What it means
The facility agreement sets out the size, the term, the pricing and every condition attached to using the money. Each drawing is technically a separate loan with its own interest period, commonly one, three or six months, which is rolled over or repaid when that period ends.
Why it matters comes down to certainty. A committed facility is a promise the lender cannot walk away from while the borrower complies with the agreement, which is what allows auditors and rating agencies to count the undrawn amount as genuine liquidity.
Uncommitted lines look similar on a summary sheet but can be withdrawn at any time and carry no such weight. Pricing has several layers.
The borrower pays a margin over a reference rate on drawings, a commitment fee on undrawn amounts usually set at 30% to 40% of that margin, and arrangement and agency fees payable up front. Some agreements add a utilisation fee that steps the cost up once drawings pass a third or two thirds of the commitment.
Conditions are where the real detail lives. Financial covenants on leverage and interest cover, conditions that must be satisfied before each drawing, and clean-down periods requiring a zero balance for a stretch each year all constrain how the facility can be used.
Breaching a covenant can block new drawings at precisely the moment the money is needed. Larger facilities are syndicated across a group of banks with one acting as agent, and many include an accordion allowing the commitment to be increased later with lender consent.
Negotiating that flexibility at signing is far cheaper than trying to add it in a hurry when trading has already turned.
In practice
Real-world examples.
Example
A building materials distributor signs a $40,000,000 three-year facility with a 2.75% margin and draws around each quarter end to pay suppliers before customer receipts arrive. The undrawn balance is disclosed in its interim accounts as available liquidity.
Example
A clothing retailer's facility includes a clean-down clause requiring the balance to sit at zero for thirty consecutive days each year. The treasury team schedules that window for February, when post-Christmas cash collection is at its strongest.
Example
A syndicate of five banks provides a $150,000,000 facility with one acting as agent, including an accordion that allows an increase to $200,000,000. Two years later the borrower uses that accordion to fund a bolt-on acquisition without reopening the whole agreement.
Formula
Calculation
Annual Cost = (Average Drawn x All-in Interest Rate) + (Average Undrawn x Commitment Fee) + Annualised Arrangement Fee.
A company signs a $25,000,000 revolving loan facility for five years. Over the year it draws an average of $10,000,000, leaving an average undrawn balance of $25,000,000 - $10,000,000 = $15,000,000. The reference rate is 4.5% and the margin is 3.5%, so the all-in rate is 8.0% and interest is $10,000,000 x 0.08 = $800,000. The commitment fee is 1.2%, giving $15,000,000 x 0.012 = $180,000. The arrangement fee of 1.00% on $25,000,000 is $250,000, spread over the five-year term at $50,000 a year. Total annual cost is $800,000 + $180,000 + $50,000 = $1,030,000, which against the average drawn balance is $1,030,000 / $10,000,000 = 10.3%, comfortably above the 8.0% headline rate.Case study
Seen in the real world.
Alder Grove Foods is an illustrative, fictional chilled food producer whose sales concentrate heavily in the second half of the year. It negotiated a $30,000,000 revolving loan facility to replace a patchwork of overdrafts that three different banks could each have pulled at short notice.
Across the first year the average drawn balance was $12,000,000 at an all-in rate of 7.5%, costing $12,000,000 x 0.075 = $900,000. The commitment fee of 0.9% on the average undrawn $18,000,000 added $18,000,000 x 0.009 = $162,000, and the arrangement fee of 0.75% on $30,000,000 came to $225,000, spread over the three-year term at $75,000 a year. The full annual cost was $900,000 + $162,000 + $75,000 = $1,137,000, or $1,137,000 / $12,000,000 = just under 9.5% on the money actually used.
The finance director's report to the board in this fictional case made two points. The all-in cost was well above the quoted margin once fees were included, and the facility was still worth it, because a committed three-year agreement removed the risk that a demand overdraft would disappear in the middle of the company's busiest quarter.
Watch out
Common mistakes.
- Comparing facilities on the margin alone, and ignoring commitment, arrangement, agency and utilisation fees that can add several percentage points to the effective cost.
- Building a cash forecast that assumes the full commitment is drawable, without testing whether covenants and drawdown conditions would actually be met at that point.
- Forgetting the clean-down requirement until the last quarter, then scrambling to repay a balance the business genuinely needs.
Questions
People also ask.
What is the difference between this and a revolver?
None in substance, since revolver is simply the shorthand market name for a revolving loan facility.
What happens at the end of the term?
Any outstanding balance falls due in full, so refinancing discussions normally start twelve to eighteen months before maturity.
Can the facility size be increased later?
Only if the agreement contains an accordion or incremental clause, and even then the increase needs lender consent and usually fresh conditions.
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