The Accordion Explained: How a Sponsor Loads More Debt Onto a Buyout After Close — the Free-and-Clear Basket, Ratio Debt, and the MFN That Stops It Repricing the Existing Loan
Michael King, PE Investment Manager · 9 min read ·
- The accordion (incremental facility) is a pre-agreed right in the credit agreement to raise more term debt after close — ranking pari passu with the original loan — without a fresh negotiation, so a sponsor can fund a bolt-on at deal speed
- Capacity comes in two buckets: a fixed free-and-clear basket (a “grower”: the greater of a hard number and a percentage of EBITDA) available with no leverage test, and ratio debt above it — effectively unlimited, capped only by a pro forma leverage test
- MFN protection is the existing lenders’ defence: if the new incremental term debt prices more than 50bps wider than their loan, the existing loan’s margin is automatically stepped up to within 50bps of the new debt — so the sponsor cannot reprice the whole structure by stealth
- The MFN usually carries a sunset (it falls away 6–12 months after close) and carve-outs, which is where the real negotiation sits — and the incremental it protects is how buy-and-build is actually financed
A Buyout Does Not Stop Borrowing at Close — the Accordion Is Pre-Agreed
The debt raised to fund a buyout is set on the closing date, but the need for debt is not. A sponsor running a buy-and-build will bolt on three or four businesses over the hold, and each one has to be paid for. Raising fresh senior debt from scratch every time is slow and hands the lenders a negotiation they did not have to give — a chance to reprice, retighten, or simply say no at the worst possible moment. The accordion, or incremental facility, removes that friction by settling the terms in advance.
It is a clause in the credit agreement that lets the borrower increase the term loan — or add a new tranche ranking alongside it — up to a pre-agreed capacity, on pricing set by the market at the time, without needing the consent of the existing lenders. The original syndicate has already agreed, at close, that this additional debt may exist and where it will rank. This is the layer above the LBO debt stack: the stack is the debt drawn on day one; the accordion is the debt the agreement permits the sponsor to draw later, and its size is negotiated as hard as the opening leverage.
Two Buckets of Capacity: the Free-and-Clear Basket and Ratio Debt
Accordion capacity is not a single number. It is built from two distinct buckets that stack on top of each other, and the distinction is exactly what an interviewer is probing.
The free-and-clear basket is certainty; ratio debt is capacity that depends on performance. Together they decide how much a sponsor can borrow into a bolt-on without reopening the deal — but capacity is only half the clause. The other half is what the new debt is allowed to cost, and that is where the existing lenders push back.
MFN Is the Existing Lenders’ Protection Against Being Repriced by the New Debt
Here is the mechanic that separates someone who has read a credit agreement from someone who has read a summary of one. The existing lenders have a problem with the accordion: if the sponsor can raise new pari passu debt at any price, it can raise it wider than their loan — and a new tranche printing at a higher spread is a signal that the market now demands more yield for the same credit. That leaves the original lenders holding a loan whose coupon is below where the credit currently clears, so its secondary price falls. They are repriced by the back door without being asked.
The MFN is why the pricing of the incremental is never a private matter between the sponsor and the new lenders. It reaches back into the existing loan. Put numbers against it and both the capacity and the MFN become concrete.
A Worked Example: Funding a Bolt-On Through the Accordion
Take a portfolio company bought with a £500M Term Loan B at S+450, issued at an OID of 99.5, on £100M of EBITDA — opening first-lien leverage of 5.0x. Eighteen months in, EBITDA has grown to £120M and the sponsor wants to fund a £150M bolt-on with debt drawn through the accordion.
The existing loan yields about S+467 (450 plus the amortised half-point of OID). The new tranche yields about S+558. The gap is 91bps — wider than the 50bps MFN threshold — so the MFN fires.
The MFN in Cash: What the 50bps Actually Costs the Borrower
The MFN does not just widen the new money; it widens the old money too. To close the 91bps gap to the permitted 50bps, the existing £500M loan’s margin is stepped up by about 41bps — from S+450 toward S+491. On £500M that is roughly £2.0M of additional interest a year, paid to lenders who did not advance a single new pound. Add it to the higher coupon on the £150M itself, and the true cost of the bolt-on financing is not the headline spread on the new tranche — it is the new tranche plus the repricing of the entire existing loan that the MFN forces.
The Sunset, the Carve-Outs, and Where the Real Negotiation Sits
The MFN is rarely permanent, and its limits are the heart of the drafting fight. Sponsor-friendly agreements attach a sunset: the MFN protection expires 6 to 12 months after close, after which the borrower can raise incremental at any price with no drag on the existing loan. In frothy markets sunsets shortened and MFN thresholds widened beyond 50bps; when credit tightened, lenders pushed them back the other way. The MFN also typically carves out incremental used for acquisitions, shorter-dated tranches, or amounts below a threshold — each carve-out a hole the sponsor negotiated into the protection.
This is the same tension that runs through the whole agreement: every freedom the sponsor wins on the accordion is a protection the lenders concede, and it is priced into the margin at close. It sits directly alongside the covenant package — a borrower with a generous free-and-clear basket, a high incurrence ratio, and a short MFN sunset has, in effect, covenant-lite flexibility on the liability side too. And where the incremental ranks when a deal goes wrong is set, like everything else, in the intercreditor agreement that governs the pari passu claim before a pound of it is drawn.
The Verdict: The Accordion Is Priced at Close, Not When It Is Drawn
The incremental facility looks like a convenience — a way to top up debt later without the paperwork — and it is treated that way by candidates who have never seen a buy-and-build financed. The reality is that it is one of the most heavily negotiated clauses in the agreement, because it decides how much more debt the sponsor can load on, on whose consent, and at what cost to the lenders already in the deal. The free-and-clear basket is unconditional capacity; ratio debt is capacity that depends on performance; and the MFN is the price the sponsor pays for keeping the new debt pari passu without repricing the old.
The candidate who says “the accordion lets them borrow more later” has the label and none of the mechanic. The one who says “there is a free-and-clear grower basket with no test, ratio debt above it capped by a leverage incurrence test, and a 50bps MFN that steps up the existing margin if the new tranche prices wider — subject to a sunset that usually kills the protection inside a year” is describing what a leveraged-finance desk actually documents. The right to borrow more is the easy half. What it costs the lenders already in the room is the half that gets negotiated.
Take Your Preparation Further
The accordion only makes sense once the debt it extends does, so read it alongside the rest of the financing. Start with the LBO debt stack to see what ranks where before the incremental is added; understand how the new tranche is priced — and why the OID feeds the MFN yield test — in how a leveraged loan is priced; see the covenant flexibility that sits beside it in maintenance vs incurrence covenants; and follow the strategy the incremental exists to fund in buy-and-build and multiple arbitrage.
To build the debt, the incremental draw and the interest line yourself inside a live deal model, download the LBO Model Template — PE Ready, and for the financing and valuation mechanics on one page, see the free Valuation Methods Cheat Sheet.
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Frequently asked questions
What is an incremental facility (accordion) in an LBO?
An accordion, or incremental facility, is a clause in the buyout’s credit agreement that lets the borrower raise more term debt after close — either by increasing the existing loan or adding a new tranche that ranks pari passu with it — up to a pre-agreed capacity and without the consent of the existing lenders. It exists because a sponsor running a buy-and-build needs to fund bolt-on acquisitions over the hold, and negotiating fresh senior debt each time would be slow and hand lenders a chance to reprice or refuse. By settling the terms at close, the accordion lets the sponsor add debt at deal speed. The pricing of any incremental is set by the market at the time it is drawn, not fixed in advance.
What is the difference between the free-and-clear basket and ratio debt?
They are the two buckets of accordion capacity. The free-and-clear (or starter) basket is a fixed amount of incremental debt available with no leverage test at all — usually a “grower” set at the greater of a hard cap and a percentage of EBITDA, commonly 100% of EBITDA, so it grows with the business. The borrower can draw it regardless of where leverage sits. Ratio debt is capacity above the basket: effectively unlimited additional incremental, but only if a pro forma leverage test is satisfied after the new debt goes on — typically pari passu secured net leverage no higher than the closing level or a set threshold. In practice sponsors draw ratio debt first when they pass the test comfortably, preserving the unconditional free-and-clear basket for a moment when leverage is high and the ratio would fail.
What is MFN protection in a leveraged loan?
Most-Favoured-Nation (MFN) protection is a provision that stops a sponsor repricing the existing loan by stealth when it raises new incremental debt. If the all-in yield on new pari passu incremental term debt — margin plus amortised OID plus any floor change — exceeds the existing term loan’s yield by more than a set threshold, the market standard being 50 basis points, the existing loan’s margin is automatically increased so the gap is no wider than 50bps. The logic is that a new tranche pricing wider signals the credit now clears at a higher yield, which would leave the original lenders holding a below-market loan whose secondary price falls. The MFN drags their coupon up with the new debt, keeping them close to where the credit actually trades.
What is an MFN sunset?
A sunset is a time limit on the MFN protection. Sponsor-friendly agreements provide that the MFN falls away a set period after close — commonly 6 to 12 months — after which the borrower can raise incremental debt at any price with no drag on the existing loan’s margin. The sunset is one of the most negotiated points in the accordion, because it defines how long the existing lenders are protected: a short sunset and a wide MFN threshold favour the borrower, while lenders push for a longer or permanent MFN and a tighter threshold. In frothy credit markets sunsets shortened and thresholds widened; when credit tightened, both moved back toward the lenders. The MFN often also carves out incremental used for acquisitions or shorter-dated tranches.
How does the accordion affect an LBO model?
Most models fund a bolt-on by adding a debt line at an assumed new coupon and stop there, which misses two costs. First, if the MFN fires — because the incremental prices more than 50bps wider than the existing loan — the margin on the existing debt is stepped up too, so the interest line on debt already outstanding jumps the moment expensive incremental is drawn. On a £500M loan repriced ~41bps that is roughly £2M a year, paid to lenders who advanced no new money. Second, capacity is finite: a draw has to fit inside the free-and-clear basket or clear the ratio test, so the accordion is not an unlimited tap at a flat rate. A model that ignores both makes a buy-and-build look cheaper and more elastic than the credit agreement actually allows.