A Bank Facility is a contractual agreement between a borrower and a bank or group of banks, known as a syndicate, in which the bank(s) agrees to lend up to a certain amount over a certain period of time subject to defined terms and conditions.
Drawdowns under facilities are usually charged at a floating rate benchmark plus a credit margin which reflects the borrower's credit worthiness.
Facilities may be agreed to be used for term finance in which case they are fully drawn. Facilities are also used as back up finance in case other forms of finance cannot be obtained or refinanced, and as revolving facilities in which funds are drawn temporarily, say for working capital cycles, and repaid until required again. Other uses are in Project Finance, to fund specific assets, and acquisition finance for which the purchaser must be able to evidence finance is available when bidding for another business.
The document format is standardised in different markets although the Loan Markets Association format is a commonly used. Terms and Conditions will include operational and financial covenants which must be measured and confirmed periodically to the bank(s).
Commitment fees are usually payable on undrawn facilities. Arrangement fees are payable on signing. An agent is usually appointed from amongst the banks to manage the drawdown, interest calculation, and repayment process and will require an annual fee to perform this duty.
Facilities are generally for three years, with five years available. Longer terms are usually available only to better and larger borrowers. Options to extend, subject of further fees, are sometimes available.
Post GFC regulation has formalised the process of calculating the credit margin in G20 countries and this has tended to put upward pressure on margins. Domestic banking regulation has tended to reduce bank appetite for lending by means of facilities, in particular beyond a country's border unless to businesses of that country. This requires treasurers to begin planning to replace facilities prior to their maturity in order to ensure they have identified banking appetite to lend to their business.