Lesson 2 of 25 · 6 min

Availability and price are two different things

A line can carry an unchanged rate and be entirely unusable, and no statement will mention the second fact.

Two questions look like one question. What does it cost to borrow, and can I borrow at all? They are answered by different parts of a lender's machinery, on different clocks, and they move independently.

Price comes from a funding cost and a pricing decision. Availability comes from advance rates, eligibility tests, internal exposure limits and how much of the lender's own capacity is already committed. Different people set them, using different inputs, and neither consults the other.

The asymmetry that matters is one of disclosure. Price is contractual and appears on every statement, because the lender has to justify a charge. Availability is a policy figure and appears nowhere, because nothing is being charged for it. A borrower who monitors the statement is monitoring the half that is disclosed, and it is by some distance the smaller half of the two.

Work it through. A $1,180,000 portfolio at a 58 percent advance rate supports $684,400 of borrowing; against a $460,000 balance that is $224,400 of undrawn capacity. Revise the advance rate to 44 percent and the same portfolio supports $519,200, leaving $59,200 undrawn. The rate never moved, the interest bill is identical, and 73.6 percent of the unused part of the line has gone — ($224,400 minus $59,200) divided by $224,400.

A rate is what you pay for what you have taken. Availability is what is still there. A statement reports the first with great precision and is silent on the second.

Key terms

Availability: How much may actually be drawn today. A function of collateral values and lender policy, not of the interest rate.
Undrawn capacity: Borrowing room that exists but has not been used. It absorbs the first part of any tightening, silently, because nobody was charged for it.
Disclosure asymmetry: The pattern where the priced half of an arrangement is reported in detail and the unpriced half is not reported at all.

Worked example

The rate holds still while the line empties

Illustrative figures. A $1,180,000 pledged portfolio, a $460,000 drawn balance, a rate of 7.4 percent that does not change.

Capacity at a 58 percent advance rate: $684,400
Undrawn capacity: $224,400
Capacity at a 44 percent advance rate: $519,200
Undrawn capacity after: $59,200
Share of the unused line removed: 73.6%
Change in the annual interest charge: $0

Nearly three quarters of the usable part of the facility disappeared in a period during which every figure on the statement was unchanged.

Check yourself

Two borrowers are quoted the same 7.9 percent rate on the same day. One has $310,000 of undrawn capacity and the other has none, because their collateral sits in different schedule rows. In what sense are they being offered the same credit?

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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.