Distributions pay the interest first, the sweep takes its share of what is left, and the portfolio shrinks as it pays: three reasons the payoff is slower than the back of the envelope.
A NAV loan repaid by a cash sweep has to be modelled year by year: each distribution pays the interest first, the sweep share of what is left repays principal, and the portfolio that produces the distributions shrinks as it pays them. On an illustrative $180M NAV loan against a $900M portfolio distributing 8 per cent a year, at 9.5 per cent interest with a 50 per cent sweep, the loan takes 5.8 years to repay and costs $59.5M of interest. The quick division of loan by swept cash says 4.7.
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 NAV facility lends against the value of a fund's existing portfolio, usually late in the fund's life when there is little uncalled capital left. The lender is repaid from exits. The facility agreement therefore directs a share of every distribution, after interest, to repay the loan before investors see anything, and many agreements step that share up with time or with the loan to value. The repayment date is not in the document; it is the output of the distribution rate, the sweep and the interest rate together.
| Input | Value |
|---|---|
| Portfolio NAV at drawdown | 900 |
| NAV loan | 180 |
| Loan to value at drawdown | 20.0% |
| Portfolio value growth before distributions | 6% a year |
| Distributions, share of NAV | 8% a year |
| All-in interest rate (illustrative) | 9.5% |
| Cash sweep, share of distributions after interest | 50% |
1. Grow the portfolio: 900 × 1.06 = 954.0.
2. Distributions: 8% × 954.0 = 76.3. NAV after distribution: 877.7.
3. Interest first: 180 × 9.5% = 17.1.
4. Sweep: 50% × (76.3 − 17.1) = 29.6 of principal repaid; the other 29.6 goes to investors.
5. Carry forward: loan 150.4, NAV 877.7, loan to value 17.1%. Repeat until the loan is zero.
In Excel, one row per year: Interest=Loan*Rate, Repay=MIN(Loan,Sweep*(Dist-Interest)), NextLoan=Loan-Repay.
| Year | Distributions | Interest | Repayment | To investors | Loan, end | NAV, end | LTV |
|---|---|---|---|---|---|---|---|
| 1 | 76.3 | 17.1 | 29.6 | 29.6 | 150.4 | 877.7 | 17.1% |
| 2 | 74.4 | 14.3 | 30.1 | 30.1 | 120.3 | 855.9 | 14.1% |
| 3 | 72.6 | 11.4 | 30.6 | 30.6 | 89.7 | 834.7 | 10.8% |
| 4 | 70.8 | 8.5 | 31.1 | 31.1 | 58.6 | 814.0 | 7.2% |
| 5 | 69.0 | 5.6 | 31.7 | 31.7 | 26.9 | 793.8 | 3.4% |
| 6 | 67.3 | 2.6 | 26.9 | 37.9 | 0.0 | 774.1 | 0.0% |
The loan is gone 5.8 years after drawdown, part way through year six. Over the six years to the final repayment the portfolio distributes $430.5M: $59.5M goes in interest, $180M repays the loan, and investors receive $191.0M, 44 per cent of the cash their portfolio produced. That is the trade a NAV loan makes. The $180M was distributed to investors, or invested, up front; the sweep then takes the lender's share of the next six years of exits back. What the early distribution does to DPI and TVPI is worked in what a NAV loan distribution does to DPI.
| Distribution rate | 50% sweep: years | Interest | 75% sweep: years | Interest | 100% sweep: years | Interest |
|---|---|---|---|---|---|---|
| 6% | 7.7 | 78.6 | 5.2 | 55.7 | 3.9 | 44.1 |
| 8% | 5.8 | 59.5 | 3.8 | 42.4 | 2.9 | 34.1 |
| 10% | 4.7 | 48.6 | 3.0 | 34.6 | 2.2 | 28.7 |
| 12% | 3.9 | 41.2 | 2.5 | 30.5 | 1.8 | 24.9 |
The payoff is more sensitive to exits than the distribution rate suggests. Cutting distributions from 8 to 6 per cent, a quarter less cash, stretches the 50 per cent sweep from 5.8 to 7.7 years, a third longer, because interest is paid first and takes a larger slice of a smaller cheque: 30 per cent of the first year's distributions at 6 per cent, against 22 per cent at 8. A sweep that steps to 100 per cent shortens the life most, but leaves investors almost nothing until the loan is gone. The covenant side of a slowdown, where falling NAV rather than slow cash is the problem, is in how far NAV can fall before an LTV breach.
Most NAV facilities are drawn because exits are slow. A sweep negotiated on a base case of 8 per cent distributions should be tested at 6, where the same loan runs to 7.7 years and costs $78.6M of interest, and the maturity date of the facility should sit beyond that, not beyond the base case.
Dividing the loan by the swept cash. Year one distributes 76.3, half of that is 38.2, and 180 divided by 38.2 is 4.7 years. The shortcut ignores two things that both point the same way: interest comes out of the distribution before the sweep, and the portfolio that distributes shrinks each year as it pays. Together they add more than a year to the life of the loan and leave the borrower with an extension request it did not plan for. Build the annual rows; it takes ten minutes and gives the number the investment committee needs, the date when distributions belong to investors again.
Repayment year by year: interest = loan × rate, repayment = sweep × (distributions − interest), until the loan is zero. Here 5.8 years and $59.5M of interest, with 56 per cent of the cash produced over those six years going to the lender. The NAV facility underwriting, from reported NAV to lending value and the loan to value that breaches, is in the free workbook for this case.
A requirement that a set share of the portfolio's distributions goes to repay the loan before anything reaches investors, often stepping up as the loan ages or if the LTV rises. On an illustrative $180M loan, a 50 per cent sweep of distributions after interest repays it in 5.8 years at an 8 per cent distribution rate; a 100 per cent sweep does it in 2.9.
Only what the interest and the sweep leave. With 8 per cent distributions, 9.5 per cent interest and a 50 per cent sweep, investors receive $191.0M of the $430.5M distributed over the six years in which the loan is repaid, 44 per cent; the lender takes the other 56 per cent as interest and principal.
It stretches faster than the distributions fall, because interest takes a larger share of each dollar. At a 6 per cent distribution rate, interest absorbs 30 per cent of the first year's cash against 22 per cent at 8, and the 50 per cent sweep takes 7.7 years to repay the loan with $78.6M of interest, against 5.8 years and $59.5M.
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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