A multi-currency borrowing base revalued at spot, the dollar move that creates a deficiency, the capital call that cures it, and why borrowing in matching currencies removes the risk.
The borrowing base is measured in the facility's base currency, so when that currency strengthens, every commitment in another currency is worth less and the base shrinks. On an illustrative dollar facility with $405.00m of its $905.00m uncalled commitments in euros and sterling, each 1 per cent rise in the dollar cuts the base by $3.44m, and with $740m drawn in dollars a dollar rise of 8.50 per cent creates a borrowing base deficiency. Drawn in matching currencies, the same loans never breach.
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 →
A subscription line lends against investors' uncalled commitments. The agreement converts every commitment into the base currency at the current spot rate, applies the advance rate, and compares the result with the loans outstanding, also converted at spot. If the dollar rises against the euro, a euro investor's uncalled commitment buys fewer dollars of borrowing capacity. Whether that matters depends on two things: the currency the fund has borrowed in, and whether the base or the facility size is the binding limit. The basic mechanics, before currency, are in how to calculate a subscription line borrowing base.
| Investor currency | Uncalled commitment | Spot to USD | In USD |
|---|---|---|---|
| USD | 500.0m | 1.00 | 500.00 |
| EUR | 250.0m | 1.10 | 275.00 |
| GBP | 100.0m | 1.30 | 130.00 |
| Total | 905.00 |
All investors are included at an 85 per cent advance rate. The facility is $750m, and $740m is drawn ahead of a capital call. The rates are illustrative.
Borrowing base = 85% × (500.00 + 250.0 × 1.10 + 100.0 × 1.30) = 85% × 905.00 = 769.25
Availability = MIN(base, facility) = MIN(769.25, 750) = 750.00; headroom = 750.00 − 740 = 10.00
Sensitivity = advance rate × non-USD commitments in USD × 1% = 85% × 405.00 × 1% = 3.44 per point of dollar strength
Today the facility size binds, not the base. The first 19.25 of base reduction costs nothing.
Breach point: 85% × (500.00 + 405.00 × (1 − x)) = 740 ⇒ x = 1 − (740 / 85% − 500.00) / 405.00 = 8.50%
At an 8 per cent rise (EURUSD 1.012, GBPUSD 1.196) the base is 741.71: headroom 1.71
At a 12 per cent rise (EURUSD 0.968, GBPUSD 1.144) the base is 727.94: a deficiency of 12.06
The fund must repay 12.06 within the cure period, usually by calling capital. Because calling capital also reduces the uncalled commitments the base is built on, the call has to be 12.06 / (1 − 85%) = 80.40, as worked in how big a capital call cures a borrowing base deficiency. A currency move nobody at the fund controls forces an unscheduled call of 9.4 per cent of the 856.40 of uncalled capital left at the new rates.
Most multi-currency facilities let the fund borrow in euros and sterling. Draw the 740 in the same proportions as the collateral: 408.84 in dollars, EUR 204.42m (224.86 in dollars) and GBP 81.77m (106.30 in dollars). When the dollar rises, the euro and sterling loans shrink in dollar terms by exactly the same percentage as the euro and sterling commitments.
| USD rise | Borrowing base | Headroom, drawn in USD | Outstanding, matched | Headroom, matched | Loans / base, USD | Loans / base, matched |
|---|---|---|---|---|---|---|
| 0% | 769.25 | 10.00 | 740.00 | 10.00 | 96.2% | 96.2% |
| 5% | 752.04 | 10.00 | 723.44 | 26.56 | 98.4% | 96.2% |
| 8% | 741.71 | 1.71 | 713.51 | 28.20 | 99.8% | 96.2% |
| 10% | 734.82 | −5.18 | 706.88 | 27.94 | 100.7% | 96.2% |
| 12% | 727.94 | −12.06 | 700.26 | 27.68 | 101.7% | 96.2% |
| 15% | 717.61 | −22.39 | 690.33 | 27.29 | 103.1% | 96.2% |
Matched, the loans stay at 96.2 per cent of the base whatever the dollar does. The currency risk is hedged inside the facility, at no cost beyond the interest rate differential between the currencies borrowed.
Lenders often apply a haircut, say 5 per cent, to commitments in currencies other than the facility's. That takes 17.21 off the base, to 752.04, which is the same base as a 5 per cent dollar rise without the haircut. Here it costs no availability at all, because the facility size of 750 still binds and headroom stays at 10.00. It starts to cost once the base binds, the same pattern the companion workbook shows for an investor downgrade: an eligibility loss is free while there is excess base and expensive once there is not.
The borrowing base, the facility cap and the stress that moves only one of them are live in the free workbooks for this book.
Commitments in other currencies are converted into the facility's base currency at spot, then multiplied by the advance rate. If the base currency rises, the base falls by the advance rate times the non-base-currency commitments times the move: 85 per cent of 405.00m is 3.44m for each 1 per cent rise in the illustrative dollar facility.
Borrow in the currencies of the investors' commitments, in proportion to them. When the base currency moves, the loans and the collateral are revalued by the same percentage, so the loans-to-base ratio stays fixed. In the worked example it stays at 96.2 per cent through a 15 per cent dollar rise, against 103.1 per cent if all 740m is drawn in dollars.
The fund must repay the excess within the cure period, usually by calling capital. Because the call itself reduces uncalled commitments, the call must be the deficiency divided by one minus the advance rate: a 12.06m deficiency at an 85 per cent advance rate needs a call of 80.40m.
The borrowing base and its levers, with a stress that moves the dollar against non-dollar commitments, are worked in chapter 4 of 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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