The Underwriting Cost Floor
Why sub-$25m secured facilities stay orphaned through the capital cycle
Structuring a secured facility takes a broadly fixed amount of work.
Diligence on the collateral pool and on the servicer behind it. Legal drafting for the SPV, the security package and the account control agreements. Negotiation of the covenants, the trigger events and the order of the waterfall. Back-up servicing arrangements that someone has tested. Then the monitoring build, so that a month after drawdown a human being can tell you whether the thing is performing and, if it is not, which covenant catches it.
Almost none of that scales down with ticket size. A $10m receivables facility needs the same account bank arrangements as a $300m one. The security documents are shorter but not by much, and the negotiation over what happens when performance deteriorates is often longer, because the counterparty is smaller and has less room to concede. In our experience the diligence and documentation effort on a well-structured sub-$25m facility runs to a meaningful fraction of what a large one absorbs, against roughly a twentieth of the deployed capital.
That ratio is the whole story. Underwriting cost per dollar deployed rises sharply as the ticket falls, and below a certain threshold no institution with a large capital base and a large cost base can justify the work. Call it the underwriting cost floor. It is not a market failure in any interesting sense. It is fixed costs meeting variable revenue, and it does not move with rates, spreads, or where the cycle happens to be.
Three things happened this summer that people are reading as evidence the gap will close. All three are evidence it will not.
Bank capital reform changes what banks can hold, not what they want
On the 7th of July the Financial Policy Committee published its July Financial Stability Report. It held the UK countercyclical capital buffer at its neutral 2% setting and judged that vulnerabilities in risky asset valuations, sovereign debt and risky credit markets, private credit among them, remain and in some cases have become more pronounced since December 2025. It also announced that it will work with the PRA to modernise the bank capital framework, with a consultation package aimed at making the leverage ratio regime more proportionate: removing the countercyclical leverage buffer, aligning the additional leverage ratio buffer with international standards, and making a greater share of requirements and buffers releasable. The stated long-run destination is a single buffer that releases in stress.
This is sensible work and it will matter in the next downturn. It will not put a £3m equipment finance facility back on a bank balance sheet. That facility was never declined because of buffer releasability. It was declined because it fails the cost-to-serve test inside a bank that must pay a credit committee, a legal team and an ongoing monitoring function to look at it. Buffer usability governs what a bank can lend in stress. The cost floor governs what it is willing to lend in ordinary conditions, and the two questions have never been the same question.
The parallel securitisation reform points the same way. The FCA’s CP26/6 and the PRA’s CP2/26 both landed on the 17th of February, responses closed on the 18th of May, final rules are expected in the second half of this year and implementation in the second quarter of 2027. The stated aim is a more proportionate, less prescriptive regime. That should reward disciplined structuring. It does not alter the arithmetic of who can afford to structure a small deal.
The largest managers are solving a different problem, correctly
Bloomberg reported on the 28th of July that BlackRock is preparing a scaled push into private credit across a platform of roughly $220bn in private debt assets, assembled through the HPS and GIP acquisitions, with distribution named as the advantage. Two days later KKR reported a record second quarter: assets under management of $796bn, up 16%, $34bn of new capital raised and $24bn deployed in the quarter. On the same call, executives put the addressable market for asset-based finance at $9 trillion within four years, up from roughly $6 trillion today. The firm is converting KCOP, a retail multi-sector credit fund, into an ABF-focused vehicle renamed KABF.
Read that last item slowly, because it is the most informative thing either firm did in July. Asset-based finance is being manufactured as a retail distribution product.
Getting from $6 trillion to $9 trillion requires volume, standardisation and a wrapper an insurance balance sheet or a wealth platform can absorb. It does not happen one bilateral facility at a time. None of this is a criticism. At $796bn of AUM it is the only rational strategy available, and the firms executing it are very good at it. But it has a consequence that the commentary keeps skipping: as these platforms scale, their minimum economic ticket rises. It does not fall. Every incremental dollar of distribution capability makes the small bespoke deal relatively less attractive, not more. Complexity cannot be managed at scale, scale requires standardisation and simplification.
Policy keeps producing more borrowers at exactly this size
On the 12th of July the Chancellor announced additional capacity for the Growth Guarantee Scheme, which the British Business Bank expects to unlock a further £6.5bn of market lending over four years and support around 33,000 businesses. Turnover eligibility rises from £45m to £54m and terms extend to ten years for term loans and asset finance.
Worth noting what the scheme does. Facility sizes are generally capped at £2m with a 70% government guarantee. It seeds and de-risks lending at the borrower level. It does not fund an originator’s loan book. Behind every specialist lender that grows into the expanded eligibility band sits a balance sheet question the scheme does not answer.
The answer looks like the facility InSoil announced on the 30th of June: €120m senior secured from Pollen Street Capital, with an EIF guarantee under InvestEU, to scale agri-SME lending across Europe. Not equity. A structured warehouse line. The European Investment Bank puts the annual European SME financing gap at around €62bn, and that gap does not get closed by anyone selling access to a diversified credit strategy.
More originators, more demand for warehouse and forward-flow capital, and no new supply of institutions willing to negotiate a covenant package at that size. The gap widens.
What to ask before you sign a warehouse line
For an originator raising structured capital at this end of the market, the useful questions are not about price. They are about whether the counterparty has done this before at your size.
Ask who negotiates the covenant package and whether that person will still be reachable in month fourteen. Ask what the reporting pack contains, specifically whether it covers waterfall, delinquency, default, prepayment and recovery at loan level, because that is what tells both sides early whether the facility is working. Ask what happens on a trigger event, in sequence, and who has the servicer relationship if you are replaced. Ask whether cash routes through pledged accounts from day one or whether that is a post-closing item, because post-closing items have a way of becoming never.
And ask what else the counterparty is doing. A lender whose smallest facility is ten times yours is not being dishonest when they say they can accommodate you. They are describing an exception, and exceptions get reprioritised.
For allocators, the read-through is narrower but the same. The concern the FPC set out in July is valuation opacity and liquidity mismatch. Both are questions about structure. Neither is answered by scale.
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