Developers and borrowers, for their part, will want maximum flexibility to introduce new lenders of their choice (including to optimize pricing conditions). They will also want to ensure that the process and timelines for setting up the new line are not excessively long, especially when considering the additional obligations arising from event financing. In the mid-cap market, as a general rule, only new maturity facilities or bonds that are of equal importance to the TLB are allowed. However, for larger transactions, revolving facilities may also be permitted and additional subordinated debt structures may be permitted. Debt accordions, such as the box-shaped portable musical instruments that give them their name, can be pulled and stretched to lengthen when needed, creating flexibility for borrowers. Companies typically include an accordion agreement, which comes with an additional cost to the borrower if they expect to need additional capital to fund expansion plans in the future, but the timeline remains uncertain. The additional funds can be used to acquire other businesses, increase working capital, money available to finance the day-to-day operations of a business or to meet other needs. Debt accordions are simple and inexpensive. They don`t need a new loan agreement, which allows corporate borrowers to access funds relatively quickly when they need it. Many credit facilities have an “accordion” feature that allows a borrower to gradually increase the amount of its availability under an existing credit facility. – making it a popular option for borrowers considering a potential acquisition. This note from Davis Polk discusses some of the key considerations associated with such additional facilities from the perspective of both the borrower and the lender. Here`s the intro: An accordion feature gets its distinctive name from how the bellows of an accordion (a musical instrument) can be stretched to increase the overall size of the instrument.
Such a clause allows an undertaking to obtain additional obligations from the original creditor and, where applicable, from other creditors not participating in the original credit agreement, provided that there is no default on the part of the borrower. However, this additional obligation is at the sole and absolute discretion of the lender. In addition, an accordion function is subject to new prices by the lender(s) as well as new conditions that must be acceptable to the borrower, agent and lender(s). It is important to note that even though a company can buy an accordion, it can still refrain from increasing credit if it thinks expansion is possible without incurring additional debt. Consider the following example to better illustrate an accordion feature. Suppose C1 already has a $1 million line of credit with B1 Bank. Suppose C1 needs additional capital worth $500,000 to install an ancillary production facility on its premises. To this end, C1 is purchasing an accordion from B1 that will allow it to increase its total debt commitment from $1 million to $1.5 million.
A debt accordion, also known as an additional facility, is a provision that allows a borrower to increase the maximum amount allowed for a line of credit (LOC) or add a term loan to an existing loan agreement. Lower or unsubmitted credits often do not include accordion facilities at all. However, we see a lot of interest for all parties to integrate at least the establishment mechanism from the outset, albeit with creditor discretion over key conditions, which can be relaxed by a simplified consent mechanism if necessary. The advantage of this approach is that it avoids changes and (possibly) provides additional mental security, as well as the required business approvals and legal advice that would otherwise be required if such a facility or increase in bonds were desirable in the future – for example, to support an acquisition or liquidity event. A borrower may also be able to get more favorable terms while having greater leverage at the beginning of a transaction. The main attractions are simplicity and economy. Since there is no need to negotiate a separate loan agreement, borrowers benefit from a short execution schedule once the accordion debt has been fully allocated. Where the new facility(s) and related credit support are provided in accordance with the guarantees granted to existing lenders, they shall be included in the existing documentary framework without the need for further consent from the creditor. Debt accordions can be especially useful for emerging startups with a new and innovative idea or product. Conditioning additional loan increases on the company exceeding pro forma expectations gives financial institutions (FIs) some peace of mind and ensures that more of them are willing to lend to a business that would otherwise be considered too risky to lend. A borrower must have sufficient debt capacity – and this level of debt capacity must be acceptable to lenders (with due regard to any debt relief narrative). The LMA credit document allows users to specify their own digital cap.
However, in loan agreements for stronger sponsors, we generally don`t see a fixed cap on accordion debt and the inclusion of unlimited accordion debt, subject to pro forma adherence to a debt test. These are generally only senior debts, if the eligible debts are only senior debts or are considered to be senior debts and total debts, although subordinated. Latham & Watkins` innovative Book of Jargon series demystifies legal and business jargon®. The latest edition of the Book of Jargon® – US Corporate and Bank Finance provides an introduction to the slang and terminology of corporate and banking finance and reflects the terms of the post-economic crisis world in a View More + The option to increase a loan term or loan amount with a financial lender is most often offered in commercial accounts and usually in the existing terms of an already existing loan agreement. put. Typically, the interest rate, amount charged for the loan, and other terms remain the same as the original line of credit or loan agreement. The current popularity of additional installations in the market suggests that they will continue to be a remarkable feature. As with any development of this type, we will likely see additional complexity and increased borrower flexibility, but only time will tell. As a general rule, it is required that the all-in-one accordion debt incurred within a certain period of time after the initial financing does not exceed a certain level above the total amount in return for the initial debt in question. The total return is intended to represent the total return, taking into account interest margins (including lower limits), upfront fees, initial issuance discounts, and other fees generally payable to lenders.
The trading points here relate to the duration of the upper limit (the “sunset period”). For large-cap transactions, this is usually 6 or 12 months from the initial conclusion of the loan agreement. For mid-cap transactions, it is often longer (perhaps the life of the facilities). It can also be relaxed by allowing the yield on accordion debt instruments to be increased beyond the established threshold, provided that the yield on existing debt securities increases accordingly. In the meantime, this source of revolving capital allows the company to quickly access the funds it needs to realize its potential when and where opportunities arise. Taking the time to warm up credit conditions can be counterproductive and give competitors a chance to take advantage of the opportunity. For companies, especially companies with a new and innovative idea or product, the accordion function is advantageous in several respects. First, it allows the company to set more favorable terms for lenders. This serves to attract more lenders to businesses looking for loans that would otherwise be considered too risky.
By conditioning increases in additional loans on the company exceeding pro forma expectations, lenders focus more on opportunities than risk. Second, the terms of the entire line of credit, including incremental increases, are negotiated at the beginning. Thus, when a credit increase takes place, all conditions are predetermined and the credit increase can be accelerated. This is especially important for the new company that has exceeded its expectations, and rapid expansion may be warranted to capitalize on untapped markets before competitors seize the opportunity. Taking the time to warm up loan terms can be counterproductive. What facilities do we see that include accordion systems? Suppose ABC has established a $100,000 line of credit with XYZ Bank. ABC has also acquired an “accordion function” that allows it to increase its total debt from $100,000 to $150,000, as ABC Company estimates it will need an additional $50,000 if it decides to add a new sales department. The origin of this term is derived from the way an accordion can be pulled and stretched in such a way as to extend its overall size. The initial reason for the yield caps is that they support the primary syndication of initial term debt, as they reduce the likelihood that potential lenders will choose not to participate in the primary syndication in the hope of obtaining lower prices for a future accordion facility.
For non-syndicated transactions, the yield cap is a more rudimentary method of increasing the yield on the initial debt. Any loan agreement that includes an accordion function is usually beneficial to all parties involved in the agreement. These credit conditions are particularly favoured by companies, which generally have a strong potential for accelerated growth, while guarding against the risks of uncertainty arising from factors beyond their control.