Legal Definitions - committed credit facility

A committed credit facility is a formal agreement where a lender (such as a bank) promises to provide a specific amount of money to a borrower, provided the borrower meets certain pre-agreed conditions. Unlike other types of credit, this promise is binding: if the borrower fulfills their part of the agreement, the lendermust make the funds available. This arrangement offers the borrower a reliable source of funding, as the lender cannot withdraw their offer unless the borrower fails to uphold their obligations (defaults). The borrower, however, typically has the flexibility to reduce or terminate the facility at any time. These facilities are often established for longer periods, commonly spanning several years.

Here are some examples to illustrate how a committed credit facility works:

• Manufacturing Company Expansion:

  A major automotive parts manufacturer plans to build a new, state-of-the-art production plant over the next three years, requiring substantial capital. They secure a $100 million committed credit facility from a bank. The agreement specifies that the manufacturer can draw funds up to $100 million as needed, provided they maintain a certain debt-to-equity ratio, submit quarterly financial reports, and ensure the construction progresses according to schedule.

  This illustrates a committed credit facility because the bank is legally obligated to provide the $100 million whenever the manufacturer requests it, as long as the manufacturer continues to meet the agreed-upon financial and operational conditions. The manufacturer has the assurance that the funding will be available for the multi-year project, and the bank cannot suddenly decide not to lend the money unless the manufacturer defaults on its promises (e.g., fails to maintain the debt ratio). The manufacturer also has the flexibility to draw funds only when needed, or even reduce the total amount if the project costs less than anticipated.

• Commercial Real Estate Development:

  A property development firm is undertaking a large mixed-use project, including residential units, retail spaces, and offices, which will take five years to complete. They secure a $250 million committed credit facility. The terms allow the firm to draw funds in stages, for example, $50 million upon completion of foundation work, another $75 million upon structural completion, and so on, provided they meet pre-sale targets for residential units and maintain project timelines.

  This exemplifies a committed credit facility because the bank is legally bound to release the funds at each stage, as long as the development firm satisfies the specific conditions (like hitting construction milestones and pre-sale quotas). The developer benefits from guaranteed funding throughout the long project lifecycle, reducing financial uncertainty. The bank cannot back out of its obligation to lend, even if market conditions worsen, unless the developer fails to meet the agreed-upon conditions.

• Renewable Energy Project:

  A company specializing in solar farm development needs significant capital to construct several large-scale solar power plants across different states over a four-year period. They secure a $300 million committed credit facility from a consortium of banks. The facility allows them to draw funds for each new project phase (e.g., land acquisition, panel procurement, grid connection) as long as they provide proof of necessary permits, maintain a minimum cash reserve, and demonstrate progress on existing projects.

  This is a committed facility because the banks are obligated to disburse the funds for each project phase once the company fulfills the agreed-upon conditions, such as securing permits and showing project advancement. This provides the solar developer with predictable and reliable access to capital for their long-term, multi-project strategy, ensuring they can complete their ambitious plans without fear of the funding being suddenly withdrawn by the lenders, unless they default on their contractual obligations.