How is a commitment fee typically calculated?

A commitment fee is typically calculated based on the unused portion of the facility. This fee serves as compensation to the lender for reserving funds that the borrower has the option to draw upon but has not yet utilized. By charging this fee on the unused amounts, the lender is incentivized to make capital available for potential future borrowing while also earning a return on the capital that remains untapped.

In leveraged finance, the structure and terms of commitment fees are essential because they influence the cost of borrowing. The unused portion reflects the amount of credit that is set aside for the borrower, and as such, it is common for lenders to charge a fee on these amounts to cover the opportunity cost of keeping funds available.

Other options do not accurately reflect the standard practice for calculating commitment fees. While the total amount drawn can have its own fees, it isn’t relevant for commitment fees specifically. Similarly, a fixed percentage of the loan or calculations based on the borrower's credit rating pertain more to the interest rate or other forms of fees rather than the commitment fee structure.