Facility Fees and All-in Cost

Fees are not a rounding error on a first facility. The interest coupon is usually the headline number, but the fee stack determines a large part of what the facility actually costs, and fees are easy to compare incorrectly because they are charged on different bases over different periods.

The discipline is simple. For every fee, write down four things: who pays it, what base it is charged on, what period it covers, and when the cash actually leaves. Two facilities with identical headline pricing can differ once you resolve those four questions, because one charges on the commitment and the other on drawn balances, or one collects at closing and the other spreads the same amount over the term. Some fees are also conditional: they only bite if you draw early, exit early, amend the documents, or fail to close at all. Write down the trigger alongside the timing.

The fee stack, item by item

• Arrangement, structuring or underwriting fee. A one-time charge paid at or near closing, calculated on a base the agreement defines. That base varies: committed amount, initial drawn amount, or some negotiated figure. In the fictional example used below, it is 1% on a USD 12 million commitment, or USD 120,000. Check the base carefully, since a fee on total commitment costs more than the same percentage on an initial draw. In that example the optional USD 3 million accordion sits outside both the commitment and the fee base until exercised, but whether an accordion is included is a drafting point, not a rule. Names vary by provider, and a facility may use one label or several. What matters is the total of one-time charges at closing, not how many line items they arrive in.

• Unused fee and commitment fee. These two labels are often used interchangeably, and they can describe different economics. An unused fee is charged on undrawn capacity: the base is the commitment less the drawn balance, however the agreement measures it. A commitment fee is sometimes calculated the same way, but in some agreements it is charged on the full commitment regardless of how much is drawn. Whether the base is an average daily balance, a period-end balance or the full commitment is a drafting question, as is whether an accordion counts toward it. Read the base, not the label.

  The behaviour of the two bases is different, and this is where comparisons go wrong:

  • A fee on undrawn capacity moves inversely to utilisation. Draw less and it costs more in absolute USD, not just as a percentage of drawn debt.
  • A fee on the full commitment does not move with drawings at all. The USD amount is fixed for the period. It rises as a percentage of your drawn balance when you draw less, but no additional dollars are payable.

• Interest on drawn balances. Facilities commonly price as a base rate plus a spread, though fixed-rate loans also exist. Where there is a floating rate, each component is negotiable in its own way: which base rate, whether there is a floor, how often the rate resets, and the day count convention. Actual/360 versus actual/365 changes the cash cost of the same quoted rate. All of it is contractual, and each piece belongs in your comparison as a separate input.

• Servicing and administration. Servicing may be charged on collateral balances, on collections, or as a flat amount, and administration covers the trustee, backup servicer, verification agent, account bank and reporting infrastructure. Whether these sit inside your operating company or are paid to third parties, they are a genuine cost of running the structure and belong in the all-in number. Collateral controls, borrowing base administration and reporting cadence all cost money to operate, and building that capability before closing is covered in what you need.

• Legal and diligence costs. Your own counsel bills you. Whether you also reimburse the capital provider's legal and diligence expenses depends on the expense terms you agree, so read that clause rather than assuming either outcome. Ask for a cap or an estimate early, and ask what happens if the transaction does not close. Abort cost exposure is a drafting point, and the answer differs by deal.

• Prepayment, break and funding-loss charges. These cover early repayment, early termination, or repaying a fixed-rate or period-matched drawing off-cycle. They can be structured as a percentage that steps down over time, a make-whole, or a pass-through of the provider's actual funding loss. If you expect to refinance into a larger facility or into a term ABS transaction — a term asset-backed securities issuance, where a structure issues securities backed by a pool of assets — within two years, this clause deserves as much attention as the spread.

• Late, default and amendment fees. Default interest may apply on overdue amounts or after an event of default, depending on what the documents provide; it is not universal, and the rate and trigger are negotiated. Amendment and waiver fees may apply when you need to change eligibility criteria, add a product, or fix a covenant breach, though whether a fee is charged and how it is calculated again depends on the documents and on the negotiation at the time. If your book is likely to evolve, read the amendment mechanics closely rather than assuming the question will not come up.

Do not double count

Providers describe the same economics in different ways. An arrangement fee and a structuring fee may be alternatives rather than additions. A servicing fee charged to the SPV — the special purpose vehicle, a separate legal entity that holds the collateral and borrows under the facility — and an internal servicing cost in your operating company can be one cost or two, depending on who actually performs the work.

Original issue discount deserves its own note. OID reduces the net proceeds you receive against the principal you owe, and it can sit alongside an explicit upfront fee rather than replacing it. Model the cash you actually receive and the cash you actually repay, then check you have not counted the same economics twice under two labels. When you build the comparison, group by economic function, confirm with the provider which items are cumulative, and put the answer in writing.

A fictional worked case

The numbers that follow are invented for teaching. They are not market benchmarks and are not drawn from any transaction. All amounts are USD.

The model is deliberately simple, and its limitations matter when you read the results. Interest, unused fees, servicing and loss rates below cover one year; the advance rate is a collateral percentage and the arrangement fee is charged once. Every balance is a flat annual average, so the USD 7.2 million of average drawn debt is assumed to sit there for the full year. Replenishment is assumed to maintain those averages, but the model does not track individual purchases, principal collections, draws, repayments, ramp-up, accrual conventions or day counts. A real facility revolves, and the timing of collections and reinvestment moves both interest and fee accruals. Treat the figures as a structure for comparing quotes, not as a forecast.

Assume USD 10 million of collateral purchased at par, USD 9 million eligible, an 80% advance rate, a USD 12 million commitment and USD 7.2 million of average drawn debt. Gross cash yield is 12% per annum on collateral, borrowing interest 8% per annum on drawn debt, the unused fee 0.5% per annum on commitment less average drawn debt, servicing 1% per annum on collateral, administration USD 30,000 a year, arrangement 1% once on the commitment and legal USD 60,000 once. Net credit losses run 2% of collateral.

First-year costs total USD 910,000: USD 576,000 interest, USD 24,000 unused fee, USD 100,000 servicing, USD 30,000 administration and USD 180,000 of upfront arrangement and legal fees. Against USD 1.2 million of gross cash income, that leaves USD 290,000 before credit losses and USD 90,000 after USD 200,000 of net losses.

Two ratios matter. First-year cost on average debt is USD 910,000 divided by USD 7.2 million, or 12.64%, and that figure includes servicing and administration rather than financing alone. Strip out the USD 180,000 of one-time fees and the recurring cost is USD 730,000, or 10.14% on the same average debt, with surplus after losses rising to USD 270,000. The gap between those two numbers is the whole argument for thinking about facility cost across a term rather than a first year.

Credit losses are not a fee. Keep them on a separate line. With the other inputs held fixed, the first-year break-even is 2.9% of collateral in net losses. Higher-loss and half-size scenarios are developed separately in the warehouse worked example.

What happens when you draw less

Fee structures that look reasonable at planned utilisation cost considerably more per dollar of debt when you draw less. Take the same fictional facility at half size: USD 5 million of collateral and USD 3.6 million of average debt against the same USD 12 million commitment. The same modelling limitations apply — annual rates, flat annual average balances, replenishment assumed but no individual intra-year cash movements modelled — and the same caveats are set out with the fuller scenarios in the warehouse worked example.

Several things move at once. Interest falls to USD 288,000 because the balance halved. Servicing falls to USD 50,000 because collateral halved. The unused fee rises to USD 42,000 because there is more undrawn capacity to pay for. Administration and upfront fees do not move at all. Total cost excluding losses is USD 590,000, or 16.39% of average debt, against 12.64% in the base case. Nothing about the pricing changed. The mix of fixed, variable and inversely variable charges did.

The unused fee is the item to watch, and only because its base is undrawn capacity. Had the same 0.5% been charged on the full commitment instead, the fee would have been a flat USD 60,000 in the base case, in the half-size case and at zero drawings alike — higher at planned utilisation, and unchanged as drawings fell.

The zero-draw case shows the fixed component clearly. Under these specific fictional terms, if you closed the facility, drew nothing and held no collateral for a full year, you would still owe USD 180,000 of upfront fees, USD 60,000 of unused fee on the full undrawn commitment and USD 30,000 of administration: USD 270,000 against zero borrowings. Cost per dollar of debt is not a large number in that case. It is undefined. That USD 270,000 depends entirely on those stated terms and a full year of commitment, and you should not assume every facility charges these fees.

Size the commitment against the book you will actually build, and check how draw timing and borrowing base capacity interact in how facility funding works.

Before you sign

Ask for a full fee schedule in writing, with base, period, trigger and payment timing for each item. Confirm in particular whether each recurring fee is charged on undrawn capacity or on the full commitment. Model first-year and steady-state cost separately. Model your realistic utilisation, not the commitment. Confirm which fees survive an early exit and which are payable if the transaction aborts. Have counsel confirm the scope of any expense reimbursement and indemnity language, since those are legal questions rather than pricing ones.

Then take the all-in total — interest, recurring fees, servicing and administration at your expected utilisation — rather than the spread alone into the negotiating terms conversation and the path to close.