The Revolving Credit Facility in an LBO: Why a Buyout Raises a Revolver It Never Intends to Draw — the Commitment Fee It Pays for an Empty Line, the Super-Senior Ranking That Puts It First in a Default, and the Springing Covenant It Quietly Carries

A Buyout Raises a Revolver It Does Not Intend to Draw

Open the sources and uses on almost any leveraged buyout and one line reads zero: the revolving credit facility, committed in full and drawn not at all. The sponsor has arranged a line of credit, agreed its size and price, paid the arrangement cost — and left it empty. That is not an oversight or a deal that fell short of its financing; it is the intended state. The revolver exists to be available, not to be used, and the discipline of a well-structured buyout is to keep it that way for as long as the business can.

The reason the line is there at all is that term debt and a revolver do two different jobs. The term loans and any bonds are the money that buys the company — drawn once, at close, in a single lump, and paid down over years. The revolver is working capital: a reusable facility the business dips into when cash is temporarily short and repays when it is not. Confuse the two and the whole structure reads wrong. The candidate who counts the revolver as part of opening leverage, or treats it as another slug of acquisition funding, has missed what the facility is for — and that error is exactly what a good interviewer is probing for.

What the Revolver Is For: Working Capital, Not the Purchase

A business does not consume cash at a constant rate. Receivables build before they are collected, inventory is bought before it is sold, suppliers are paid on a different clock from customers, and a seasonal business earns most of its cash in a few months and spends through the rest. The gap between cash out and cash in is working capital, and it swings. The revolver is the facility that bridges the trough: drawn when the swing is against the business, repaid when it reverses.

That is why the revolver is committed and reusable rather than a term draw. A term loan is borrowed once and amortised; a revolver can be drawn, repaid and drawn again as many times as the business needs across the life of the facility, up to its limit. It typically carries a letter-of-credit sub-limit as well, so the business can post the LCs that suppliers and landlords demand without tying up cash. What it is emphatically not for is the acquisition itself. Using a working-capital line to fund part of the purchase price is precisely the misuse the clean-down provision, below, is written to prevent.

Sizing: Half a Turn to a Full Turn of EBITDA, Set by the Cash Trough

The revolver is sized to the business’s peak working-capital need, not to a leverage target. In practice that lands most deals at roughly 0.5–1.0x EBITDA of committed revolver — a £100M EBITDA business might carry a £50–100M line — but the multiple is an output, not the input. The real question the lead arranger asks is how deep the seasonal cash trough gets in a normal year, plus a cushion for a bad one, plus headroom for the letters of credit the business has to keep outstanding. A steady, negative-working-capital software business needs almost none; a seasonal retailer or a project-based contractor with lumpy receivables needs a large one.

Getting this number right matters more than it looks. Size the revolver too small and the business hits the trough with no liquidity and is forced into a covenant conversation with its lenders at the worst possible moment. Size it too large and the sponsor pays a commitment fee on capacity that never gets used — a small, permanent drag on returns for an insurance policy that is bigger than the risk. The facility is a liquidity backstop, and like any backstop it is priced whether or not it is called.

Pricing: You Pay for the Option Whether or Not You Use It

A revolver has two prices, and the whole logic of leaving it undrawn lives in the gap between them. On any amount actually drawn, the business pays a drawn margin — a spread over the reference rate (SOFR or SONIA), usually pitched at or a touch inside the term loan, so roughly the mid-3s to low-4s in percentage-point terms for a typical credit. On the amount left undrawn, it pays a commitment fee — a much smaller charge for the lender keeping the capital available. Market convention sets the commitment fee at around 35% of the drawn margin (deals cluster in a 30–50% band, or a flat 25–50bps), so a facility with a 4.00% drawn margin carries a commitment fee near 1.40% on the empty line.

That table is the argument in three rows. Drawing the revolver and parking the proceeds as cash roughly triples the annual cost of the line while doing almost nothing to net leverage, because the cash you are holding nets straight back against the debt you just raised. The revolver earns its keep only when the drawn cash is actually working — funding a real trough, not sitting in the account — which is exactly why the sensible default is to leave it empty until the business genuinely needs it.

Super-Senior Ranking: Last to Fund, First to Be Repaid

The revolver is usually the smallest facility in the structure and, in a default, the safest. Under the intercreditor agreement the revolving lenders — together with the hedge counterparties — rank super-senior: they share the same security as the senior term debt, but they are paid first out of enforcement proceeds. The term-loan investors, despite holding the largest and nominally “senior secured” claim, sit behind the revolver in the recovery waterfall.

That ordering is not an accident of drafting; it follows from who holds the paper. The revolver is provided by the relationship banks that arrange the deal and expect an ongoing relationship with the borrower — the same banks that then syndicate the term loan B out to CLOs and institutional funds. Those banks will commit reusable, undrawn capital only if they are first in line when it goes wrong. The institutional buyers of the term loan accept ranking behind a small super-senior revolver because it is the price of the banks arranging the financing at all. It is the same priced-queue logic that governs the rest of the debt stack: claims are paid in order, and the order sets who bears the loss.

The Springing Covenant: The Undrawn Line Carries the Deal’s Only Brake

Here is the feature that makes the revolver matter far beyond its size. Most large buyouts today are financed covenant-lite on the term debt — the term loan B has no maintenance covenant, so there is no quarterly leverage test the business has to pass. But the revolving lenders, ranking super-senior and closest to the operating cash, will not extend a reusable line with no maintenance protection at all. So the one covenant that survives in an otherwise cov-lite structure lives on the revolver: a springing net-leverage covenant.

“Springing” means it is dormant until triggered. The covenant is tested only when the revolver is drawn beyond a set threshold — commonly around 35–40% of total commitments — at the relevant quarter-end. Below that line, nothing is tested and the cov-lite structure behaves as advertised. Cross it, and the borrower must now pass a leverage test every quarter it stays above the threshold. The practical consequence is sharp: a business under stress is exactly the business that needs to draw its revolver, and drawing it past the threshold is what switches the covenant on. The one facility nobody expected to use becomes the tripwire that hands the lenders a seat at the table precisely when the business is weakest.

Why It Sits Undrawn at Close — and the Clean-Down That Enforces It

Put the pieces together and the empty line explains itself. Drawing the revolver at close does not reduce the equity cheque — the term debt and equity already fund the purchase in full — it just swaps commitment fee for the more expensive drawn margin while raising gross leverage and, above the threshold, arming the springing covenant. There is no return benefit and several costs. So the facility is left at zero, held as the liquidity cushion it was built to be, and drawn only when a genuine working-capital trough demands it.

Lenders reinforce that discipline with a clean-down provision: a requirement that the borrower reduce revolver drawings to zero, or near zero, for a short continuous period — often five consecutive business days — at least once in each financial year. The clean-down exists to prove the facility is genuinely funding a temporary working-capital swing and not being used as permanent, cheap financing dressed up as a revolver. A business that cannot clean down to zero once a year is not using the line as working capital; it is using it as term debt, and the covenant is there to force that fact into the open before it becomes a problem.

In the Model: The Revolver Is the Cash-Flow Plug

Inside an LBO model the revolver has a specific and slightly awkward job: it is the plug that keeps cash from going negative. Each period, the model runs the cash flow and debt schedule, and if the business would end the period below its minimum cash balance, the revolver is drawn just enough to hold the floor; if there is surplus cash, the revolver is the first debt repaid before any sweep of the term loans. That is what makes it reusable in the model as it is in life — it breathes with the cash balance.

It is also the classic source of the model’s circular reference: the revolver draw depends on the cash available, the cash available depends on the interest expense, and the interest expense depends on the revolver draw. The circularity is real, not a spreadsheet bug, and it is resolved with iterative calculation or a copy-paste circuit breaker rather than by pretending the revolver is fixed. An associate who understands that the revolver is the balancing item — the line the whole schedule leans on to tie — builds a model that behaves; one who hard-codes it builds a model that lies in the first stress case.

How This Is Tested: “Why Would You Raise a Revolver You Don’t Draw?”

The question is a favourite in leveraged-finance and PE interviews precisely because the naive answer sounds sensible and is wrong. “You draw it to fund the deal” fails immediately — the revolver is working capital, not acquisition funding. The strong answer starts from purpose: it is a committed, reusable line for working-capital swings, left undrawn because drawing it is leverage-neutral on a net basis but pure added cost, so you pay a commitment fee to hold it as a backstop instead.

The follow-ups probe whether the understanding is real. Why does it rank super-senior? Because the arranging banks that hold it will not sit behind the institutional term-loan buyers they syndicated to. Why does an undrawn line matter in a cov-lite deal? Because it carries the springing covenant — the only maintenance test in the structure. What does drawing it do to leverage? Gross leverage rises, net leverage barely moves, and above the utilisation threshold the covenant springs. A candidate who can walk from purpose to pricing to ranking to the springing covenant has described a financing; one who says “it’s extra cash for the deal” has described a misunderstanding.

The Verdict: The Line Nobody Draws Governs the Deal

The revolving credit facility is the smallest, cheapest, quietest part of a buyout’s financing, and it repays attention out of all proportion to its size. It funds none of the purchase, sits at zero for most of the deal’s life, and costs the sponsor a fee for staying empty. Yet it is first in the recovery waterfall, it holds the only maintenance covenant in a cov-lite structure, and it is the line a stressed business reaches for at exactly the moment reaching for it arms the tripwire.

That is the judgement the facility rewards. Read as a spare pot of cash, it looks trivial. Read as a priced option — a committed backstop, super-senior for the lender’s protection, carrying a dormant covenant that wakes when the business is weakest — it is one of the more elegant pieces of engineering in the whole capital structure. The revolver is the clearest small proof that in a buyout nothing is free and nothing is idle: even the line nobody draws is doing work.

Careers: An Associate Lives in the Revolver Line

On a live deal the revolver is not a footnote the associate reads about — it is the line they wire into the model and defend to the lenders. Sizing it means forecasting the working-capital trough month by month and arguing the number to the lead arranger; modelling it means building the plug that draws and repays as cash breathes, resolving the circular reference cleanly, and making sure the springing covenant is coded to test only above the threshold. Get the revolver line wrong and the model fails in the first downside case, which is the case the investment committee actually cares about.

The judgement shows in the questions the associate can answer without being asked. How deep does the trough go in a bad year, and does the line cover it with room to clean down? At what point does utilisation spring the covenant, and how much headroom does the business have before it gets there? Is the commitment fee a rounding error or a real drag on this return? An associate who treats the revolver as a plug that just needs to tie produces a schedule; one who understands it as the deal’s liquidity backstop and covenant tripwire produces a financing the team can actually stress-test. The first keeps the model balanced — the second is what the seat is for.

Take Your Preparation Further

The revolver sits at the join between the debt structure and the cash schedule, so read it alongside the pieces on either side. Start with the debt stack, where the revolver’s super-senior ranking sits at the top of the priced queue, and the cash sweep, where the revolver is the plug that keeps the model from going negative. For how much debt the structure can carry in the first place, see LBO debt capacity, and for the covenants the revolver quietly preserves, covenant-lite explained. For who actually holds the paper, private credit and direct lending, and for how the term loan it ranks ahead of is priced, leveraged-loan pricing.

To build the schedule yourself — term tranches, a revolver plug, interest, and a returns bridge — download the LBO Model Template, and for the coverage and leverage ratios that decide how much the revolver has to backstop, the free Financial Ratios & Formulas Cheat Sheet.

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