Accordion Facility: How the Option to Borrow More Works

A business planning to grow by acquisition does not know, at signing, which target it will buy or when. It could borrow the larger amount now and pay a commitment fee on money it may not use, or arrange a new facility when the deal appears and lose weeks it may not have. The accordion sits between the two. The documents, the security and the limits on the extra money are agreed once, so that when the need arrives the only open question is who will lend.

For the lenders, the accordion is a limit as much as a permission. Without it, new debt sharing their security would need an amendment and the lender group's consent, or might be raised elsewhere under a permitted-debt basket. With it, the size of any increase, the conditions on it and the ranking of the new money are known in advance, and each lender keeps the right to decline its own share.

Mechanics differ between documents, but a request commonly moves through the same steps:

Three terms deserve the closest reading. The ceiling, which can be a fixed amount or, in larger deals, a fixed amount plus whatever keeps leverage below a ratio. The protections for existing lenders: a right to be offered the increase first protects their share and their votes, and a cap on how much more richly the new money may be priced protects them from being undercut by lenders they will sit beside. And the conditions on the increase date, which decide whether the option works at the moment it is wanted.

A food distributor, constructed for this page, has a US$45m revolving facility from a club of three banks holding US$15m each, with an accordion of up to US$25m. It has US$32m drawn and EBITDA of US$14m. It agrees to buy a competitor for US$30m, funded with US$20m from the accordion and US$10m of new equity. The agreement allows the increase if leverage, measured as if the acquisition had already happened, is no more than 3.25 times. That level is the example's, not a market norm.

The test passes, with less room than the borrower's model showed, because the agreement does not let the target's promised savings count. Then the banks answer. One takes US$10m and another US$5m; the third declines, because the purchase would take it over its own limit for the food sector. A new bank takes the remaining US$5m and joins the club.

Taking at least two-thirds of commitments as the example's majority lenders test: before the increase, any two banks could carry a decision. After it, A and B can carry one on their own, and the bank that declined now needs A or B, not the newcomer, to block it. The accordion changed the voting map as well as the debt.

The sharpest contrast is with an undrawn commitment. Committed money is promised: the bank must lend while the conditions are met, and charges a fee for holding it ready. Accordion headroom is promised by no one, carries no commitment fee, and can vanish exactly when it is wanted, because a borrower whose sector or results have turned is the borrower lenders decline. In that sense an accordion sits closer to an uncommitted facility than to the facility it extends.

An incremental facility is the leveraged-loan version of the same idea: new term loans or revolving commitments under the existing agreement and security, capacity often set as a fixed amount plus a ratio-based amount, and price protection for existing lenders. The names are used loosely. An incremental clause often allows new tranches with their own pricing and maturity, while a mid-market accordion may simply enlarge an existing facility on its existing terms.

DEFINED IN ONE PARAGRAPH → · PRODUCT FILE: REVOLVING CREDIT FACILITY → · INCREMENTAL FACILITY →

A lender reading a new facility can read it at its full size. If the accordion is used, the business will carry the extra debt, so the credit paper can test leverage and cover at the ceiling as well as at today's drawings, and ask whether the conditions on the increase would stop debt being added once performance had slipped. A condition tested on pro forma earnings is only as tight as the definition of those earnings, as the distributor's promised savings show.

The borrower's reading is the mirror image. An accordion is a route to money, not money. Where a seller needs to know the funds are there, its lack of commitment is a defect, and the purchase price is better covered by commitments signed in advance or on certain-funds terms. In a bilateral facility the accordion gives less again: it fixes the documents for an increase that the same bank must still approve.