Accordion facilities are an attractive feature to sponsors and borrowers. It is not difficult to see why: they afford flexibility to incur additional (or in-creases in) debt facility commitments, which will typically benefit from guarantees and security on the same basis as other existing facility commitments. As such, they permit and provide a mechanism for new, market-priced debt to be incurred on a more cost-effective basis than negotiating a new suite of credit documentation.
In this Q&A, we recap what they are, examine their increased use and highlight some points that lenders and borrowers should bear in mind.
Recap | What is an accordion feature?
‘Accordion features’, also known as ‘incremental facilities’, have long been a common feature of large-cap sponsor term loan B (TLB) transactions. They are so labelled because they allow total commitments under the credit agreement to expand to accommodate incremental debt.
In the borrower-friendly markets that have prevailed since around 2014, it has not been uncommon to see mid-cap borrowers enjoying this flexibility, albeit subject to tighter constraints in the lower mid-market and for non-sponsored speculative grade credits. The Loan Market Association form of loan agreement for use in leveraged finance transactions (the LMA Credit Document) now incorporates optional drafting for such a feature.
Which facilities do we see comprising accordion facilities?
In the mid-cap market, typically only new term facilities or commitments ranking pari passu with the TLB are permitted. However, in larger transactions, revolving facilities may also be permitted, and in structures with junior debt, additional junior debt may be permitted.
Some unitranche – super-senior / first out structures – also allow for the incurrence of super-senior ranking term debt, typically representing no greater proportion of the capital structure than that represented by the super-senior debt at the outset.
Why do borrowers seek to incorporate accordion features?
The main attractions are simplicity and cost-effectiveness. As there is no need to negotiate a separate credit agreement, borrowers benefit from a short execution timetable once the accordion debt has been fully allocated. If made available in accordance with protections afforded to existing lenders, the new facility/commitments and related credit support slot into the existing documentary framework without a requirement for further lender consent.
What does the security and guarantee package look like ?
Accordion debt will typically rank pari passu with the original debt and will benefit from the same guarantees and security. The credit agreement (including the LMA Credit Document) will often confer authority on the parent as ‘obligors’ agent’ to provide credit support confirmations. This approach – as an alternative to taking fresh guarantees and security, with all that entails – can save considerable expense and reduce the transaction timetable.
Legal advice would need to be taken when establishing the accordion facility to ascertain whether credit support needs to be amended or retaken, or whether a guarantee and/or security confirmation is sufficient. Lenders should resist providing confirmation when signing the credit agreement that no additional credit support will be required, especially where the laws of multiple jurisdictions may be relevant but in any event to allow scope to reflect any necessary change in law or market practice.
The credit agreement may also empower the security agent to execute any necessary amendments to the transaction security documents as may be required in order to ensure: i) that the accordion facilities rank pari passu with the existing debt facilities; and ii) that the transaction security is shared on a pari passu basis by the finance parties. The accordion facility lenders will also be required as a condition of establishing the accordion facility to accede to the intercreditor agreement, so will be subject to the provisions contained in that agreement (such as turnover, restrictions on enforcement action, and application of proceeds).
Who provides an accordion facility?
That is a matter of negotiation. Existing lenders agreeing to allow accordion capacity will have two motivations: first they will wish to ensure (as is customary) that there is no requirement for existing lenders to participate in the accordion debt; the uncommitted nature of the facility is clearly important from a credit and regulatory capital perspective.
Second, they will wish to have a right to participate (either as a right of first offer or a right of last look) in any proposed increase to the commitments. An accordion is an opportunity to increase exposure to the credit, rather than purchasing in the secondary market (in cases where the debt is liquid). It also avoids the effect that dilution would have on voting arrangements under the finance documents. This latter point is particularly important where illiquid credits are concerned (for instance, many debt fund deals), where having the exclusive ability to control enforcement in a downside scenario is paramount.
Sponsors and borrowers for their part will wish to achieve maximum flexibility to introduce new lenders of their choice (not least to optimise pricing terms). They will also want to ensure the process and time periods for establishing the new line are not unduly lengthy – especially where the additional commitments are contemplated as part of an event-driven financing.
In mid-market transactions, we typically see provisions based around those found in the LMA Credit Document optional mechanism that affords existing lenders a right to provide debt on terms proposed by the borrower. However, at the lower end of the market, there may be no accordion facility mechanism (though see below), while at the upper end of the mid-market and in large cap credits, we more frequently see the alternative LMA Credit Document option achieved by credits (allowing the parent to select financial institutions of its choosing to provide the facility or increased commitments). In this scenario, the protections mentioned below are key.
How else might an accordion facility benefit a borrower?
Weaker or non-sponsored credits frequently do not include accordion facilities at all. However, we see plenty of merit for all parties in incorporating at least the mechanism for establishment at the outset, albeit with lender discretion over key terms, which can be relaxed as and when required through a simplified consent mechanism. The advantage this approach has is that it avoids amendments and (quite possibly) supple-mental security, together with requisite corporate authorisations and legal opinions, which would otherwise be required should such a facility or increase in commitments be desirable in the future – for instance, to support an acquisition or liquidity event. A borrower may also be able to achieve more favourable terms whilst it has greater leverage at the outset of a transaction.
In addition, the mechanism can be used as the basis for incorporating a revolving credit facility at a future date in circumstances where there is no working capital need at the outset or a working capital provider has not yet been identified. In such a scenario further negotiation – especially in relation to any super-senior protections should the revolving credit facility be afforded such a ranking – may be required at the time of establishment. It will not generally be possible to use this mechanism to allow for the introduction of asset-based lending working capital lines owing to the more complex intercreditor arrangements that such prod-ucts will necessitate.
What are the key protections for the original lenders?
The following protections are customary. However, in transactions where the original lenders’ consent is re-quired for establishment, such protections will be of less significance. In these circumstances, lenders will want the flexibility to be able to consent to relaxation of the restrictions.
A borrower must have sufficient debt capacity available – and that level of debt capacity will need to be acceptable to lenders (having due regard to any de-levering narrative). The LMA Credit Document allows for users to include their own hard numerical cap. However, in credit agreements for stronger sponsors, we typically see no hard cap on accordion debt and the incurrence of unlimited accordion debt to be permitted, subject to pro-forma compliance with a leverage test. This is typically senior-only where the debt permitted to be incurred is senior only, or senior and total where junior debt is also contemplated.
In addition to the leverage test limb, occasionally a ‘freebie’ (either a fixed amount or an amount calculated by reference to EBITDA) debt basket may also be included in the cap on accordion debt incurrence.
There will usually be a requirement that the all-in-yield on the accordion debt incurred within a specified period after the original financing must not exceed a certain level over the all-in-yield for the relevant original debt. All-in-yield is intended to represent the total yield taking into account interest margins (including any floors), upfront fees, original issue discount and other fees payable to lenders generally. The negotiation points here relate to the length of time the cap applies (the ‘sunset period’). In large cap transactions this is usually 6 or 12 months from when the credit agreement was originally entered into. It is often longer (potentially the life of the facilities) in mid-cap transactions. It may also be softened by allowing the accordion debt yield to be increased beyond the specified threshold provided the yield on the existing debt is in-creased commensurately.
The original rationale for yield caps is that they assist primary syndication of the original term debt as they reduce the likelihood that potential lenders elect not to participate in primary syndication in the hope of obtaining more favourable pricing in a future accordion facility. In non-syndicated deals, the yield cap represents a more crude method of enhancing yield on the original debt.
Occasionally, the overall yield cap is simplified (particularly in lower value transactions) to a margin cap.
There will be a requirement that the termination date of the accordion debt must be no earlier than the termination date applicable to the relevant original term debt. Occasionally an additional buffer is included (for example, three or six months) to provide further comfort to the original term lenders that they will be repaid prior to the accordion debt lenders.
Further, especially in mid-cap transactions, it is not uncommon for accordion facility capacity to be limited to non-amortising term loans. Where amortising loans are permitted, the original lenders will usually seek to ensure the amortisation profile of the accordion debt is no more aggressive than that applicable to the original debt.
The current popularity of incremental facilities in the market suggests they will continue as a prominent feature. As with any such development, we are likely to see added complexity and proliferation of borrower flexibility, but only time will tell.