In a subscription credit facility, the borrowing base is typically calculated by applying reductions, commonly referred to as concentration limits, to the uncalled capital commitment of each eligible investor (i.e. an investor whose uncalled capital commitments are included in the calculation of the borrowing base) and then multiplying the aggregate uncalled capital commitments (as reduced by concentration limits) of each eligible investor by the applicable advance rate. Concentration limits are included in the calculation of the borrowing base as a way for a lender to diversify its risk by capping the amount of exposure to a particular investor or group of investors it is willing to lend against.

While many people conceptualize concentration limits as a percentage of the borrowing base itself or as a percentage of the entire investor base of the fund, the most typical approach is to apply the haircut to that amount of an individual investor’s uncalled capital in excess of a specified percentage of the uncalled capital commitments of all eligible investors included in the borrowing base (e.g., all “Included Investors” and “Designated Investors”) without taking into account the investor’s particular advance rate, the advance rate of any other eligible investors or the uncalled capital commitments of any investors which are excluded from the borrowing base.

Concentration limits are usually assigned via a risk rating system—with strong “Rated Included Investors” having the most relaxed concentration limits and “Designated Investors” having the most stringent. Additionally, concentration limits can also be applied to some classes of investors in aggregate (e.g., all “Non-Rated Included Investors” and/or all “Designated Investors” may be subject to a concentration limit).

Most Common Way Advance Rates and Concentration Limits Are Used to Determine Borrowing Base

While advance rates vary among lenders and depend on the composition of the borrowing base, large syndicated facilities...