Facility Agreement

A facility agreement is the legal foundation of a loan or credit line, identifying the borrower, lenders, facility amount and permitted purpose, and setting the rules for requesting money and paying it back. An owner should not treat it as a simple rate sheet, because important restrictions can sit many pages beyond the pricing clause.

Borrower guides to Loan Market Association documents explain common agreement structure, and a public credit agreement filed with the US Securities and Exchange Commission shows how detailed real contracts can be, but these are examples, not a template automatically governing a small company's bank line, since the executed agreement and local law control the transaction. Commitments state what lenders agree to make available under conditions: a revolving facility may allow repayment and later redraw, while a term loan may permit one initial utilisation, and an uncommitted overdraft can have different cancellation rights.

Compare the form of credit with the investment or working-capital need. Conditions precedent can delay first funding, since corporate approvals, security registration, legal opinions and insurance evidence may be required, so a signed agreement alone does not mean the bank will release cash tomorrow; assign an owner to each condition and confirm satisfaction before promising a supplier payment.

Utilisation terms specify notice deadlines, minimum draws, currency, destination and interest periods, and a request may be irrevocable once delivered. Finance should reconcile the planned draw with the amount actually needed and the agreement's availability, because drawing too early incurs cost while drawing too late can miss a project milestone.

Interest can be fixed or floating, and a floating rate may equal a reference rate plus margin, subject to floors and reset dates, while fees can include arrangement, commitment or agency charges, so calculate a cash schedule for several scenarios. Repayment terms can require scheduled instalments, a bullet repayment or mandatory prepayment after certain events, so a borrower should map dates to expected cash generation.

A facility that matures before the asset pays back creates refinancing risk, and the borrower should not assume renewal will be offered on the same terms. Covenants protect lenders and constrain the borrower by requiring, for example, a leverage ratio, financial reporting or consent before taking on more debt, and definitions matter because "EBITDA" may be adjusted and "debt" may include leases or guarantees, so maintain a covenant model based on the document, not a shorthand in a board slide.

Security and guarantees can put other assets or group entities at risk, and a charge over receivables or a parent guarantee may be in a separate document. Map them alongside the facility; a person signing a guarantee should understand the cap, duration and claim trigger, not rely on the borrower's assurance that it will never be needed.

Events of default can allow lender action, and non-payment, covenant failure or insolvency may be listed with notice or cure terms: a default is not always automatic acceleration but it can restrict further drawing, so inform management and advisers early if a test may fail, and document any waiver properly. Amendments require attention to authority and form, because a relationship manager's email may not be enough to change a covenant; check who must consent, whether a fee applies and when the amendment takes effect, and keep signed versions and update internal models so staff do not test against superseded terms.

For a simple interest illustration, $10,000,000 drawn at a 4% base rate plus 2.5% margin for 90 days under an actual/360 convention gives $162,500 of simple interest, though other fees, balance changes and contract details can alter the bill, so use the formula only with the agreement's actual day count and reset rules. A facility agreement is useful when its terms become a working checklist of draw conditions, repayments, covenants, notices, security and expiry dates, so review the full cost and downside before signing and keep live calculations aligned with the signed contract throughout its life.