Loan Origination, Liquidity Management and the New Substance Test
Julian R. Sterling
One Excel workbook. Chapter 11 says the reverse stress level is the most useful number a
liquidity stress test produces, and asks for one line to the board each quarter. Chapter 21
gives a fund and gives a number — approximately 19 per cent — and does not show the
walk. This file does the walk, on Fund IV’s own figures, and prints the line. It is
free. Nothing is gated behind a sign-up, and no email address is asked for.
Per cent of what? Chapter 21 §657 gives four liquidity buckets
— 11, 9, 24 and 56 per cent — and never says what they are percentages of. Fund IV
has two balance sheets: €310 million of net asset value and, at 140 per cent
leverage, €434 million of gross assets. Read as shares of net asset value the buckets
sum to 310 and €124 million of assets is unaccounted for —
exactly the debt. Read as shares of gross assets they close to the euro. Only one reading
works, every figure downstream is 40 per cent larger under it, and the book should say which
in four words.
The severe quarter, line by line. Cash after the operating buffer 43.1,
contractual flows 10.5, the liquid bucket sold at a 6 per cent haircut 36.7, the realisable
part of the six-month bucket at 14 points below carrying 35.8. Against that: the facility
taking its advance rate on every disposal −36.3, borrowers drawing −17.1, fees and
interest −3.0, and the borrowing-base call the markdown triggers −16.5. Net to
redeeming investors 53.2, or 17.2 per cent of net asset
value.
And the book is corroborated. Vary the three inputs that matter —
prepayments, the advance rate, the undrawn book — and the band is ±4.8
points, a two-sigma interval of 7.6 to 26.7 per cent. Chapter
21’s approximately 19 sits inside it. One of the twenty-five checks exists to say so.
The point of computing the number was never to catch the book out; it was to know how much
weight the number will bear.
The largest term is in a credit agreement. Set the advance rate to zero and
the reverse stress level goes from 17.2 to 34.2 per cent. No asset changed,
no investor changed, no redemption assumption changed. Chapter 11’s list of common
defects does not mention the facility at all.
The undrawn book against the gate. Chapter 11 calls undrawn borrower
commitments one of the most commonly omitted items in credit fund liquidity models. Here they
are €38 million, drawn at 45 per cent under stress: an outflow of
5.5 per cent of net asset value against a gate set at 4. The item the model
is most likely to forget is larger than the barrier the gate provides.
And the eight per cent. §657 says the profile supports redemptions of
roughly 8 per cent per quarter in ordinary conditions. Computed on the chapter’s own
grid, ordinary capacity is 37.7 per cent counting the whole six-month bucket
and 21.8 per cent counting none of it. No reading reaches 8. It is a policy,
not a capacity — a good discipline that should be written down as a choice with the
computed figure beside it. Twenty-five checks.
Set the advance rate to zero on sheet 1 and watch the reverse stress level go from 17.2 to
34.2 per cent. That is the single largest term in the answer, it lives in a credit agreement, and
it is usually negotiated by someone who will never see this file. Then set the undrawn book to
zero: the level rises to 22.7 per cent — five and a half points of resilience that exist
only in the model that forgot the commitments.
What the arithmetic does not settle
It cannot tell you what your own facility’s advance rate is, or whether a markdown triggers
a borrowing-base call under your documents — those are the two terms that carry the answer
and they are readable only in the credit agreement. It cannot tell you how borrowers behave in a
quarter nobody has lived through; 45 per cent is a stress assumption, not an observation. And it
cannot settle where a supervisor will place the line between “meaningfully below” and
merely below — it can only make the distance measurable, which is what the file is for.
Conventions used throughout
Amber fill
an input — you may edit these
Grey fill
a formula — do not overtype these
ADDED
an input the book does not state — seventeen of them, each labelled with the reason
Checks sheet
twenty-five controls — three test the file against the book, and one of those confirms it
Every figure is illustrative. Fund IV, its facility and its borrowers are the book’s own
invented case; the facility terms, the undrawn book and the cash-flow parameters are added because
the book does not state them, and each is an editable cell.
Opening the file
The workbook opens in Microsoft Excel, LibreOffice Calc, Google Sheets and Numbers. It uses no
macros and no add-ins, so nothing needs to be enabled or trusted. If your spreadsheet asks to
update links on opening, decline — there are none.
Closing the DealTwo defensible bridges 20.70 million apart, a peg worth 7.00 million, and the six choices that remove 6.60 of a 12.00 earn-out.
CMBS and CRE CLOsWhere the loss actually lands, from appraisal reduction to realised severity, and what the B-piece is really being paid for.
How to Read a Commercial LeaseThe three refinements chapter 19 names and never performs, and the renewal rate below which the mark-to-market is worth nothing.
How to Read a Credit AgreementWhere the default actually comes from, the cure that costs 5.5 times the other, and the capacity nobody adds up.
How to Read a Real Estate Loan AgreementThe cure ratio in closed form, the four-point window in which the cheap cure works, and the cure sized to the wrong threshold.
Office Real EstateA six per cent yield that returns 3.2 per cent once the re-letting cycle is paid for, and the headline-to-net-effective rent arithmetic.
Private Equity Real EstateBoth worked waterfalls to the dollar, the two capital stacks, and the arithmetic of the promote made changeable.
Private Markets PerformanceThirty-one of the thirty-three figures chapter 19 publishes reproduce exactly — and the two that do not are named rather than quietly adopted.
Raising a Real Estate FundThe chapter 17 funnel run on a calendar — when the first close actually lands, and why more travel does not help.
Real Estate FinanceFour people look at one building and reach four numbers; the lender is whole only above 105,109,489, twelve per cent below today’s value rather than forty.
Real Estate Financial ModelingProperty, development and fund models built line by line, and the modelling test worked end to end.
Real Estate Fund ManagementThe waterfall of 6.11, the build-to-core of 8.7 and the proceeds gap, reproduced as live formulas rather than asserted.
REIT Analysis and ValuationFFO of 532.0, AFFO of 381.0, net asset value and dividend safety — every figure a formula you can change.
Retail Real EstateThe occupancy cost of every unit in a centre, the sixteen per cent of the rent roll no tenant can sustain, and the right-size-convert-or-hold decision priced.
Sale and LeasebackA €179.5 million transaction end to end, with rent cover measured on the entity that actually signs the lease.
Self-Storage Real EstateThe cohort engine behind a 590-unit store, and the rate increase on existing customers priced against the move-outs it causes.
The Fund Finance ProfessionalChapter 8 builds the reported-to-eligible NAV bridge; chapter 9 computes every ratio without it. Two points at every state — and what a subscription line does to the IRR.
The Growth Equity InvestorWhat a pro rata cheque really costs, and the band where defending your ownership loses money.
The Private Credit InvestorThe two coverage ratios are not measured on the same thing: the erosion is 47.7 per cent, not the 28.7 the headline implies.
The Private Equity Fund Controller PlaybookThe book defines IRR, DPI, RVPI and TVPI, tells you to update them at the exit, and prints not one value. Computed: a 1.833× deal inside a fund at 0.892 TVPI.
The Venture Capital AssociateWhat defending a position costs, and how many companies a reserve pool actually defends.
Financial Risk ManagementA fund inside every limit that cannot meet a redemption — and the number that decides it is the one with no currency attached.
Business ValuationThree advisers land 26.8 per cent apart on one company, and the whole gap turns out to be 1.96 points of perpetual growth.
Quantitative FinanceThree models agree to a quarter of one per cent about a number that one unobservable input moves a hundred and three times as much.
Asset ManagementFour people quote four returns for one mandate, all correct and 2.7017 points apart — forty-eight times the manager’s net skill.
Alternative InvestmentsA manager reports 13.29 per cent and the endowment earns 6.26 — both correct, and only a third of the advertised advantage arrives.
Credit AnalysisFour defensible EBITDAs on one borrower give leverage from 3.19x to 6.47x — and the add-back argument is fifty times the covenant headroom.
Venture CapitalOne company out of twenty-eight returns 56.7 per cent of the fund, and half the capital goes in after the decision — at half the return.
Machine Learning for FinanceFive people quote the accuracy of one credit model, all five are right, and the number that decides how much money it makes is none of them.
Commercial Real Estate InvestingThe equity earned 8.6647 per cent and the investor received exactly 8.0000 — the preferred return, and nothing above it.
Mergers and AcquisitionsThe board paper says the deal creates 13,436,667 of value. The arithmetic says it destroys 17,530,855. Nobody is lying.
DerivativesThe treasury report says the hedge cost 1,233,698. That is the interest differential, not a cost.
Treasury ManagementFive cash balances for one company, all correct and 145,600,000 apart — and the revolver that is two-thirds of the liquidity leaves at a revenue fall of 8.4127 per cent.
Financial Planning and AnalysisRevenue 3.0190 per cent above budget and operating profit 16.3209 per cent below it, in the same quarter, with every figure correctly stated.
Energy TradingA position report that is 91.7031 per cent hedged and correctly computed, on a book that is short 2,542,000 MWh — and a margin call of 198,400,000 the next morning.
Construction Cost ControlA contract sum of 26,301,102 became a final account of 29,153,363 on the building that was drawn — and 85.8 per cent of what was lost was knowable on the day it was signed.
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