Lesson 11 of 25 · 7 min

Sector concentration and the lender's grouping

A schedule can collapse several line items into one, so a ratio computed per holding can miss the limit entirely.

Lesson 6 measured concentration one holding at a time. A schedule frequently measures it a group at a time, and the grouping is the lender's, not yours.

Groupings that commonly appear, each collapsing several line items into one test:

Issuer: two share classes of the same company, or a holding plus a convertible bond of the same issuer.
Industry: several operating companies whose revenues respond to the same conditions.
Look-through: a narrow sector fund whose holdings are added to the same group as the shares you hold directly.
Factor: holdings a risk model treats as driven by one common exposure, even across industries.

Work an example. The pledged pool is $3,140,000 and five holdings sit in one industry: $410,000, $288,000, $356,000, $174,000 and $262,000, totalling $1,490,000. The largest is $410,000 ÷ $3,140,000 = 13.1 percent of the pool, comfortably inside a 15 percent single-name limit. The group is $1,490,000 ÷ $3,140,000 = 47.5 percent, and a 30 percent group limit permits $942,000.

The excess is $1,490,000 − $942,000 = $548,000, and if the schedule drops the advance rate on that excess from 65 percent to 25 percent, lending value falls by $548,000 × 0.40 = $219,200. Every single-name test passed. The five holdings were each unremarkable. The line lost $219,200 of collateral to a rule that never looked at a holding individually.

A concentration test is only as informative as the grouping it uses. Five passing line items and one failing group are the same portfolio described at two levels of aggregation.

Key terms

Issuer group: All exposures to the same company, across share classes and instrument types, added together for concentration purposes.
Sector limit: A cap on the share of the pledged pool a lender will count at full value within one industry, independent of any single-name cap.
Look-through: Counting a fund's underlying holdings toward a group, rather than treating the fund as one diversified line item.

Worked example

Five passing holdings, one failing group

Pledged pool $3,140,000. Five holdings in one industry: $410,000, $288,000, $356,000, $174,000, $262,000. Illustrative limits: 15% single name, 30% per industry group; excess drops from a 65% to a 25% advance rate.

Largest single holding as a share of the pool: 13.1%
Group total: $1,490,000
Group share of the pool: 47.5%
Amount inside the group limit: $942,000
Excess above the group limit: $548,000
Lending value lost on the excess: $219,200

No line item breached anything. The aggregate breached by 17.5 points of the pool, and the collateral effect was $219,200.

Check yourself

A pledged pool of $2,460,000 contains four holdings in one sector totalling $861,000. The group limit is 25% of the pool, and the excess falls from a 62% to a 20% advance rate. How much lending value does the group rule remove?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.