Seen in practice
NAV Facility Margin Spirals
A NAV facility becomes dangerous when falling marks reduce borrowing capacity faster than the fund can raise liquidity. The facility can turn an accounting decline into a cash demand.
The Basic Sequence
The fund borrows against portfolio NAV. If valuations fall, the permitted loan balance falls too. When outstanding debt exceeds the permitted amount, the lender can require a cure through cash, new collateral, repayment, or asset sales.
Why It Can Spiral
Forced sales during weak markets often clear below reported NAV. Those lower sale prices can pressure remaining marks, which can create more borrowing-base pressure and another margin call.
Diligence Questions
- What is the current facility balance as a percentage of NAV?
- How often are marks refreshed, and who controls valuation?
- What cure period applies after a borrowing-base breach?
- Can the lender force asset sales or block distributions?
- Does the fund have uncalled capital or cash to cure stress?