Lesson 8 of 25 · 7 min
Concentration limits: the caps written inside the schedule
An advance rate applies to an asset; a cap applies to its share of the whole, and the lower answer wins.
A schedule row is not the end of the calculation. Alongside the percentages sits a second set of rules limiting how much of the total any one holding may support, and those rules are applied after the row, not before it.
The reason is the shape of the loss. A diversified portfolio can fall a long way, but it rarely gaps. A single holding can go to a fraction of its value overnight on one announcement, and if that holding is most of the collateral, the lender's recovery goes with it. A concentration cap is the institution refusing to let one event determine the outcome of one loan.
Mechanically it is simple. The cap states a maximum share of eligible market value that a single position may contribute — 25 or 30 percent in a typical schedule, stated illustratively. Market value above that share is advanced at zero, or in a stepped schedule at a reduced rate. The position is not sold, not flagged, and not discussed. It is simply counted twice: once at the schedule rate up to the cap, and once at nothing beyond it.
The output is that the effective rate on a concentrated position bears little resemblance to its row. A 55 percent row, capped at 30 percent of an account in which the position is 42 percent, delivers 39.3 percent. The borrower reading the schedule sees 55. The system computing capacity sees 39.3, and the difference is not an error in either place.
Key terms
- Concentration cap
- A ceiling on how much of a portfolio's eligible market value one position may support. Applied after the advance rate, not instead of it.
- Excess above the cap
- The market value of a position beyond its permitted share. Credited at zero in a hard cap, or at a lower rate in a stepped one.
- Stepped cap
- A cap that reduces the advance rate on the excess in stages rather than cutting it to nothing at a single line.
Worked example
A 55 percent row delivering 39 percent
A $1,480,000 eligible portfolio, of which $622,000 is one listed company carrying a 55 percent row. The cap is 30 percent of eligible market value.
- Position as a share of the portfolio
- 42.0%
- Market value inside the cap
- $444,000
- Market value above the cap, credited at zero
- $178,000
- Lending value contributed
- $244,200
- Lending value if the cap did not exist
- $342,100
- Effective advance rate on the position
- 39.3%
$622,000 divided by $1,480,000.
$1,480,000 × 0.30.
$622,000 less $444,000.
$444,000 × 0.55.
$622,000 × 0.55.
$244,200 divided by $622,000.
The cap removed $97,900 of lending value without touching the schedule row, the price, or the number of shares held.
Check yourself
A schedule caps any single position at 25 percent of eligible market value and credits the excess at zero. An account holds $960,000 in total, including $384,000 of one company that carries a 60 percent advance rate. What does that position actually contribute?
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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.