Ancillary Facility: a Worked Example

The products a business uses every day are one-bank products by nature. An overdraft runs on one bank's account platform; a performance bond is issued by one bank to a named beneficiary; a forward exchange contract is a trade with one counterparty. A revolver shared among several lenders cannot provide them, because it lends in shares and on notice.

Without an ancillary mechanism, the group would take those lines outside the syndicated agreement, as separate facilities from one bank. Each would then need room in the agreement's limits on other debt and security, and would sit outside the shared guarantees, or need a separate arrangement to share in them. The ancillary route brings them inside. The line is counted as part of the revolver, it is guaranteed and secured with the rest, and in an enforcement it shares in recoveries on the same footing.

The borrower and one lender agree the line, and notify the agent. From that date, the lender's revolving commitment falls by the ancillary amount, so revolver loans are shared among the lenders in proportion to their reduced commitments. When the line ends, or is cancelled, the commitment is restored. The ancillary lender documents the line itself, and the syndicated agreement typically prevails where the two conflict, with exceptions such as the rules of a pooled overdraft. The mechanism comes from the Loan Market Association's forms, which most UK syndicated lending uses; an agreement without it provides the same lines another way, as a separate tranche or as facilities outside the agreement.

Four details recur in the drafting. How outstandings are measured: the net balance of a group's pooled overdraft, or the gross debit balances, and the face amount of bonds and letters of credit. When the line must end: by the revolver's final date, with any guarantee still running by then backed by cash cover. What the ancillary lender may do on its own after a default: commonly little, beyond asking for its balance to be refinanced by a revolver loan, until the facility is accelerated or the line expires. And what happens then: an adjustment, in the agreement or an intercreditor deed, by transfers between the lenders, so that each ends with a share of the total exposure in proportion to its original commitment.

A facilities-management group, constructed for this page, has a US$90m revolver from three banks: A holds US$40m, B US$30m and C US$20m. A, its transactional bank, provides an ancillary overdraft of US$12m and a bond line of US$6m for the group's maintenance contracts, so its revolving commitment falls to US$22m.

A year later the group has US$36m of revolver loans, shared in proportion to 22, 30 and 20, and its overdraft and bond line are fully used. Then it loses its two largest contracts, and the lenders accelerate.

Before the adjustment, A carried 54% of what the group owed (29 of 54), though it committed 44% of the facility (40 of 90). The loss-sharing clause moves US$5m of exposure from A to B and C, so each bank ends with the share it agreed to when it signed: 24, 18 and 12, or 4, 3 and 2 in ninths. Because US$6m of the total is bonds that may not be called, the agreement revisits the position as contingent amounts become actual or fall away.

A bilateral facility taken outside the syndicate can look the same to the treasurer: one bank, one overdraft. To the lenders it is different. It is debt beside the revolver rather than part of it, it needs room under the agreement's restrictions, and its security, ranking and share of recoveries depend on what the documents and any intercreditor arrangement say, not on the revolver's own sharing clause.

A swingline is the opposite case. It is designed to be shared from the start, through participations every lender agrees to take, and it lasts days. An ancillary line is the ancillary lender's own risk for as long as it runs, possibly years, and is shared only if the facility is accelerated. Inside a bilateral facility, the same need is met more simply, with a sub-limit for guarantees or foreign exchange.

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

For the ancillary lender, the line is a separate credit decision inside a commitment it has already approved. It decides which products to offer, how to measure a pooled overdraft, and whether bonds may run past the revolver's final date. It also gives up the right to act alone: an overdraft it could call on demand outside the syndicate becomes a line it holds until the syndicate moves.

For the other lenders, the question is how much of their eventual exposure is being shaped by another bank's product decisions. Agreements cap the total ancillary amount, list the products allowed, and set the measurement rules, because in an acceleration each lender shares in lines it did not underwrite. For the borrower, the ancillary lines usually go to the bank that runs its accounts, which is often what that bank wanted from joining the syndicate. The cost is less visible: every ancillary commitment reduces what can be drawn as an ordinary revolver loan, whether or not the line is used.

PRODUCT FILE: OVERDRAFT → · PRODUCT FILE: BANK GUARANTEE → · CASH COVER →