What it means
The name comes from the idea that the facility can expand like the bellows of an accordion. The credit agreement fixes the maximum uplift and the conditions attached, so the increase can be documented in a short amendment rather than a fresh financing process.
It matters because arranging debt is slow and expensive. Having an accordion in place means a borrower who signs an acquisition in March is not beginning a three-month financing exercise from a standing start, which is frequently the difference between winning and losing a competitive deal.
The size is normally capped in two ways at once: a fixed dollar amount and a leverage-based test, with the borrower typically limited to the lesser of the two. The leverage test compares total debt after the increase with earnings, so a company that grows its earnings automatically earns more accordion capacity.
The point that catches borrowers out is that the capacity is uncommitted. Existing lenders usually have the right to be offered the increase first but no obligation to take it, and if credit conditions have turned, paper capacity may attract no actual money.
Pricing on the incremental tranche is generally governed by a most favoured nation clause. If new money has to be priced more than a set margin above the existing loan, the existing loan's pricing is dragged up to within that gap, which protects current lenders from being repriced behind.
In practice
Real-world examples.
Example
A healthcare group signs a $200,000,000 term loan with a $75,000,000 accordion. Eighteen months later it uses $50,000,000 of that capacity to buy two clinics, closing the acquisition financing in under three weeks rather than three months.
Example
A software business tests its accordion during a period of tight credit markets and finds that only two of its five existing lenders will fund the increase. It brings in a new lender to take the remaining share, which the agreement permits with the agent's consent.
Example
A manufacturer discovers that using its accordion would push leverage from 2.8x to 3.6x, just inside the 3.75x permitted level but uncomfortably close to a 4.0x covenant. The board scales the request back to keep a full turn of headroom before covenant testing.
Formula
Calculation
Leverage-based accordion capacity = (Permitted leverage ratio x EBITDA) - Existing total debt
Available accordion = Lesser of the fixed cap and the leverage-based capacity
A borrower has EBITDA of $20,000,000 and existing total debt of $60,000,000, so current leverage is $60,000,000 / $20,000,000 = 3.0x. Its credit agreement permits an accordion taking leverage up to 3.75x, subject to a hard cap of $30,000,000 of additional debt.
Total debt permitted at 3.75x = 3.75 x $20,000,000 = $75,000,000
Leverage-based capacity = $75,000,000 - $60,000,000 = $15,000,000
Available accordion = lesser of $30,000,000 and $15,000,000 = $15,000,000
Drawing the full $15,000,000 takes the facility to $75,000,000 and leverage to exactly 3.75x, leaving no further headroom under the ratio test.
Now suppose the company first grows EBITDA to $24,000,000. Permitted total debt becomes 3.75 x $24,000,000 = $90,000,000, and the leverage-based capacity becomes $90,000,000 - $60,000,000 = $30,000,000. At that point the fixed cap of $30,000,000 becomes the binding constraint rather than the ratio.Case study
Seen in the real world.
Ashgrove Speciality Foods is an invented company used to illustrate how accordion capacity behaves over time. When it refinanced, its adviser pushed for a $30,000,000 accordion even though the company had no immediate use for it, on the argument that the cheapest time to negotiate flexibility is when you do not need it. At the time EBITDA was $20,000,000 and debt was $60,000,000, giving leverage of 3.0x and usable capacity of $15,000,000 under the 3.75x test.
Two years later, in this fictional scenario, EBITDA had grown to $24,000,000 and a competitor came up for sale at $28,000,000. The company's ratio capacity had risen to $30,000,000, matching the fixed cap, so it could fund the purchase almost entirely from the accordion.
Three of its four existing lenders took their share and a new bank absorbed the rest, and the deal was documented in five weeks. The illustrative lesson is that the accordion did not create the capacity; earnings growth did, and the clause simply meant nobody had to renegotiate the agreement to use it.
Watch out
Common mistakes.
- Describing the accordion as committed funding in board papers. It is permission to ask, and lenders can decline, so a plan that depends on it should carry a fallback.
- Looking only at the headline cap. The leverage-based test usually binds first, so real capacity depends on current earnings and current debt, not the number in the term sheet.
- Forgetting the effect on covenants. Drawing the full amount can leave leverage sitting right against a covenant level, removing the cushion for any dip in earnings.
Questions
People also ask.
Is an accordion the same as an incremental facility?
The terms are used almost interchangeably in loan documentation, with accordion more common in bank lending and incremental facility more common in institutional term loan markets.
Does the accordion cost anything if it is never used?
Usually very little, since undrawn and uncommitted capacity attracts no commitment fee, which is why borrowers negotiate for it at the outset.
Who decides the pricing on the increase?
It is negotiated at the time within limits set in the original agreement, most importantly any most favoured nation clause that caps how much higher the new margin can be before existing pricing rises too.
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