What key terms should I understand in a revolving credit facility?

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AcadiFi · Accepted Answer

A revolving credit facility lets the borrower draw, repay, and redraw up to a committed limit for a set term. Key provisions shape cost, flexibility, and risk.

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Pricing: stated as SOFR plus a spread that adjusts with leverage or credit rating (a pricing grid). Negotiate a tight grid so your spread falls when you deleverage. Watch for SOFR floors that set a minimum even if benchmarks fall.

Commitment fees: paid on undrawn capacity, usually 20-50 bps. On a $200M facility half drawn, a 30bps commitment fee on $100M is $300K annually. Push for lower fees on the portion you regularly utilize.

Maturity: longer is better for the borrower because it reduces refinancing risk. 5-year terms are standard; avoid 364-day facilities unless you specifically want off-balance-sheet treatment (which itself has become restrictive).

Financial covenants: maximum leverage (debt/EBITDA), minimum interest coverage (EBITDA/interest), and sometimes minimum liquidity. Negotiate cushions so normal business variance doesn't trigger defaults. Understand the testing frequency and cure rights.

MAC clauses: material adverse change provisions can let lenders pull funding during stress. Sophisticated borrowers negotiate these out or narrow them substantially.

Accordion features: the right to upsize later (e.g., by $100M) without renegotiating. Useful if you anticipate growth.

Borrowing base: asset-backed revolvers tie availability to receivables and inventory. Not standard in investment-grade facilities but common in leveraged loans.

Imagine Rhiannon Zarillo closing a facility for Halfdan Machinery. She wins a 75bps lower commitment fee, a 25bps wider covenant cushion, and removes a MAC clause. Over the 5-year term these concessions save $2.3M.

Read the full agreement. A 200-page credit agreement hides dozens of traps in basket definitions, restricted-payment tests, and reporting requirements.

What key terms should I understand in a revolving credit facility?

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