A subscription facility priced the way a CFO pays for it: per dollar actually drawn, at five levels of utilisation, and against a smaller line.
The all-in cost of a subscription line is everything the fund pays in a year, interest, commitment fee, the upfront fee and legal costs spread over the tenor, divided by the average amount actually drawn. On an illustrative $300M line at S+175 drawn 40 per cent on average, that is 6.65 per cent, or 265 basis points over the base rate, not the 175 on the term sheet. The lower the utilisation, the wider the gap.
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 buyout fund puts a three-year subscription facility in place to bridge capital calls. The lender offers a margin of 175 basis points over the reference rate, a commitment fee on the undrawn amount and an upfront fee on the whole commitment. The fund expects to draw $120M on average, 40 per cent of the line, because draws are repaid by capital calls within months. The reference rate is held flat at an illustrative 4.00 per cent and the pricing is illustrative, not a market quote.
| Input | Value |
|---|---|
| Facility size | $300M |
| Reference rate (illustrative) | 4.00% |
| Margin | 175 bp |
| Commitment fee, on undrawn | 35 bp |
| Upfront fee, on commitment | 25 bp |
| Tenor | 3 years |
| Legal and arrangement costs, one-off | $0.60M |
| Average utilisation | 40% |
Put every cost on an annual basis, then divide by the amount the fund actually uses. One-off costs are spread straight-line over the tenor, which is close enough for a decision of this kind; discount them if the tenor is long.
Interest: 120 × (4.00% + 1.75%) = 120 × 5.75% = 6.90
Commitment fee: (300 − 120) × 0.35% = 180 × 0.35% = 0.63
Upfront fee: 300 × 0.25% = 0.75, over 3 years = 0.25 a year
Legal: 0.60 over 3 years = 0.20 a year
Total 7.98 a year ÷ 120 drawn = 6.65%, or 265 bp over the 4.00% base
Excel: =(Drawn*(Base+Margin)+(Facility-Drawn)*CF+Facility*Upfront/Tenor+Legal/Tenor)/Drawn
The interest is 175 basis points over base, as quoted. The other 90 basis points are the 1.08 of non-interest cost spread over 120 of drawings. They are paid whether the fund draws or not, which is why the denominator decides the answer.
| Average utilisation | Drawn | Interest | Commitment fee | Upfront and legal | Total | All-in cost | Over base |
|---|---|---|---|---|---|---|---|
| 20% | 60 | 3.45 | 0.84 | 0.45 | 4.74 | 7.90% | 390 bp |
| 40% | 120 | 6.90 | 0.63 | 0.45 | 7.98 | 6.65% | 265 bp |
| 60% | 180 | 10.35 | 0.42 | 0.45 | 11.22 | 6.23% | 223 bp |
| 80% | 240 | 13.80 | 0.21 | 0.45 | 14.46 | 6.03% | 203 bp |
| 100% | 300 | 17.25 | 0.00 | 0.45 | 17.70 | 5.90% | 190 bp |
Even fully drawn, the line costs 190 basis points over base, because the upfront and legal costs never disappear. At 20 per cent utilisation it costs 390, more than double the headline margin. Many funds sit at the low end for long stretches: a line used only to smooth calls is drawn hard for a few weeks around each call and lightly otherwise, and the average is what matters for cost.
The lever the fund controls is size. Keep the same $120M of average drawings and shrink the facility:
| Facility | Utilisation | Total cost | All-in cost | Over base | Saving a year |
|---|---|---|---|---|---|
| 300 | 40% | 7.98 | 6.65% | 265 bp | 0.00 |
| 200 | 60% | 7.55 | 6.29% | 229 bp | 0.43 |
| 150 | 80% | 7.33 | 6.11% | 211 bp | 0.65 |
Each $100M of headroom that is never used costs about $0.43M a year here: 0.35 of commitment fee and 0.08 of upfront fee. That is the price of an option, and the question is what it insures. The peak drawing, not the average, sets the size the fund needs: if two large acquisitions can close in the same quarter before a call is made, the $150M line could run out when it is needed most. The borrowing base can bind first too: a facility is only as large as the eligible commitments behind it allow.
Lenders price the line on committed capital because they hold capital against the commitment, not the drawing. The fund pays for the option to draw, and the margin is only the price of using it.
The first is to compare offers on margin alone. A lender at S+165 with a 45 bp commitment fee is cheaper than one at S+175 with 35 bp only if utilisation is above 50 per cent; at 40 per cent drawn it costs $0.06M a year more, because the fund pays the commitment fee on 60 per cent of the line. The second is to report the cost of the line to investors as the interest paid. The fees are fund expenses and the investors bear them all, including the part that buys headroom nobody used. The third is to forget that the line changes the timing of calls, which flatters the IRR: the cost should be weighed against that effect, not hidden by it.
The book's Northbridge facility, where the base reaches 650.5 against a facility of 250 and most of the eligibility buys nothing, is worked in the free workbook for this case. For the collateral side of the same question, see how to calculate a subscription line borrowing base, and for the return side, what a subscription line does to the IRR.
Commitment fees are charged on the undrawn amount and are a fraction of the margin; the worked case uses an illustrative 35 bp. On a $300M line drawn $120M on average, that is $0.63M a year, or 52.5 basis points when spread over the drawn amount, which is why the fee matters more than its size suggests at low utilisation.
The interest scales with what is drawn, but the upfront fee, legal costs and much of the commitment fee do not. On the worked $300M line the all-in cost over base falls from 390 bp at 20 per cent average utilisation to 265 bp at 40 per cent and 203 bp at 80 per cent, against a headline margin of 175 bp.
Only to the point where headroom still covers the largest call it must bridge. Cutting the worked line from $300M to $200M for the same $120M of average drawings saves $0.43M a year and brings the cost from 265 to 229 bp over base. Each $100M of unused headroom costs about $0.43M a year in commitment and upfront fees.
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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