The NAV facility loan-to-value worked from reported NAV to lending value, and why the asset that falls matters more than the size of the fall.
To find how far NAV can fall before a NAV facility breaches its loan-to-value covenant, divide the loan by the covenant ratio to get the minimum lending value, then compare it with the adjusted NAV the lender actually tests, not the reported NAV. A $150m loan against a $900m portfolio looks safe for a fall of a third, but on the adjusted NAV of $758.0m a 25 per cent covenant breaches after a uniform fall of 20.8 per cent.
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 →
The difference between those two answers is the difference between the cover page and the agreement. The headline loan-to-value uses reported NAV. The covenant uses eligible NAV after exclusions and concentration limits, and those adjustments do not scale neatly when one asset moves and the others do not.
| Asset | Reported NAV | Treatment |
|---|---|---|
| Asset A | 250.0 | Eligible, above the cap |
| Asset B | 160.0 | Eligible |
| Asset C | 140.0 | Eligible |
| Asset D | 120.0 | Eligible |
| Asset E | 100.0 | Eligible |
| Asset F | 70.0 | Eligible |
| Restricted asset G | 60.0 | Excluded: transfer restrictions |
| Reported NAV | 900.0 |
The loan is $150.0m. The covenant is a maximum loan-to-value of 25 per cent on adjusted NAV. The concentration limit: no single asset counts for more than 20 per cent of eligible NAV.
Eligible NAV = 900.0 − 60.0 = 840.0
Cap = 0.20 × 840.0 = 168.0
Excess over cap = 250.0 − 168.0 = 82.0
Adjusted NAV = 840.0 − 82.0 = 758.0
Headline LTV = 150.0 ÷ 900.0 = 16.7%. Covenant LTV = 150.0 ÷ 758.0 = 19.8%.
Only 84.2 per cent of the reported NAV reaches the lending value. The ratio on the compliance certificate is already 3.1 points above the one in the investor letter, before anything has moved.
The covenant breaches when adjusted NAV falls below loan ÷ covenant: 150.0 ÷ 0.25 = $600.0m. If every asset falls by the same percentage, the cap scales with them and adjusted NAV falls in proportion, so the breach decline is 1 − 600.0 ÷ 758.0 = 20.8 per cent. Reported NAV at that point is $712.4m.
The headline arithmetic, 1 − 600.0 ÷ 900.0, says 33.3 per cent. That is the number a borrower quotes and the one a lender does not use.
| Fall in values | Reported NAV | Adjusted NAV | Headline LTV | Covenant LTV |
|---|---|---|---|---|
| 0% | 900.0 | 758.0 | 16.7% | 19.8% |
| 10% | 810.0 | 682.2 | 18.5% | 22.0% |
| 20% | 720.0 | 606.4 | 20.8% | 24.7% |
| 20.8% | 712.4 | 600.0 | 21.1% | 25.0% |
| 25% | 675.0 | 568.5 | 22.2% | 26.4% |
| 30% | 630.0 | 530.6 | 23.8% | 28.3% |
Past the breach point, the cure is sized the same way in reverse. At a 25 per cent fall adjusted NAV is $568.5m, which supports a loan of 0.25 × 568.5 = $142.1m. The fund must prepay $7.9m, from cash, a distribution held back or a sale, or post additional assets the lender accepts. Many agreements step in a cash sweep before the hard covenant; the arithmetic of each step is identical.
Portfolios do not fall evenly, and with a concentration cap in the test, the asset that falls matters more than the size of the fall.
| Scenario | Fall in reported NAV | Fall in adjusted NAV | Covenant LTV |
|---|---|---|---|
| Asset A falls 40% | 100.0 | 32.0 | 20.7% |
| Asset B falls 40% | 64.0 | 76.8 | 22.0% |
| Restricted asset G written off | 60.0 | 0.0 | 19.8% |
| Everything except A falls 30% | 195.0 | 212.4 | 27.5% |
A $100.0m fall in the largest asset costs the lending value only $32.0m, because most of that fall comes out of the $82.0m the cap had already removed. A $64.0m fall in the second asset costs $76.8m, more than the fall itself: eligible NAV shrinks, the cap shrinks with it, and more of Asset A is pushed above the cap. Writing off the excluded asset costs nothing at all.
The dangerous scenario is the largest asset holding up while everything else falls. Hold Asset A flat and let the rest decline evenly, and the covenant breaches after a 22.3 per cent fall in the other assets, when reported NAV has fallen only 16.1 per cent. Concentration gets worse precisely as the rest of the book weakens.
Running the headroom on reported NAV, or applying the haircuts once and then flexing the adjusted figure as if it were a single asset. The first overstates headroom by 12.5 points in this case (33.3 per cent against 20.8). The second misses the cap: it treats a fall in Asset B as a fall of $64.0m when the lender's test sees $76.8m. A borrower who models the covenant should rebuild adjusted NAV from asset values in every scenario, with the cap recomputed each time.
The book's own underwriting, from reported equity NAV to lending value and the downside that crosses the line, is in the free workbook for this case. For the same logic applied to stress testing a whole fund, see how to compute the reverse stress level for an open-ended credit fund, and for the other facility on a fund's balance sheet, how to calculate a subscription line borrowing base.
Headline LTV divides the loan by reported NAV; covenant LTV divides it by the lender's adjusted NAV after excluded assets and concentration limits. In the worked case the loan is $150.0m, reported NAV $900.0m and adjusted NAV $758.0m, so the headline is 16.7 per cent and the covenant ratio 19.8 per cent.
Because the concentration cap is a percentage of eligible NAV. When a smaller asset falls, eligible NAV and the cap both shrink, so more of the largest asset is excluded. In the worked case a $64.0m fall in the second asset cuts adjusted NAV by $76.8m, while a $100.0m fall in the largest asset cuts it by only $32.0m.
Divide the loan by the covenant ratio to get the minimum adjusted NAV, then solve for the asset values that produce it. A $150.0m loan at a 25 per cent covenant needs $600.0m of adjusted NAV; with uniform declines that is reached when reported NAV falls to $712.4m.
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.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: private equity and private markets → · All 324 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.