Incremental Financing and Syndicated Facilities: Borrower and Lender Considerations When Accommodating New Debt

Description

There are currently various issues borrowers face and macroeconomic factors that limit their new financing options. Flexibility in existing loan agreements may allow private credit providers to fill the gap left by traditional lenders, but the parties should understand how such financing fits into an existing credit arrangement and what amendments and consents may be required.

Incremental financing is commonly implemented pursuant to one or more of the following provisions: (1) the accordion, (2) the incremental-in-lieu basket (usage of which reduces accordion capacity on a dollar-for-dollar basis), (3) the ratio debt basket, and (4) the acquisition debt basket. If a borrower has capacity for additional first lien debt pursuant to one of the foregoing baskets, it will have to find a lender willing to provide the quantity and type of financing it seeks, taking into account implications for existing debt.

Given the current volatility, creditors may now require higher pricing, larger fees, and greater amortization along with other pro-lender terms--some of which may be more favorable to the new lender compared to existing lenders. Counsel should carefully review the relevant definitions and component defined terms, the rules of construction, the lien covenant if secured debt is being incurred, and other sections within the credit documents and intercreditor agreement to ensure the additional facility is permitted on the desired terms.

Key protections for lenders may include most favored nation (MFN) pricing and terms provisions, requirements regarding loan maturity and prepayment terms, additional guarantee and collateral requirements, and limitations with respect to financial maintenance covenants.

Listen as our authoritative panel discusses the nuances of evaluating and documenting additional debt for private equity funds and companies with existing facilities in effect.