Incremental debt flexibility or accordion features

Produced in partnership with Max Millington of Pinsent Masons

Practice notes

Incremental debt flexibility or accordion features

Produced in partnership with Max Millington of Pinsent Masons

Practice notes

What are incremental facilities?

An incremental facility is feature included in a credit agreement where, subject to meeting certain pre-agreed parameters, the borrower is afforded the flexibility to incur additional (or increases in) debt facility commitments. These will typically benefit from guarantees and security on the same basis as other existing facility commitments.

Incremental facilities are sometimes referred to as 'accordion' facilities as total commitments under the credit agreement will expand if incremental debt is incurred.

Typical deal structure—where/when are they used

Incremental debt flexibility is a common feature of large-cap and mid-cap sponsor-backed transactions. 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.

In mid-cap transactions, only pari-passu ranking senior term incremental facilities are typically contemplated—these will sit alongside the existing senior term facilities. An exception to this is that certain unitranche super-senior mid-cap structures also allow for the incurrence of additional super-senior term debt.

In large-cap deal structures, incremental facilities are often established

Max Millington

Partner, Pinsent Masons

Max’s practice involves advising financial institutions, private equity sponsors, borrowers and management on mid-market leveraged and corporate finance products, financial restructurings and stressed/distressed positions.

Within that universe, he has a particular focus on advising in relation to private debt: direct lending, unitranche, first-out/super-senior, junior debt (mezzanine, second lien, holdco PIK) and rescue capital.

Jurisdiction(s):

United Kingdom

Key definition:

Accordion definition

What does Accordion mean?

An accordion, or incremental debt feature, refers to a mechanism in the facilities agreement under which, provided certain conditions are met such as pro forma compliance with a leverage test, lenders under the facilities agreement who wish to do so can lend additional debt. The terms of the additional debt will typically be documented in an increase notice. An accordion or incremental debt flexibility should be distinguished from structural adjustment which typically requires the majority consent of the syndicate. Borrowing under the incremental facility mechanism only requires consent from participating lenders (provided the conditions set out in the facilities agreement are met).

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