Module IV· InterestIntermediate
Question
What is a 'commitment fee' and when is it due?
Answer
Mechanics
Commitment fee = a fee on the UNDRAWN portion of a credit line (typically an RCF or DDTL). The lender is compensated for the availability risk.
Deep diveShow more details
Example — RCF
| Item | Value |
|---|---|
| RCF total commitment | $50m |
| Drawn amount | $20m |
| Undrawn amount | $30m |
| Commitment fee rate | 50% of the spread (typical) |
| Spread on drawn | 350bps |
| Commitment fee rate on undrawn | 175bps |
| Annual commitment fee | 30 × 1.75% = $0.525m |
Consequence
On $30m of undrawn RCF at a 175bps commitment fee: ~$525k per year in availability cost, even if never drawn. Over 7 years = ~$3.7m cumulative (at a constant $30m undrawn).
Common pitfalls
- The commitment fee applies only to the undrawn portion, not the total commitment
- Modeling error: with a fluctuating RCF you must use the average undrawn balance
- For a DDTL: the commitment fee is often lower (50-100bps) because the drawdown is planned
Pitch tip
Question: "Is an RCF even worth it then?"
Answer: "In the middle market yes, because it cushions working-capital seasonality. The alternative — a higher cash reserve on the balance sheet — drags on IRR. A 175bps commitment fee is cheaper than the opportunity cost of holding liquidity"