The current economic climate has prompted borrowers to seek more flexibility for their financing arrangements. One option that may be available to them is an accordion facility, otherwise known as an 'incremental' facility.

This briefing outlines the key characteristics of incremental facilities.

Incremental facilities, once the preserve of leveraged finance deals, have become increasingly common across the loan market. Such facilities allow borrowers to have access to additional funding in a relatively small amount of time as typically only the consent of the lenders providing the financing and the administrative agent is needed. Consent from the non-participating lenders is not typically needed as there already is a pre-approved mechanism to introduce additional term or revolving facilities. The incremental facility is uncommitted until the mechanism is exercised.

The Loan Market Association has acknowledged the prevalence of incremental facilities by providing for some optional incremental facility provisions to be included in its form of facilities agreement for leveraged acquisition finance transactions.

Incremental facilities are used to increase the borrowing capacity of a borrower in connection with capital expenditure, to finance the acquisition of new business entities, to refinance existing debt or for general corporate purposes. The terms of the incremental facility will often match those of the existing facility save for typically the margin and repayment profile.

In practice and in order to exercise the incremental option, the borrower will issue a request to the facility agent and the existing lenders will have the option to participate in the increased commitments. Should they decide to not participate, their portion of the increased commitments will either be offered to the other existing lenders or to new lenders who do have the appetite. The process is subject to a specified timescale to ensure the borrower receives a timely response to its request.

To protect the existing lenders, the following terms often apply:

  • a bullet repayment profile with the maturity date set after the existing term loan maturity date
  • a cap on the amount of the incremental facilities (and the number of requests that can be made)
  • a cap on the margin and fees payable on the increased commitments
  • a requirement for separate credit approval from the lenders providing the additional facilities and 'know your customer' requirements for new lenders.

The benefits that incremental facilities offer to borrowers whose funding needs are expected to increase is becoming more widely recognised in the mid-market. They are particularly attractive as a means of providing quick finance for acquisition opportunities, avoiding the sometimes lengthy process of negotiating new facilities. Negotiating the right terms at the outset is key to ensuring the intended benefits are realised for the borrower without compromising the position of the lenders in relation to the day one financing.