Any loan contract with an accordion function is generally advantageous to all parties to the agreement. These credit conditions are particularly favoured by companies, which generally have strong growth potential, while being cautious due to uncertainties inherent in factors beyond their control. Accordion debts will generally rank pari passu with the initial debts and will enjoy the same guarantees and security benefits. The credit contract (including the LMA credit document) often gives the parent company the power to provide credit support confirmations. This approach – as an alternative to new safeguards and security, with all that this entails – can reduce considerable costs and reduce the timing of transactions. 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. For companies, especially a company with an innovative idea or product, the accordion function is advantageous in several respects. First, it allows the company to grant more favourable terms to lenders. This helps attract more lenders to businesses looking for loans that would otherwise be considered too risky. Lenders focus more on luck than risk, making additional credit increases more likely to exceed pro forma expectations. Second, the terms of the entire line of credit, including all incremental increases, are negotiated at the beginning. So when there is an increase in credit, all conditions are predetermined and the increase in credit can be accelerated. This is particularly important for the new business, which has exceeded its expectations, and rapid expansion may be warranted to take advantage of untapped markets before competitors seize the opportunity. It can be counterproductive to take the time to reorganize credit conditions. Incremental facilities are sometimes referred to as “accordion facilities” as the overall commitments of the credit contract are expanded in the event of additional debt.
Debt agreements, such as the portable, box-shaped musical instruments that name them, can be pulled and stretched to lengthen the size as needed, creating flexibility for borrowers. An accordion feature is a kind of business option or clause of a loan agreement (or syndicated facility) that allows an entity to increase its line of credit (i.e. the principal amount under the agreement) or other commitments to a lender financial institution. Accordion functions are generally acquired by companies that require more working capital in anticipation of high growth scenarios, including potential expansion opportunities. A debt agreement, also known as an incremental facility, is a provision that allows a borrower to extend the maximum amount allowed on a line of credit (LOC) or to add a fixed-term loan to an existing credit contract. Often, smaller or unscredited credits do not include accordion facilities. However, we consider that all parties have a great deal of merit in at least integrating the settlement mechanism from the outset, even though lenders have discretion with respect to key terms, which can be relaxed if born