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Unlocking Capital: The Complexities of Syndicated Revolving Credit Facilities (RCFs)

Revolving credit facilities (RCFs) stand as essential tools for businesses seeking to secure flexible, ongoing access to capital. This article delves into the intricacies of RCFs, highlighting their distinctions from term loans, the costs associated with them, the rights of creditors, typical covenants and reporting requirements, and the pivotal role of an RCF agent in syndicated facilities. For a comprehensive understanding of how RCFs empower companies with financial agility, read on.

RCF vs. Term Loan: Discerning the Distinctions

Prior to delving into the details of RCFs, it is important to distinguish the fundamental differences between an RCF and a term loan.

A term loan has a predetermined duration, typically spanning 1 to 10 years. Irrespective of whether a term loan has an amortising profile, where principal is repaid periodically during the term of the loan, or a bullet profile, where principal is repaid in a single repayment on the maturity date of the loan, once principal has been repaid by the debtor, it cannot be redrawn.

On the other hand, an RCF is a credit line that remains open for an extended period, typically 3 to 5 years, where borrowers can draw, repay, and redraw funds within the facility's limit as per their evolving needs. Interest is typically charged only on the outstanding balance, granting borrowers greater financial flexibility.

Understanding the Costs: Fees and Interest Rates

Within a syndicated RCF, debtors face various fees:

  1. Arrangement Fee: This fee is a one-time payment to compensate the lenders for setting up the RCF. It's typically a percentage of the total facility amount and can be quite substantial.

  2. Commitment Fees: These fees are levied on the unused portion of the RCF, incentivizing borrowers to use the facility and ensuring that lenders receive compensation for the risk they undertake.

  3. Utilisation Fees: When businesses actually draw funds from the RCF, they may incur utilisation fees, calculated as a percentage of the amount drawn.

  4. Underlying Interest Rate: This is the benchmark interest rate (e.g., SONIA, ESTR or SOFR) upon which the interest charged on the outstanding balance is based. It fluctuates with market conditions.

  5. Interest Margin: The interest margin is a spread added to the underlying interest rate, representing the lenders' compensation for bearing the credit risk.

Creditor Rights: Safeguards in Syndicated RCFs

Creditors in a syndicated RCF have several rights to protect their interests, including:

  • Enforcement Rights: Lenders can demand repayment if the borrower breaches covenants or defaults on their obligations.

  • Security Interests: Lenders may have the right to secure their position with collateral in the event of default.

  • Communication Rights: Creditors often have the right to receive regular financial statements and other updates, such as covenant compliance certificates, from the borrower to monitor the company's financial health.

Covenants and Reporting Requirements

Covenants are the financial and operational conditions set by lenders to maintain the borrower's financial health. These typically encompass metrics such as leverage ratios, interest coverage ratios and limitations on capital expenditures. The two most commonly employed covenants are Interest Coverage and Leverage Covenants:

  1. Interest Coverage Covenant: Typically expressed in financing documentation as EBITDA to Net Financing Cost. This stipulates that the company's earnings before interest, tax, depreciation, and amortization (EBITDA), a proxy for earnings, must exceed a certain multiple of interest expenses, typically defined as net financing cost, assuring lenders that the company can comfortably service its debt. A typical covenant for an investment grade company is >4.0x.

  2. Leverage Covenant: Typically expressed in financing documentation as Net Debt to EBITDA. This covenant specifies that the company's net debt (total debt minus cash and cash equivalents) should not exceed a certain multiple of its EBITDA. A typical covenant for an investment grade company is <3.0x.

Reporting requirements mandate that borrowers furnish periodic financial statements, offering transparency and accountability to the creditors. These often include providing Covenant Compliance Certificates to creditors via the agent bank, typically on a semi-annual or quarterly basis, in accordance with the borrower’s financial reporting schedule.

Role of RCF Agent in Syndicated Facilities

The RCF agent assumes the role of an impartial intermediary between the borrower and the consortium of lenders. The role is held by one of the banks in the syndicate of lenders and requires an annual fee from the borrower. Their responsibilities encompass facilitating communication, disbursing funds, and ensuring diligent adherence to covenants and reporting requirements set out in the financing documentation between the borrower and the syndicate of lenders. The agent bank plays an important role in maintaining seamless operations of a syndicated RCF.

In conclusion, revolving credit facilities in syndicated finance offer companies a dynamic financial lifeline, enabling them to navigate shifting financial tides. To harness this financial instrument effectively, businesses must understand the complexities associated with RCFs, including the array of costs, creditor rights, and the pivotal role of the RCF agent. With discernment and diligence, businesses can secure the capital needed to fuel their growth and resilience, particularly in turbulent times.


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About the author

Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of transactions across financing, M&A and derivatives with global corporates, private equity funds and financial sponsor groups.

About Langdon Capital

With a network of 700+ alternative investors, Langdon Capital raises debt and equity capital between £1m and £25m for high-growth and innovative scale-ups with >£1m annual revenue and >30% annual revenue growth in technology enabled and clean-tech sectors at Series A or beyond to help fulfil growth ambitions and paths to profitability.

This is not financial advice or any offer, invitation or inducement to sell or provide financial products or services or to engage in any form of investment activity.

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