A single interest payment touches several systems before it shows up in a fund's NAV. The agent calculates it, the borrower pays it, a bank receives it, the fund's loan system accrues it, and the fund administrator books it. Each party keeps its own record, and each record can be wrong in its own way.
This lesson follows the data between those parties, then looks at how operations teams reconcile the records (compare them and explain every difference), handle exceptions, and control the process so errors are caught before they reach investors.
Where the data comes from
Loan operations run on documents and data that arrive from outside the fund. The main sources are:
| Source | What it provides | Who sends it |
|---|---|---|
| Agent notices | Rate settings, interest and fee amounts, fundings, paydowns, amendments | The administrative agent (lesson 1.1) |
| Borrower reporting | Financial statements and compliance certificates | The borrower, often through the agent |
| Rate fixings | Term SOFR or daily SOFR for each period | A rate publisher, via a market data feed |
| Cash records | Money received and paid | The fund's custodian or bank |
| Trade confirmations | Purchases and sales of loan positions | The counterparty or the agent (lesson 1.3) |
A compliance certificate is the borrower's periodic confirmation of whether it meets its covenants, with the calculations (PC101 4.3). It matters to operations as well as credit: a covenant breach or a pricing grid based on leverage can change the interest rate.
The systems that hold the records
Two records sit at the center of a credit fund's operations.
The loan administration system is the fund's own record of each loan, kept by an in-house operations team or an outsourced loan administrator. It holds:
- Positions: how much of each loan the fund holds, funded and unfunded.
- Schedules: interest periods, payment dates and amortization.
- Terms: the spread, floor, day count and fees from the credit agreement.
- Accruals: interest and fees earned but not yet received, calculated daily.
The fund administrator keeps the fund's books and calculates its NAV (lesson 3.2). It takes position and income data from the loan system, cash from the bank, and fair values from the valuation process, and produces the fund's accounts.
The two records are designed to agree. Data typically flows like this:
| Step | From | To | Check |
|---|---|---|---|
| 1 | Agent notice | Loan system | Recalculate the amount from the loan's terms |
| 2 | Bank or custodian | Loan system | Match cash received to the expected payment |
| 3 | Loan system | Fund administrator | Match positions and accrued income |
| 4 | Agent register | Loan system | Confirm the fund's holding in each loan |
Some managers run the loan system themselves and some outsource it; some fund administrators provide both. The checks are needed either way.
Reconciliations and why breaks happen
A break is a difference found by a reconciliation. The two main reconciliations are:
- Positions: the fund's holding in each loan per the loan system, the fund administrator and the agent's register.
- Cash: what the loan system expected, what the agent said it would pay, and what the bank actually received.
Many teams reconcile cash daily and positions at least monthly, though the frequency varies. Breaks commonly come from:
- Timing: a payment or trade booked for one date settles on another.
- Rate differences: the wrong fixing, or a floor not applied.
- Day count differences: a loan set up with the wrong convention.
- Missed notices: a paydown, rate change or amendment not entered.
- Fees: amendment, commitment or prepayment fees paid alongside interest but not expected.
Worked example: a day count break
The following example is illustrative. The agent's payment notice shows $2,338,194.44 of interest on Alder Ridge Logistics' $100m loan: 9.25% for 91 days on Actual/360 (lesson 1.2). The fund's loan system expected a different amount.
| Record | Calculation | Interest |
|---|---|---|
| Agent notice | $100,000,000 × 9.25% × 91 ÷ 360 | $2,338,194.44 |
| Loan system | $100,000,000 × 9.25% × 91 ÷ 365 | $2,306,164.38 |
| Break | $32,030.06 |
The rate and the days match, so the analyst looks at the day count. The credit agreement says Actual/360; the loan was set up on Actual/365. The agent is right and the fund's setup is wrong.
The fix is to correct the loan's setup to match the credit agreement, with approval and evidence, and let the system recalculate the accrual. It's tempting to book a manual adjustment so the accrual equals the cash, but that clears this quarter's break and leaves the error in place: the loan would under-accrue every day until someone notices. Past NAVs may also have understated accrued income, so the finding goes to the fund administrator too.
Exception handling
Not every break can be cleared the same day. Good exception handling means:
- Logging every break with its amount, date found and owner.
- Investigating the root cause against source documents, usually the credit agreement and the agent notice.
- Aging: tracking how long each break stays open, with escalation to a manager after a set time.
- Resolving at the source, whether that's a system setup, a missed notice or a query to the agent.
If the agent's figure looks wrong, the team raises it with the agent rather than booking its own number and moving on. Agents make mistakes too.
Controls
Controls are the checks that stop errors and fraud from getting through. Common ones in loan operations are:
- Segregation of duties: no one person controls a process from start to finish. The person who sets up a loan isn't the one who approves the setup, and the person who books a payment isn't the one who releases it.
- Dual authorization of payments: two authorized people approve each outgoing payment, such as a funding. Changes to payment instructions are commonly confirmed by a call-back to a known contact, since fake instructions are a known fraud risk.
- Independent checks: the fund administrator independently recalculates income and reconciles to the loan system, and the auditor tests the controls and balances each year.
- Review of new setups: a second person checks each new loan's terms against the credit agreement before the first accrual runs.
The Alder Ridge break is exactly what a setup review is designed to catch before it reaches the cash.
Key terms
- Loan administration system: The fund's record of its loan positions, terms, schedules and accruals.
- Reconciliation: Comparing two records of the same thing and explaining every difference.
- Break: A difference between two records found by a reconciliation.
- Compliance certificate: A borrower's periodic confirmation of whether it meets its covenants.
- Segregation of duties: Splitting a process so no one person controls it from start to finish.
- Dual authorization: Requiring two authorized people to approve a payment.
Key takeaways
- Data flows from agents, borrowers, rate publishers, banks and counterparties into the loan system and on to the fund administrator.
- Positions and cash are reconciled between the agent, the loan system, the fund administrator and the bank.
- Breaks commonly come from timing, rates, day counts, missed notices and fees.
- Fix breaks at the root cause, as with the $32,030.06 day count break, rather than forcing the numbers to match.
- Segregation of duties, dual authorization and independent checks keep errors and fraud out of the NAV.
This lesson is for educational purposes only and is not investment advice.