Accordion Feature Facility Agreement
To the extent that this is possible, an incremental facility allows the borrower to properly complete the financing within its existing capital structure, without the need to refinance or “reset” other lenders under the existing loan agreement, or to develop separate credit or guarantee documents and enter into complex borrowing agreements. It can therefore be a very quick and inexpensive way to structure acquisition financing. How else could an accordion facility benefit a borrower? Consider the following example to better illustrate an accordion function. Suppose C1 already has a line of credit worth $1 million to Bank B1. Suppose C1 needs an additional capital of $500,000 to set up an aid manufacturing plant on its premises. To do this, C1 purchases a B1 accordion function that allows it to increase its total debt from $1 million to $1.5 million. In particular, the use of incremental facilities to finance acquisitions of sponsor portfolio companies has increased considerably in recent years and has been accompanied by other innovations aimed at maximizing the flexibility and usefulness of these provisions. In this note, we look at some key features of incremental provisions from the perspective of a borrower and a lender who wishes to finance a potential acquisition. In addition, the mechanism can be used as the basis for setting up a revolving credit facility at a later date if, at the beginning, there is no need for working capital or when no working capital investor has been identified. In such a scenario, further negotiations may be necessary at the time of creation, particularly with regard to super senior safeguards if such a classification is granted to the revolving credit facility. In general, it will not be possible to use this mechanism to allow the introduction of working capital lines for active credits, as these funds are more complex because of the complexity of the inter-credit agreements that make these products necessary.
Businesses generally include an accordion agreement that entails additional costs for the borrower if they feel that additional capital is needed to finance expansion plans in the future, but when the timing remains uncertain. The additional funds can be used to acquire other businesses, to increase working capital, the money available to finance a company`s day-to-day operations or to meet other needs. Another important feature of the accordion that benefits the business is the optional credit increase.