Accordion Feature - Definition
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Accordion Feature Definition
An accordion feature is a type of corporate option or a clause in a loan (or a syndicated facility) agreement that allows a company to increase its line of credit (i.e. the principal amount under the agreement) or other liabilities with a lending financial institution. Accordion features are typically purchased by companies that require more working capital in anticipation of high growth scenarios, including possible expansion opportunities.
A Little More on Accordion Feature
An accordion feature derives its distinctive name from the manner in which the bellows of an accordion (a musical instrument) can be stretched in order to increase the total size of the instrument. Such a clause allows a company to secure additional commitments from the original lender and, if necessary, from other lenders not party to the original loan agreement, provided that there has been no default on the part of the borrower. However, such an additional commitment is at the sole and absolute discretion of the lender. Moreover, an accordion feature is subject to new pricing by the lender(s) as well as new terms and conditions that must be acceptable to the borrower, the agent and the lender(s). It is important to note here that although a business might purchase an accordion feature, it can still opt out of any credit increases if it feels that expansion is possible without incurring any additional debt. Let us consider the following example to better illustrate an accordion feature. Suppose, company C1 already has a line of credit worth $1 million with bank B1. Now, suppose C1 needs additional capital worth $500,000 in order to set up an auxiliary manufacturing facility in its premises. To do this, C1 purchases an accordion feature from B1 that allows it to increase its total debt commitment from $1 million to $1.5 million.
Advantages of an Accordion Feature
Any loan agreement that includes an accordion feature, usually proves beneficial for all parties involved in the agreement. Such loan terms are especially preferred by businesses that typically demonstrate strong potential for accelerated growth, while at the same time being wary of risks from uncertainty stemming from factors outside their control.
- The main advantage of purchasing an accordion feature is that lenders pre-approve any increase in the loan amount, which means that the borrower does not have to obtain the lenders consent again in order to increase the loan facility at a later date. In other words, the borrower has easy access to funds throughout the term of the loan.
- From the perspective of the lender, an accordion feature can be immensely lucrative since it offers the lender the opportunity to charge more upfront fees in exchange for eliminating interest rate uncertainty for the borrower.
- Additionally, a bank can utilize the accordion feature to generate non-interest income by monetizing an interest rate spread.
- Lastly, although the borrower pays a flat rate of interest, an accordion feature allows the lender to structure the loan in such a way as to derive a floating rate of interest.