How credit is sized.

Sizing a facility is the quiet part of structured credit. The term sheet is the artifact everyone sees; the work that produced it — the tape cuts, the curve calibration, the argument over whether a 1.35× coverage target is generous or thin — sits in a spreadsheet most people never open. This is a walk through that spreadsheet, using a fictional but ordinary pool: a $100M Consumer AR facility, twelve-month revolver, 2.25-year scheduled weighted-average life.

The first thing you do with a tape is stratify it. A flat headline number — $100M of receivables, 14.6% gross yield — tells you almost nothing about how the pool will behave under stress. You break it apart along the dimensions that historically drive loss, and you do it before you touch a default assumption.

Cutting the tape

For a consumer pool, the cuts are fairly standard. The question isn't which dimensions to use — those are known — but where the concentrations sit and whether any single band is carrying more of the pool than you're comfortable extrapolating from.

• FICO bands: 620–659, 660–699, 700–739, 740+. In our pool, 38% sits in 660–699, which is the band where small macro moves produce the largest delta in observed default.
• DTI bands: <20%, 20–35%, 35–45%, 45%+. Anything above 45% gets haircut hard or excluded from the borrowing base.
• Seasoning: 0–3 months, 4–12 months, 12+. Fresh originations default at a meaningfully different rate than seasoned paper, and the mix shifts month-to-month in a revolver.
• Geographic concentration: top-5 MSAs, single-state cap typically at 15–20%.
• Industry concentration (for employment): no single employer sector above a stated threshold, often 25%.
• Loan-size distribution: average balance, top-10 obligor concentration, max single-loan exposure.

The stratification isn't decorative. It's what tells you whether the agency-calibrated loss curves you're about to apply are even the right reference set. If your 660–699 FICO band is 38% of the pool but the reference curve was built on a book where that band was 22%, you don't get to use the reference curve unadjusted. You either re-weight it to your mix or you build an in-house curve from comparable vintages and argue for why it's more representative.

From curves to advance rate

Once the tape is cut, you calibrate two loss scenarios: a base case and a stress case. Base case is typically the weighted blend of agency curves adjusted for your specific mix, trued up against the originator's own historical static pool data if it's long enough to be credible (three full vintages is the minimum I'll underwrite against). Stress is usually base × 2 to 2.5× for consumer, with a path — not just a terminal number — because timing of losses matters when you're modeling cash-flow coverage quarter by quarter.

For our pool: base-case cumulative net loss lands at 6.8% over the life of the receivables. Stress runs at 15.5%. Probability-of-default on an annualized basis sits around 4.2% in base, loss-given-default at roughly 72% (consumer unsecured recovers poorly). The math that matters is expected loss under stress: 15.5% cumulative, call it 17% with a buffer for modeling error and mix drift. That's the floor the advance rate has to clear, plus cushion.

Advance rate is then straightforward in structure but argued-over in degree. You start at 100%, subtract the stress loss (17%), subtract a cushion for timing mismatch and trigger-cure dynamics (typically 1–3%), and land somewhere in the low-80s. We priced the facility at 82% advance — $82M senior tranche at roughly SOFR + 450, a 10% mezzanine layer ($10M) at SOFR + 950, and an 8% equity sliver held by the sponsor. That equity piece isn't cosmetic; the senior won't close without the sponsor having real first-loss capital at risk.

Coverage and triggers

Coverage ratio is the single number that summarizes whether the cash thrown off by the pool, net of stressed losses and servicing, covers the debt service on the senior. For consumer AR we target 1.35–1.45×. Asset-based lending on receivables from investment-grade obligors can run tighter, at 1.25×. Specialty verticals — litigation finance, hard-money bridge, anything with lumpy recoveries — we push to 1.5× or higher. Our pool comes in at 1.38× base-case coverage, which is inside the band but not luxuriously so. That number is what the investment committee actually debates.

Triggers are the operational expression of the coverage target. The soft trigger — typically set at 1.20× — cuts off excess-spread distributions to equity and traps cash inside the structure. It's a warning light. The hard trigger — 1.10× for this facility — is a full early-amortization event: no new advances, all collections swept to senior paydown until the structure cures or unwinds. The gap between 1.20 and 1.10 is where the structure is supposed to self-correct. If it can't, the hard trigger is the circuit breaker that protects the senior from watching the cliff approach in slow motion.

The reason you don't just set the advance rate lower and be done with it is that structured credit is a three-sided negotiation. A facility sized at 70% advance is very safe for the senior and completely uneconomic for the sponsor, who is now funding 30% of the pool with equity and mezz at a blended cost that exceeds the asset yield. The sponsor walks, or worse, accepts and then runs the pool hot to earn their way out of the capital stack. Sizing that's too tight produces the same adverse selection as sizing that's too loose — it just takes longer to show up.

So the real discipline is designing a facility where the economics still make sense at every rung. The borrower gets capital at a rate that lets them originate. The junior earns a coupon that compensates for being in the first-loss path without the equity upside. The senior gets a coverage ratio and a trigger package that lets them sleep through a bad vintage. When one of those three is out of balance, the facility closes anyway — deals close — but it doesn't perform. Sizing, done well, is the argument that all three rungs hold weight.