A borrower must have sufficient debt capacity and this capacity must be acceptable to lenders (due consideration of any form of debt relief). The LMA credit document allows users to include their own hard digital cap. However, we generally do not see credit contracts for stronger sponsors as a severe ceiling for accordion debt and the appearance of unlimited accordion debt, provided pro forma compliance is done with a leveraged test. As a general rule, it is only in the first place that debt-related debts are older or, on the whole, taken into account for junior debts. It is mandatory that the termination date of the accordion debt not be set on the termination date for the original maturity debt. Sometimes an extra buffer (for example. B three or six months) is included in order to offer the original lenders additional comfort to be repaid to accordion lenders. The initial rationale for the performance ceilings is that they support the primary syndication of the initial maturity debt, as they reduce the likelihood that potential lenders will choose not to participate in the primary syndication in the hope of obtaining lower prices as part of a future accordion facility. In the case of non-union transactions, the performance cap is a gross method of increasing the return on initial debt securities.
One of the essential features of many modern credit contracts is the so-called “incremental” or “accordion” regime, which allows a borrower to increase the total amount of financing available under a credit facility, provided that he can find a willing lender and is subject to certain conditions. The frequent use of these incremental facilities is to finance an acquisition. As a general rule, all-in-yield debt on accordion debt incurred within a specified period of time after the initial financing must not exceed a certain value above the all-in-yield for the initial debts concerned. All-in-yield is expected to represent overall returns, taking into account interest margins (including potential floors), pre-feeding fees, original issue discounts and other royalties payable to lenders in general. The negotiating points here relate to the duration of the ceiling (sunset period). For large capital transactions, it usually takes 6 or 12 months from the date the credit contract was originally concluded. It is often longer (perhaps the lifespan of the facilities) in mid-cap transactions. It can also be weakened by increasing the yield on accordion securities above the specified threshold, provided that the yield on existing debt is increased accordingly. Another important feature of the accordion that benefits the business is the optional credit increase. Thus, if the company can grow without making additional debts, it can make that decision.
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. Debt agreements are simple and inexpensive. They do not require a new credit contract, which allows business borrowers to access funds fairly quickly when they need them. These types of loans typically come with several conditions, including a maximum amount of total incremental debt that the entity can borrow and a ceiling on how often the incremental facility can be used.