Accordion Feature

What is an accordion facility?

An accordion facility is a clause in a loan agreement that lets the borrower ask for a larger facility later, on the same documents, up to a stated cap. It is almost always uncommitted: the lender decides whether to fund the increase, so the accordion buys speed and optionality, not certainty.

Accordion feature, accordion facility, incremental facility

The three names point at the same clause. Commercial banks and venture lenders usually say accordion; syndicated leveraged-loan documents more often say incremental facility or incremental term loan. The economics are identical: a pre-agreed path to a bigger loan without renegotiating the whole agreement. MINDBODY's own 8-K used the plain term, disclosing that its amendment "includes an accordion feature for the revolving line."

What separates the versions is who has to say yes. An uncommitted accordion gives the borrower a right to ask. A committed increase, which is rarer and more expensive, obliges the lender to fund if conditions are met. Read the verb.

How an accordion works

The clause has five moving parts, and all five are negotiated separately.

• The cap. A maximum size for the facility after the increase, or a maximum increase amount. These are two ways of saying the same thing and agreements use both.
• The consent standard. Sole discretion, reasonable discretion, or a conditions-only test with no discretion at all.
• The conditions. Typically no event of default, current financial statements, and sometimes a pro forma covenant test.
• The notice period. A fixed number of business days before the requested effective date.
• The pricing and terms of the increase. Whether the new money prices at the existing margin or at whatever the market bears, and whether the maturity matches.

MINDBODY's amended agreement with Silicon Valley Bank shows four of the five in one paragraph, and is silent on the fifth: nothing in it says how an increase would be priced. The Revolving Line is defined as $20,000,000, and so long as no event of default has occurred, the borrower may request during the term that the bank increase the Revolving Line to $40,000,000. Any increase is made in the bank's sole discretion, based in whole or in part on the bank's review of the borrower's most recent financial statements, the bank's internal risk management review, and the bank's receipt of the borrower's request no less than ten business days before the proposed increase date.

That is an uncommitted accordion with a hard cap, three named conditions and a ten-business-day clock. Note what it is not: a commitment. The borrower cannot sue for the extra $20,000,000.

The venture-loan cousin: the discretionary tranche

Venture term loans reach the same result with a different shape. Instead of one facility that can be enlarged, the loan is divided into tranches, and the later tranches are gated.

In the Hercules-form loan to X4 Pharmaceuticals, the commitment schedule lists Tranche 1 of $15,500,000 and $9,500,000 from two lender trusts, Tranche 2 of $7,500,000, Tranche 3 of $7,500,000 and Tranche 4 of $10,000,000, totaling $50,000,000. Add them: 15,500,000 plus 9,500,000 equals 25,000,000; 25,000,000 plus 7,500,000 equals 32,500,000; 32,500,000 plus 7,500,000 equals 40,000,000; 40,000,000 plus 10,000,000 equals 50,000,000. The footnote is the whole point. Funding of Tranche 4 is subject to approval by the lender's investment committee in its sole discretion, which makes that $10,000,000 an accordion wearing a tranche's clothes, while Tranche 2 was gated on the borrower's prior achievement of a defined Performance Milestone instead.

Venture Lending and Leasing VIII's registration statement describes the same structure from the lender's side: loans are typically structured as commitments to provide financing in one or more advances over a specified period of availability, subject to the absence of default and the borrower's compliance with requirements including, where applicable, achievement of performance-based milestones.

A worked example of an accordion being exercised

New Mountain Guardian IV BDC borrowed under a subscription facility from BMO Harris Bank, secured by the fund's uncalled investor commitments. On October 27, 2022 the fund asked for more, and the parties signed a facility increase and advance rate amendment letter.

The numbers in that letter:

• Before the amendment, the advance rate was 45 percent and the amount of maximum credit was $71,604,000.
• After the amendment, the advance rate is 55 percent, with the maximum credit raised to $109,714,000.
• The increase was agreed by the lender in its sole discretion.

Work the implied collateral base, since the advance rate is expressed as a percentage of the fund's remaining capital commitments. Before: $71,604,000 divided by 0.45 equals $159,120,000 of remaining capital commitments. After: $109,714,000 divided by 0.55 equals $199,480,000. Check both multiplications. $159,120,000 times 0.45 equals $71,604,000. $199,480,000 times 0.55 equals $109,714,000. Both reconcile exactly, which is consistent with maximum credit having been set at the advance-rate cap on each side of the amendment, so the facility grew on two levers at once: a larger base of remaining capital commitments and a more generous rate against it. The letter does not say why the base grew.

The dollar increase was $109,714,000 minus $71,604,000, or $38,110,000, a 53.2 percent step up in available credit from a single amendment letter.

Where it shows up in documents

In a bank loan and security agreement the accordion usually hides inside a definition, not in a separately titled section. MINDBODY's sits in the definition of "Revolving Line" in the definitions article, which is why searching an agreement for the word accordion often returns nothing.

In a venture term loan, look at the commitment schedule and its footnotes. In the X4 agreement the relevant text is a single asterisked footnote to Schedule 1.1-1, Commitments.

In fund finance, the increase arrives as its own short letter agreement amending the loan authorization agreement, with a replacement certificate attached as an annex. In the New Mountain letter that annex is titled Certificate of Status, and its dollar lines are blank in the filed copy.

Three questions to ask of whichever form you find.

• Is the increase committed or discretionary, and in whose discretion?
• Does exercising it require new lender consents, an amended intercreditor arrangement, or new warrants?
• Does the original pricing apply to the increase, or is it repriced?

Common mistakes

Modeling an accordion as available capital. An uncommitted accordion belongs in a scenario, not in the runway calculation. Treating MINDBODY's second $20,000,000 as cash would have overstated available liquidity by half.

Assuming the accordion survives a covenant trip. Every accordion condition list begins with the absence of a default, so the facility stops expanding at exactly the moment the borrower wants it most.

Forgetting the notice clock. A ten-business-day notice requirement means the accordion cannot solve a cash crisis inside two weeks.

Ignoring what the lender takes in exchange. Venture lenders commonly reprice a discretionary tranche when they fund it, or attach additional warrant coverage, and the incremental cost of capital on the accordion can exceed the original loan's.

How it relates to adjacent terms

A tranche is the venture-debt vocabulary for the same idea. Where a bank enlarges one facility, a venture lender pre-slices the loan and gates the slices, so read the tranche conditions the way you would read an accordion's consent standard.

Negative covenants on additional indebtedness are what make an accordion valuable. Because the loan agreement forbids most new debt, the cheapest route to more borrowing is usually the accordion inside the agreement the company already signed.

A warrant is often the price of the increase. Venture lenders size warrant coverage against funded amounts, so an accordion drawn later typically carries its own warrant grant at the then-current price.

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