Revolving Credit Facility
A revolving credit facility, or revolver, is a committed lending arrangement that allows a borrower to draw, repay and generally reborrow amounts up to the available commitment during the facility’s term, subject to the credit agreement.
A revolver is designed for reusable liquidity
The borrower can draw when cash is needed and repay when cash improves. Subject to the agreement, repaid principal becomes available again.
That flexibility distinguishes a revolver from a term loan, where principal repayment ordinarily does not recreate borrowing capacity.
Unused commitments can still cost money
Lenders reserve capital and liquidity for the borrower even when no loan is outstanding. Credit agreements therefore commonly charge a commitment fee on the unused portion.
The economic cost of a revolver includes both interest on drawn amounts and the fee paid for standby availability.
Letters of credit can consume availability
A revolver often includes a letter-of-credit sublimit. An outstanding letter of credit can reduce the amount otherwise available for cash borrowing even though the borrower has not received a loan advance.
Swingline loans can provide another short-duration borrowing mechanism inside the same facility.
Maintenance covenants may be springing
Leveraged revolvers often contain a leverage covenant tested only when usage exceeds a stated percentage of commitments.
That means the covenant can be dormant when the facility is largely undrawn and become active when liquidity use rises—exactly when lender protection may matter more.
Revolver availability should be stress-tested, not just quoted
Suppose a company reports a $300 million revolver and says it is undrawn. That does not necessarily mean $300 million is available. Outstanding letters of credit, borrowing-base restrictions, covenant limits and minimum-liquidity requirements can reduce usable capacity.
The more useful liquidity calculation is:
cash on hand + actual revolver availability − near-term mandatory cash uses
A revolver can also become more important precisely when earnings weaken. If a springing leverage covenant activates when utilization passes 35% or 40% of commitments, the borrower may face a tighter covenant at the same time it needs more liquidity.
For investors, that interaction is critical. A large headline revolver is valuable only if the borrower can actually draw it when operating conditions are under stress.
Common mistakes
Equating facility size with available liquidity Existing draws and letters of credit reduce availability.
Treating an undrawn revolver as free Unused commitment fees can apply.
Assuming a revolver has no maturity risk The commitment expires or must be refinanced at the stated maturity.
Example
A company has a $600 million revolver with a $50 million swingline subfacility and a $20 million letter-of-credit subfacility. If it has no loans outstanding but $10 million of letters of credit, its immediately available borrowing capacity is reduced by the outstanding letters of credit under the agreement.
Example
A company has a $600 million revolver with a $50 million swingline subfacility and a $20 million letter-of-credit subfacility. If it has no loans outstanding but $10 million of letters of credit, its immediately available borrowing capacity is reduced by the outstanding letters of credit under the agreement.
Professional note
Available commitment is not the same as cash on hand. Availability can be reduced by outstanding loans, letters of credit, borrowing-base limits, covenant restrictions or events of default.
Related terms
- Working Capital
Working capital is commonly calculated as current assets minus current liabilities. Positive working capital means reported current assets exceed reported current liabilities; negative working capital means the reverse.
- Debt Commitment Letter
A debt commitment letter is an agreement in which lenders or arrangers commit, subject to stated terms and conditions, to provide debt financing for an acquisition or other transaction.
- Term Loan
A term loan is debt advanced for a specified term and repaid according to the loan agreement through scheduled amortization, mandatory prepayments, a maturity payment or some combination of those mechanisms.
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