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WORKBOOK — THE CORPORATE EXECUTIVE

Chapter I.06 · Bringing the Money With You

For the person with a P&L, a treasury function and a capital allocation process. You have a pilot that paid. This is how it gets funded at size, on terms your treasurer will recognise and your auditor will sign.

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THE PREMISE, STATED COMMERCIALLY

Your pilot was funded out of discretion. That route closes at scale, and it closes abruptly: the sum passes a threshold, a committee appears, and the conversation stops being about the result and starts being about the cost of capital.

That is not an obstacle. It is the point at which this becomes a treasury matter, and treasury is far better equipped to solve it than the sponsor was. Your treasurer already knows how to layer a capital structure, price subordination, read a guarantee and compute a blended cost of funds. What they have not been given is a reason to point those skills at a regenerative asset, and a loss assumption they can defend.

Both are supplied here, and neither requires a new mandate.

The commercial claim of this chapter, in one line: for an asset with a genuine return and an unfamiliar risk profile, the cheapest capital available is almost never the cheapest tranche — it is the structure that lets a conventional lender attach high enough to price normally. Firms routinely pay 300 basis points for unfamiliarity when 150 basis points of first loss would have removed it.

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PART ONE — DISCOVERY

Days 1–30

Exercise 1.1 — The internal capital audit (one week, with treasury)

Before going outside, find what is already inside. Answer in writing:

1. What is our actual weighted average cost of capital, by tranche, today — not the number in last year's board pack?
2. What committed but undrawn facilities do we hold, and what do they cost us in commitment fees for capital we are not using?
3. Which of our existing facilities carry sustainability-linked margin ratchets, what is the ratchet in basis points, what is our average utilisation, and what does the reporting actually cost us in assurance fees and internal hours?
4. Where does our pension scheme, foundation, or corporate giving programme hold capital, and what is it earning?
5. What guarantees have we issued to subsidiaries, suppliers or customers, and what has any of them ever cost us?

Question three is the one that pays for the week. Run the break-even: annual cost divided by (ratchet × utilisation). A great many firms discover they are paying five and six figures a year to prove they earned a discount on a margin they are barely paying. If you are below break-even, renegotiate the ratchet at the next amendment or drop the label — and say so plainly rather than quietly.

Question four is the one that surprises people. Corporate foundations frequently hold endowment capital in instruments returning less than the first-loss position in your own facility would return, with no mission benefit at all.

Exercise 1.2 — The external capital map (one week)

List, by name, every institution within reach that could take a position in a stack. Not categories — names.

The third column is the only one that matters. Institutions do what they have done. A foundation that has written a reserve before will write another in weeks; one that has not will take a year and may not finish.

Exercise 1.3 — The appreciative lender conversation (three meetings)

Ask your existing bank, before you need anything:

"Tell me about a credit you approved that you would not normally have approved. What made it possible? What was in the structure that let you get comfortable?"

Credit officers answer this question generously and almost nobody asks it. You will hear the words attachment point, cushion, cover ratio and precedent. Those four words are the specification for everything you build next.

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PART TWO — THE ARITHMETIC

Days 31–45

Exercise 2.1 — The loss assumption, sourced (one week)

This is the foundation of the entire structure and it is where most proposals fail.

Write one page: what losses should this book be expected to produce, and from what history? Name the source. The community development finance sector's net charge-off rate of 0.58 percent is a real, published, defensible figure — and it is a figure about that sector's book, so applying it to yours requires you to argue the comparison rather than assume it.

State three things:

1. The rate, and the source.
2. Why your book is comparable, and in what ways it is not.
3. The stressed rate you will also compute at — three times is conventional.

A loss assumption with no named source is the most common failure in this whole field, and it is fatal at the first credit committee, not the second.

Exercise 2.2 — The blended cost of funds, computed twice (2 hours)

  layer                 weight    cost    contributes
  first loss              10%    0.00%       0.000%
  subordinated            20%    2.00%       0.400%
  senior                  70%    6.00%       4.200%
  ---------------------------------------------------
  blended cost of funds                       4.60%

  book: 8.00% yield − 0.58% losses − 2.50% opex  =  4.92% net
  margin                                          +32 bps

Now do it again with the senior tranche at 7.50 percent. Blended cost becomes 5.65 percent and the margin becomes −73 basis points.

Present both numbers, always, and present the second one first. A treasurer who is handed only the favourable case will compute the unfavourable one themselves, in the meeting, and you will spend the rest of it recovering.

The rule that follows is the one to take to the committee: if the structure fails the stressed computation, the fix is a thicker first-loss layer, never a higher lending rate. Raising the rate closes the arithmetic gap by importing exactly the credit losses that will reopen it.

Exercise 2.3 — Price the guarantee (2 hours)

For any eligible portion of your book, compute the guarantee properly.

  $4,000,000 loan, 10 years, 8%, 80% guaranteed
  upfront 3% of guaranteed portion           $96,000
  0.55% annual renewal on guaranteed o/s    $107,865
  ------------------------------------------------
  total                                     $203,865
  average outstanding balance             $2,451,474
  annualised                                   83 bps

Then answer the question that decides whether to buy it: what does the lender's internal rating do when the guarantee is applied, and what is that worth in margin? If a guaranteed facility prices 150 basis points inside an unguaranteed one, an 83 basis point fee is a 67 basis point gain and a faster credit committee. If your lender will not price the difference, ask a second lender — some price it mechanically and some do not.

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PART THREE — DESIGN

Days 46–60: the instrument

Exercise 3.1 — Draft the facility (one week, with treasury and legal)

The structure is a blended revolving facility with a first-loss reserve and an optional guarantee wrap. One legal entity, or one ring-fenced account inside an existing one.

Exercise 3.2 — The accounting conversation (one meeting, early)

Three treatments to settle before the raise, not after:

• The first-loss reserve is an asset of its provider, carried at face less an impairment allowance equal to expected loss — not an expense at placement. That distinction is why a foundation can post a dollar and expense two cents a year. If you are the provider, this conversation is the whole transaction.
• The guarantee fee is a finance cost amortised over the term, not a period expense.
• The funded asset, where its productive capacity is demonstrably rising, should be depreciated over its regenerated life rather than its extracted life. Bring condition evidence, not conviction: soil organic carbon trend, plant availability statistics, defect rates, retention curves.

You will not close all three in one meeting and should not try. You are opening a file, not closing one — and the file, once open, changes what is arguable in year two.

Exercise 3.3 — Sequence the raise (one afternoon)

Build from the back. Never open with the senior lender.

The single most useful sentence in the senior meeting: "With ten percent of first loss and twenty percent of subordination beneath you, you attach at thirty." It relocates the conversation from your project to their risk, which is the only thing they are permitted to decide about.

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PART FOUR — DESTINY AND DELIGHT

Days 61–90

Exercise 4.1 — Make it a facility, not a project (one week)

The most expensive mistake available here is to assemble the machinery for one project and dismantle it when the project ends.

Write the availability period into the documents. Write the eligibility criteria for the second deal before the first one closes. Name the person who administers it who is not you.

Exercise 4.2 — The reserve provider's annual page (draft it now)

One page, annually, to whoever posted the first loss:

  capital mobilised this year        $
  losses absorbed                    $
  reserve remaining                  $
  projects delivered                 n
  expected loss vs actual            x bps vs y bps

They are defending this internally too. Make the defence easy and the reserve renews; leave them to construct it and it quietly does not. Draft the page before you take the money, and show it to them during the ask — it is frequently the thing that closes it.

Exercise 4.3 — The failure modes, on one page

Name them in the board paper, before someone else does:

• First loss sized to convention. Ten percent because ten percent is typical, rather than because the loss history says so. The first bad year eats it.
• A verbal covenant in the patient tranche. The founder agreed it; the successor discovers it in writing.
• Single-lender concentration. One credit officer's departure reopens the whole structure.
• Project, not facility. The machinery goes out with the scaffolding.
• Below-break-even labelling. Paying six figures a year to prove you earned a discount on an undrawn margin.

A board paper that names its own failure modes is read differently from one that does not, and the difference is worth more than any additional evidence you could put in it.

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THE NINETY DAYS ON ONE PAGE

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BOARD PAPER TEMPLATE

One page. In this order.

1. The result. The pilot, its verified number, its signed baseline. Two lines.
2. The ask. Facility size, and what it funds in twenty-four months.
3. The stack. The four layers, by name, with amounts and costs.
4. The number that decides it. book yield − expected losses − operating cost > blended cost of funds, computed on quoted rates and with the senior tranche 150 basis points higher.
5. The loss assumption, with its source, and why this book is comparable.
6. The failure modes, named, with what mitigates each.
7. What is being asked of the board, in one sentence, with a date.

What is not in it: the environmental case. Not because it is untrue, but because it is not what this committee is deciding, and putting it in signals that you think the arithmetic needs help. It does not.

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APPRECIATIVE QUESTIONS FOR YOUR LEADERSHIP TEAM

1. When has this firm been lent money on unusually good terms, and what — exactly — made the lender comfortable? Who in this room was in that conversation?
2. Which of our existing lenders would tell us what their attachment point needs to be, if we simply asked them before we needed anything?
3. Where is capital sitting in our orbit — foundation, pension, undrawn facility, parent company — earning less than a first-loss position would return?
4. If our treasury could assemble a four-layer stack as routinely as it renews an overdraft, what would we fund next year that we are not funding now?
5. What would have to be true for this facility to make its fourth loan after everyone in this room has moved on?