Accordion Feature
An accordion feature — also called an incremental facility — is a provision in a credit agreement that allows the borrower to increase the size of the existing loan facility without negotiating a new credit agreement. Like the instrument it is named for, the facility can expand when the borrower needs more room.
What It Is
When a company closes a syndicated credit facility, it typically negotiates a maximum size — a term loan of $500 million, for example, or a revolving credit facility of $250 million. An accordion feature gives the borrower the contractual right to upsize that facility at a later date, up to a specified limit, subject to defined conditions.
The conditions vary by agreement but commonly include: no existing event of default, pro forma compliance with financial maintenance covenants after giving effect to the incremental borrowing, and the requirement that existing lenders be offered the opportunity to participate before the borrower approaches new lenders. If existing lenders decline to fund the accordion, the borrower can typically bring in new lenders on terms no better than those received by existing lenders.
Accordion features serve acquisitive companies and high-growth businesses well. A company that closes a leveraged buyout with a $1 billion term loan and a $200 million accordion can execute a bolt-on acquisition using the accordion capacity without returning to the credit markets for a full refinancing — saving time, legal fees, and the uncertainty of market conditions.
The accordion amount may be expressed as a fixed dollar figure, a ratio of EBITDA, or a combination of the two. Credit agreements negotiated in favorable market conditions (lender-friendly environments are rare; borrower-friendly environments are common in buoyant credit markets) often contain generous accordion baskets with few conditions.
Etymology
The accordion is a musical instrument that expands and contracts physically as the bellows are pushed and pulled. The metaphor in lending is direct: the facility expands to accommodate additional borrowing when the borrower needs it, then remains at the expanded size. The term is industry slang that has become sufficiently standard to appear in credit agreement documentation and legal commentary.
A Concrete Example
A private equity-backed healthcare company closes a leveraged buyout with a $600 million term loan and a $150 million accordion. Eighteen months later, a complementary clinic network becomes available for acquisition at a price that falls within the accordion capacity. The PE firm exercises the accordion, upsizing the term loan by $120 million using the existing credit agreement. The company acquires the target, integrates it, and the combined entity carries a $720 million term loan — all under the original documentation, without a new syndication process.
Common Misconception
The accordion feature is sometimes described as a committed facility — as though the borrower has already secured a binding commitment for the incremental funds. In most credit agreements, existing lenders have no obligation to fund accordion draws. The feature gives the borrower the right to request additional funding and to syndicate it under existing terms; it does not guarantee that capital will be available. In a stressed market, accordion capacity may be nominally available but practically unusable because lenders will not commit.