Incremental Facility
An incremental facility is additional term-loan or revolving-credit capacity that a borrower can add under an existing credit agreement, subject to the agreement’s specified limits, lender participation and conditions.
Incremental facilities avoid a full refinancing
A borrower expecting acquisitions or growth can negotiate flexibility at the original closing to add debt later under the existing credit-document framework.
This can reduce execution friction compared with replacing the entire credit agreement whenever new capital is needed.
Free-and-clear capacity does not require a leverage test
Many agreements provide a fixed amount—or a greater-of fixed amount and percentage of EBITDA—that can be incurred without satisfying the main ratio-based incremental test.
That amount is often described as free-and-clear incremental capacity.
Ratio-based capacity can be much larger
Beyond the fixed basket, a borrower may incur additional incremental debt if a pro forma first-lien, secured or total leverage ratio satisfies the agreed threshold.
In some agreements, the ratio-based amount is theoretically unlimited as long as the test remains satisfied.
Repaid debt can restore capacity
Credit agreements can add prior voluntary term-loan repayments or permanent revolver commitment reductions back to the incremental basket, subject to exclusions.
This can let a borrower delever and later reborrow capacity without relying entirely on the original fixed basket.
Incremental facilities can dilute existing lenders without changing their nominal ranking
Assume an existing first-lien term loan has $500 million outstanding. The credit agreement permits another $200 million of pari passu incremental first-lien debt.
If the borrower raises the full amount, existing lenders remain first lien—but now share collateral with $700 million of equal-priority debt rather than $500 million.
That can reduce expected recovery in a downside scenario without changing the words first lien in the original loan’s description.
Existing lenders therefore focus on incremental caps, leverage tests, maturity requirements and all-in-yield protections. Borrowers value the same provisions because they preserve acquisition and refinancing flexibility without reopening the entire credit agreement.
Common mistakes
Treating incremental capacity as cash available today New lenders still must agree to fund.
Assuming all incremental debt is first lien Agreements can permit different lien and unsecured structures.
Ignoring all-in-yield protections New debt pricing can trigger most-favored-lender adjustments or other yield protections for existing loans.
Example
A credit agreement permits a $100 million free-and-clear incremental amount plus unlimited additional first-lien incremental debt if pro forma first-lien leverage does not exceed 3.50×. The borrower can add $80 million without using the ratio capacity, then potentially add more if the leverage test is satisfied and lenders commit.
Example
A credit agreement permits a $100 million free-and-clear incremental amount plus unlimited additional first-lien incremental debt if pro forma first-lien leverage does not exceed 3.50×. The borrower can add $80 million without using the ratio capacity, then potentially add more if the leverage test is satisfied and lenders commit.
Professional note
Incremental capacity is permission to borrow, not committed liquidity. Distinguish contractual capacity from actual lender commitments and model how new debt affects leverage, all-in yield, collateral sharing and future basket availability.
Related terms
- First-Lien Debt
First-lien debt is secured debt that holds the first contractual lien priority over specified collateral, subject to permitted liens, equal-priority obligations and the governing intercreditor and security documents.
- Original Issue Discount (OID)
Original Issue Discount, or OID, in a loan financing is the discount between a loan’s stated principal amount and the amount paid by lenders when the debt is originally issued.
- SOFR Floor
A SOFR floor is the minimum SOFR value that a credit agreement uses to calculate interest on a floating-rate loan, even when the applicable SOFR reference rate falls below that contractual minimum.
- Incurrence Covenant
An incurrence covenant is a credit-agreement restriction that is tested when a borrower proposes to take a specified action—such as incurring debt, making an investment, granting a lien or paying a restricted payment—rather than automatically on every recurring reporting date.
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