A borrower must have sufficient debt capacity – and this level of debt capacity must be acceptable to lenders (with due regard to all deleveraging narratives). The LMA credit document allows users to insert their own digital cap. However, in loan agreements for stronger sponsors, we usually don`t see a strict cap on accordion debt and the birth of unlimited accordion debt, which are allowed subject to pro forma adherence to a leverage test. As a general rule, this is only a priority if the debt that may arise is only primary or predominant and total, if the additional debts are also taken into account. The guilt accordion can be especially useful for up-and-coming startups with a new and innovative idea or product. Conditioning increases in additional loans on the condition that the company exceeds pro forma expectations gives financial institutions (FIs) some certainty and ensures that more of them are willing to lend to a business that would otherwise be considered too risky to lend. In this Q&A session, we summarize what they are, look at their increased use, and highlight some points that lenders and borrowers need to keep in mind. In borrower-friendly markets that have prevailed since about 2014, it is not uncommon for mid-cap borrowers to benefit from this flexibility, although under stricter restrictions in the lower middle market and for non-sponsored speculative loans. The Loan Market Association`s loan agreement form for use in leveraged financing transactions (the LMA loan document) now includes an optional design for such functionality. Lower or unser sponsored credits often do not include accordion facilities at all. However, we see a lot of merit for all parties to integrate at least the establishment mechanism from the outset, although with the lender`s discretion on key conditions that can be relaxed if necessary by a simplified consent mechanism.
The advantage of this approach is that it avoids changes and (most likely) fluid security, as well as the required corporate approvals and legal advice that would otherwise be required if such a facility or increase in liabilities 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. 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. An accordion feature is an option a business can buy that gives it the right to increase its line of credit (or a similar type of liability) from a lender. Companies typically purchase an accordion function in anticipation of the need for more working capital for potential expansion opportunities. If such opportunities arise, the option may expire without penalty. Accordion debts will generally be classified pari passu with the initial debt and will benefit from the same guarantees and guarantees. The loan agreement (including the LMA loan document) often gives the parent the power as the „debtor agent“ to provide credit support confirmations. This approach – as an alternative to the new guarantees and guarantees, along with all that comes with it – can significantly reduce costs and shorten the transaction schedule. Summary| What is an accordion function? „Accordion functions,“ also known as „incremental facilities,“ have long been a common feature of large-cap transactions between limited partners, term loans, and term loans (TLB). .