between the columns is LP-207, whose 1,900,000 of unfunded commitment carries 1,235,000 of borrowing base. The deal team's 817,000 of spare capacity becomes a 418,000 hole.
Each of four facts was individually correct: the investment was approved, the notice period was fixed, the cutoff had passed, and the lender's eligibility rule was in the credit agreement all along. Together they leave the fund 418,000 short on 18 September. Three numbers bound the fix. The fund would need an advance rate of 66.28 per cent instead of 65; or drawings of no more than 14,982,000, a repayment of 418,000 before the draw; or the transfer completed and the investor reinstated before the borrowing request. In the book the resolution is commercial and legal rather than operational: a revised funding sequence for the investment, facility capacity used within its terms, and the call issued on the required notice.
| Advance rate | Available, included | Gap | Available, excluded | Gap |
|---|---|---|---|---|
| 60% | 5,348,000 | -912,000 | 4,208,000 | -2,052,000 |
| 65% | 7,077,000 | 817,000 | 5,842,000 | -418,000 |
| 70% | 8,806,000 | 2,546,000 | 7,476,000 | 1,216,000 |
| 75% | 9,600,000 | 3,340,000 | 9,110,000 | 2,850,000 |
At 75 per cent the included column hits the 25,000,000 facility cap, which is why its availability stops at 9,600,000. With the transfer excluded and the advance rate at 65, the drawn balance is the lever: at 14,000,000 drawn the fund would have had 982,000 to spare; at 16,000,000 it would have been 1,018,000 short.
The advance-rate mechanics, concentration limits and exclusion events are set out in how to calculate a subscription line borrowing base; the size of call that restores a base once it is deficient is in how big a capital call cures a borrowing base deficiency.
The call, the notice timing in business days and both borrowing bases are live formulas in the free workbooks for this book.
Because until the transfer is effective, it is unclear which party the lender can look to for the unfunded commitment, and the transferee has usually not yet given the lender the investor documents the facility requires. In the worked case the exclusion removes 1,900,000 of unfunded commitment, worth 1,235,000 of borrowing base at a 65 per cent advance rate.
Available capacity is the lower of the facility commitment and the borrowing base, less what is already drawn. The borrowing base is the advance rate times eligible unfunded commitments. With 32,680,000 of eligible unfunded commitment at 65 per cent, a 25,000,000 facility and 15,400,000 drawn, availability is 5,842,000.
Complete the transfer so the investor is reinstated, repay part of the drawn balance first, or renegotiate the funding sequence of the investment. In the worked case the fund would need drawings of no more than 14,982,000, or an advance rate of 66.28 per cent, to cover the 6,260,000 need. The notice period itself cannot be shortened.
The call, the notice period and the facility are worked in chapter 5 of The Private Markets COO. 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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