A borrowing base worked investor by investor, and why one exclusion costs more than the investor's own contribution.
A subscription line borrowing base is calculated investor by investor: exclude the ineligible commitments, cap each investor at the concentration limit, apply the advance rate for its group, then add up. On $600m of uncalled commitments that sequence gives a borrowing base of $377.6m, not the $540m of a flat 90 per cent, and availability is the lower of that base and the facility, less what is drawn.
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 →
Most of the time the base sits comfortably above the facility and nobody looks at it. The day it matters is the day one investor drops out of eligibility, and on that day the base falls by more than that investor's own contribution. The arithmetic below shows why.
| Investor | Uncalled | Group | Advance rate |
|---|---|---|---|
| Public pension | 200.0 | Included | 90% |
| Insurer | 120.0 | Included | 90% |
| Endowment | 80.0 | Included | 90% |
| Family offices, five of 20 each | 100.0 | Designated | 65% |
| Wealth feeder | 60.0 | Designated | 65% |
| Excluded investors | 40.0 | Excluded | 0% |
| Total | 600.0 |
The facility is $300.0m and $240.0m is drawn. The concentration limit: no single investor counts for more than 20 per cent of eligible uncalled commitments.
Investors that fail the eligibility tests (no acknowledgement of the lender's security, a side letter that blocks the call for repayment, a sanctions or ratings failure, an investor in default) come out first. That removes $40.0m and leaves $560.0m of eligible uncalled commitments.
The cap is 20 per cent of eligible uncalled, so 0.20 × 560 = $112.0m per investor. The pension's $200.0m counts as $112.0m and the insurer's $120.0m counts as $112.0m. Everyone else is below the cap.
The cap is tested name by name. The five family offices count as five investors of $20m each, not as one holding of $100.0m. The wealth feeder counts as one investor unless the agreement looks through it to the underlying clients, and that drafting choice can swing a feeder from fully eligible to partly capped. Here it makes no difference, because $60.0m is below $112.0m.
Base = Σ advance rategroup × MIN(uncalledi, cap) for every eligible investor
In Excel, with uncalled in B, advance rate in D, an eligibility flag in E and the cap in F1:
=SUMPRODUCT(E2:E7*D2:D7*((B2:B7<F1)*B2:B7+(B2:B7>=F1)*F1))
| Investor | Uncalled | After cap | Advance | Base value |
|---|---|---|---|---|
| Public pension | 200.0 | 112.0 | 90% | 100.8 |
| Insurer | 120.0 | 112.0 | 90% | 100.8 |
| Endowment | 80.0 | 80.0 | 90% | 72.0 |
| Family offices | 100.0 | 100.0 | 65% | 65.0 |
| Wealth feeder | 60.0 | 60.0 | 65% | 39.0 |
| Excluded investors | 40.0 | 0.0 | 0% | 0.0 |
| Borrowing base | 600.0 | 377.6 |
The caps alone take $96m of commitment out of the base, worth $86.4m of borrowing capacity at 90 per cent.
Availability is the lower of the base and the facility commitment, less outstandings: MIN(377.6, 300.0) − 240.0 = $60.0m. The base exceeds the facility by $77.6m, and that excess buys nothing. The base only starts to cost money when it falls below the facility.
An investor is downgraded, transfers its interest to a buyer the lender has not approved, or defaults. Its commitment leaves the base. But it also leaves the denominator of the concentration test, so the cap on every remaining large investor tightens at the same moment.
| Scenario | Eligible uncalled | Cap | Base | Fall in base | Headroom over drawn |
|---|---|---|---|---|---|
| As above | 560.0 | 112.0 | 377.6 | 0.0 | 60.0 |
| Feeder excluded | 500.0 | 100.0 | 317.0 | 60.6 | 60.0 |
| Designated advance cut to 50% | 560.0 | 112.0 | 353.6 | 24.0 | 60.0 |
| Insurer excluded | 440.0 | 88.0 | 255.2 | 122.4 | 15.2 |
| Pension excluded | 360.0 | 72.0 | 233.6 | 144.0 | −6.4 |
| Pension excluded, designated at 50% | 360.0 | 72.0 | 209.6 | 168.0 | −30.4 |
The pension contributed $100.8m of base. Losing it costs $144.0m, because the cap falls from $112.0m to $72.0m and pulls the insurer and the endowment down with it: an extra $43.2m. With $240.0m drawn, the fund now has a borrowing base deficiency of $6.4m and must repay or call capital to cure it within the cure period. The feeder shows the same effect on a small scale: it carried $39.0m of base and takes $60.6m with it.
The concentration cap is a multiplier on any exclusion. When the cap is a percentage of eligible commitments, every exclusion shrinks the cap for everyone else. Stress the register by excluding the largest investor first, not by trimming advance rates: the advance-rate cut in the table costs less than any single exclusion.
Computing the cap on total uncalled commitments, $600.0m, instead of eligible ones gives a cap of $120.0m and a base of $392.0m. That overstates capacity by $14.4m, quietly, until the day a compliance certificate is checked against the agreement. The order matters for the same reason: exclusions first, then the cap, then advance rates, exactly as the definition is drafted.
The book's own borrowing base, with four levers applied in order and the stress that shows when the base starts to bind, is in the free workbook for this case. What the same line does to reported returns is in what a subscription line actually does to the IRR, and what happens when an investor fails to fund in what a missed capital call actually costs.
The borrowing base is the collateral value of eligible uncalled commitments; availability is the lower of the base and the facility commitment, less loans outstanding. In the worked case the base is $377.6m, the facility $300.0m and drawings $240.0m, so availability is $60.0m and the extra $77.6m of base buys nothing.
Illustratively, around 90 per cent for highly rated institutional investors in the included group and 50 to 65 per cent for designated investors such as family offices and wealth feeders, with excluded investors at zero. The worked case uses 90 and 65 per cent; cutting the designated rate to 50 per cent removes $24.0m of base.
The fund has a borrowing base deficiency and must repay the excess, usually from a capital call, within a short cure period. In the worked case excluding the largest investor drops the base to $233.6m against $240.0m drawn, a deficiency of $6.4m.
The borrowing base and its levers 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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