In addition, it is not uncommon, particularly in the case of mid-size transactions, to limit the capacity of accordion facilities to unpreciated long-term loans. When amortization credits are authorized, original lenders will generally strive to ensure that the amortization profile of accordion debt is no more aggressive than that of the original debt. In the meantime, with this source of renewable capital, the company can quickly access the means it needs to exploit its potential, when and where opportunities arise. Taking the time to rehabilitate credit conditions can be counterproductive and give competitors the opportunity to seize the opportunity. 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. 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. 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. Retrospective| What is an accordion function? “Accordion characteristics,” also known as “incremental entities,” have long been a common feature of large-capital capital (TLB) transactions.
They are characterized in this way because they allow the overall commitments under the credit contract to be extended in order to meet the additional debts. To the extent that this is possible, an incremental facility allows the borrower to properly complete the financing within its existing capital structure, without the need to refinance or “reset” other lenders under the existing loan agreement, or to develop separate credit or guarantee documents and enter into complex borrowing agreements.