Revolver Finance Dictionary

Revolver Finance, like any specialized field, boasts its own unique lexicon. Understanding this vocabulary is crucial for anyone looking to navigate the world of revolving credit facilities and participate effectively. Here's a dictionary of key terms:

Revolving Credit Facility (RCF):

The cornerstone of Revolver Finance. This is a credit agreement where a borrower can draw down funds, repay, and redraw again up to a predetermined credit limit, over a specified period. Think of it like a high-value credit card for businesses.

Commitment:

The total amount of credit the lender(s) are obligated to provide to the borrower under the RCF agreement. This is the maximum amount that can be outstanding at any given time.

Availability:

The amount of the commitment that the borrower can currently draw upon. It's calculated by subtracting outstanding borrowings, outstanding letters of credit, and any other amounts reducing borrowing capacity from the total commitment.

Drawdown (or Borrowing):

The act of the borrower taking funds from the RCF. These drawdowns typically have specific terms, including interest rate and repayment schedules (although within the overall facility term).

Repayment:

The act of the borrower returning funds to the lender(s), reducing the outstanding balance under the RCF.

Margin:

The spread, expressed in basis points (bps, where 100 bps = 1%), added to a benchmark interest rate (like LIBOR, SOFR, or Prime Rate) to determine the interest rate charged on outstanding borrowings. This represents the lender's profit margin and compensates for credit risk.

Benchmark Rate:

The underlying reference rate (e.g., LIBOR, SOFR, Prime Rate) to which the margin is added to calculate the interest rate on the loan.

Commitment Fee:

A fee paid by the borrower to the lender(s) on the undrawn portion of the commitment. It compensates the lender for reserving the credit and for capital they must hold against potential drawdowns.

Utilization Fee:

A fee sometimes charged by lenders based on the percentage of the commitment that is utilized. This fee increases as utilization increases, encouraging responsible borrowing.

Letter of Credit (LC):

A guarantee issued by the bank on behalf of the borrower, promising payment to a third party if the borrower fails to meet certain obligations. LCs issued under the RCF reduce the availability under the commitment.

Borrowing Base:

A formula used to determine the maximum amount the borrower can borrow, typically based on the value of the borrower's assets (e.g., accounts receivable, inventory). The borrowing base acts as collateral and protects the lender. The amount borrowable fluctuates with the value of the assets.

Covenant:

Restrictions and requirements placed on the borrower by the lender in the credit agreement. These can include financial covenants (e.g., debt-to-equity ratio, interest coverage ratio) and operational covenants (e.g., restrictions on asset sales or acquisitions). Failure to meet covenants can lead to default.

Financial Covenants:

Specific financial ratios that the borrower must maintain, as agreed upon with the lenders. Common examples include leverage ratios, coverage ratios, and liquidity ratios.

Amortization:

The gradual repayment of the principal amount of the loan over time. While RCFs are primarily revolving, some agreements may include a term loan component with amortization.

Default:

A failure by the borrower to comply with the terms of the credit agreement, such as failing to make payments or violating covenants. Default can trigger various remedies for the lender, including accelerating the loan and seizing collateral.

This dictionary provides a foundational understanding of the key terms used in Revolver Finance. A thorough grasp of these concepts is essential for effective communication and participation in this area of corporate finance.