United States: Recent Trends In Acquisition Finance - Incremental Loan Facilities

Last Updated: April 8 2015
Article by Elke Rehbock

Recent years have been marked by low interest rates and a highly liquid loan market, creating a very favorable environment for leveraged loans used to fund mergers and acquisitions, sometimes in conjunction with large one-time dividend payouts. As a result, liquidity has increased and borrowers have been successful in expanding the scope of and in adding new features to incremental loan facilities (also called an "accordion").

Generally, an incremental facility allows a borrower to add another term loan tranche or to increase revolving commitments. The benefit to the borrower is obviously the easy access to additional liquidity already pre-approved by the existing group of lenders.

Traditional incremental facilities - typical terms and conditions

Traditional incremental facilities are generally made available to borrowers within the confines of the existing credit agreement and require incremental lenders not already a lender to become a party to the existing credit facility. While these facilities usually have a cap, a very limited number of large-cap facilities provide for unlimited incremental facilities. Typical conditions for these loans include:

  • Pro forma compliance with the existing (or adjusted/ improved) financial covenants
  • A maximum amount of the total incremental debt
  • A maximum number of times the incremental facility may be used
  • Customary closing conditions 
  • The absence of a default or event of default, and the accuracy of representations and warranties

These incremental loans typically:

  1. Mature at or before the existing maturity date and may share pari passu in the collateral of the existing loans or be junior to them.
  2. Contain, as to pricing, a so-called most favored nation clause, effectively tying the pricing of the existing debt to the pricing of the new debt. Thus, if the pricing of an incremental loan is higher than for the existing loan, the interest rate margin on the existing loan will be adjusted. Typically, the adjustment will be expressed in a specified number of basis points (usually 50) less than the rate on the incremental loan.

Traditional incremental facilities - addition of SunGard language

Recently, term sheets providing for incremental facilities, which are permitted to be used for future acquisitions, have added so-called "SunGard" language, effectively allowing the borrower to limit the closing conditions of the incremental loan. Recall that, out of a concern for deal certainty, buyers started requesting SunGard language (also called a "certain funds" provision) at the commitment letter stage. This provision limits:

  • The closing conditions to conditions precedent specifically listed, typically in an annex to the commitment papers
  • The representations and warranties required to be true at closing to those set forth in the acquisition agreement and a narrow set of additional "specified representations"
  • The specified representations typically encompassing corporate governance issues (from existence, power and authority to due authorization), compliance and regulatory issues (anti-terrorism laws, margin regulations and compliance with the Investment Company Act of 1940, for example), as well as validity of the loan and security documents

Further, with respect to collateral at closing, the certain funds provision allows the borrower to only deliver UCC 1 financial statements for filing, documentation sufficient to enable a stock pledge to be perfected and, under some circumstances, intellectual property filings to be made. All other items needed to perfect the lender's security interest can be delivered post-closing within a specified time period allowing for a smooth closing of the M&A deal concurrent with the financing.

This addition to the conditions of an incremental loan facility effectively turns the accordion feature into a true option for financing a follow-on acquisition, which should be a very attractive feature for sponsor-led deals.

"Sidecar" incremental facilities

Large-cap borrowers have been able to push the envelope and are now sometimes permitted to incur incremental loans outside of the existing credit facility. The obvious benefit of this structure for the borrower is the potential to negotiate better terms with a new lender or new group of lenders.

To make this provision work smoothly in its implementation phase, it is prudent for both the borrower and the agent to draft a form of intercreditor agreement that can be attached to the original credit agreement and that would be required from each incremental lender. While not all facilities with sidecar incremental facilities also have an intercreditor agreement, it is a helpful tool, on the one hand, to manage the increased risk for existing lenders who now have new lenders competing for the same collateral, and on the other hand, for the borrower to ensure the smooth addition of a new incremental lender, thus avoiding the need to negotiate a new intercreditor agreement.

Considerations for 2015

A renewed regulatory focus on the leveraged loan industry may have an impact on incremental facilities and other terms in leveraged loans in 2015. The Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp revised their 2013 Interagency Guidance on Leveraged Lending, which generally outlines principles of leveraged lending with the goal of avoiding systemic risk to the financial industry.

Some of the requirements contained in the guidance speak to the absence of "meaningful" financial covenants, the fact that leverage should not exceed six times EBITDA or the ability of a company to pay off at least half its debt within five to seven years. While the regulators state that these requirements are not "a bright line," one can expect the market to react in order to respond to the risk factors identified by the regulators.

  • First, lenders' and investors' demand for leveraged loans may decrease as today's widespread borrower-friendly terms and higher leverage ratios may come under increased scrutiny in the future.
  • Second, that increased scrutiny may lead lenders to reconsider the loan terms they can offer borrowers. One can expect that the bargaining power borrowers have enjoyed in the leveraged loan market in the past will be reduced as banks have to face the renewed regulatory scrutiny.

In particular, provisions impacting leverage are likely to be scrutinized. Incremental loans, for instance, increase leverage and may consequently be the subject of debate in the leveraged loan market. Similarly, regulators' concern regarding a borrower's ability to repay a loan within a certain time frame may push lenders to revisit their repayment terms. This could trigger an increase in scheduled amortization payments, as well as mandatory prepayments with excess cash flow.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
6 Dec 2017, Webinar, New York, United States

Join Dentons for a complimentary webinar focused on the ongoing challenge of integrating new technologies into existing information governance policies and risk management frameworks.

7 Dec 2017, Seminar, Cape Town, South Africa

Dentons South Africa would be delighted if you could join us for our upcoming event.

8 Dec 2017, Seminar, Johannesburg, South Africa

Dentons South Africa would be delighted if you could join us for our upcoming event.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.