September 11, 2019

M&A Finance: How to Play the “Accordion”

Many credit facilities include an “accordion” feature that allows a borrower to incrementally increase the amount of its availability under an existing credit facility. – which makes it a popular option for borrowers considering a potential acquisition.  This Davis Polk memo discusses some of the key considerations associated with such incremental facilities from both the borrower’s and lender’s perspective. Here’s the intro:

One key feature of many modern credit agreements is the so-called “incremental” or “accordion” provision, which allows a borrower to increase the aggregate amount of financing available under a credit facility, assuming it can find a willing lender and subject to certain terms and conditions. A common use of these incremental facilities is to finance an acquisition.

Where it is available, an incremental facility allows the borrower to add financing neatly within its existing capital structure, without the need to refinance or “backstop” a required consent from other lenders under the existing loan agreement, or to develop separate credit or collateral documentation and enter into complicated intercreditor arrangements. It can therefore be a very quick and cost-effective way to structure an acquisition financing.

The use of incremental facilities to finance acquisitions by sponsor portfolio companies in particular has increased dramatically in recent years, and has been accompanied by further innovation in terms designed to maximize the flexibility and utility of these provisions. In this note we explore certain key features of incremental provisions, from the perspective of a borrower and lender looking to finance a potential acquisition.

John Jenkins