This page explains the general building blocks. Every facility is negotiated separately, and the terms of a specific deal are almost never public. For the basic idea first, see what a warehouse facility is.
Tranches: senior, mezzanine and junior
The loans sit in a special purpose vehicle (SPV). The SPV's funding is stacked in layers, called tranches:
- Senior: the largest part, usually from a bank. Repaid first and paid the lowest interest.
- Mezzanine: an optional middle layer, often from a credit fund. Repaid after the senior and paid more.
- Junior or first loss: the bottom layer. It absorbs losses before anyone else. The lender often funds it itself, sometimes with an outside investor.
The order in which cash is paid out to each layer is called the waterfall. Because the lender's own money is at the bottom, it has a direct reason to make good loans.
Advance rate
The advance rate is the share of the eligible loans' value the senior lender will fund. If the advance rate is high, the lender needs less of its own money; if it is low, the senior lender is better protected. The gap between the advance rate and the full value is filled by the mezzanine and junior layers.
Eligibility criteria
Only loans that meet set rules can be funded. Typical criteria cover the loan size, term, interest rate, the borrower's country, whether the loan is in arrears, and the lender's own credit checks. A loan that stops meeting them, for example because it falls behind, stops counting towards what the lender may draw.
Borrowing base
The borrowing base is the amount the lender may have drawn at any time. It is recalculated regularly, often monthly, from the eligible loans in the pool, the advance rate and the concentration limits. If the pool shrinks or loans become ineligible, the lender may need to repay part of the facility or add more loans.
Concentration limits
Concentration limits stop the pool depending too much on one kind of loan. They might cap the share of loans to one region, one industry, one product, one large borrower, or loans with long terms. Loans above a limit stay in the pool but do not count towards the borrowing base.
Performance triggers and covenants
Triggers measure how the loans perform, for example arrears, defaults or how fast customers repay. Covenants can also cover the lender as a company, such as minimum cash or equity. If a trigger is breached, commonly the facility stops funding new loans, and cash from the pool goes to repay the senior lender first, an "early amortisation". Breaches can sometimes be cured or waived.
Revolving period and term
During the revolving period the lender can keep drawing and replacing repaid loans with new ones. After it ends, the facility amortises: cash from the loans repays the lenders until the facility is paid off, unless it is renewed or refinanced, for example by a securitisation.