Glossary

What is a Facility Agreement in AR Securitization?

The legal contract governing your AR facility, defining the facility limit, advance rate cap, covenant triggers, reporting requirements, and eligibility criteria that control every aspect of the program.

Facility Agreement Defined

A facility agreement (also called a credit agreement, receivables purchase agreement, or master purchase agreement) is the comprehensive legal contract that governs the terms and conditions of an AR securitization or asset-based lending facility. It is the foundational document that defines the relationship between the borrower (or seller/originator), the lender (or purchaser), and any other parties to the transaction. The facility agreement specifies every material term: the facility limit, advance rates, reserve formulas, eligibility criteria, concentration limits, covenant triggers, reporting requirements, events of default, and remedies. All borrowing base calculations, compliance determinations, and operational procedures derive from the terms set forth in this document.

Key Terms in the Facility Agreement

The facility agreement establishes several critical parameters. The facility limit is the maximum committed amount the lender will fund. The advance rate cap sets the maximum percentage of eligible receivables that can be borrowed. Eligibility criteria define which receivables qualify as collateral, aging limits, concentration caps, excluded categories, minimum invoice amounts, and payment term restrictions. Reserve formulas specify how dilution, yield, loss, and servicing reserves are calculated. Covenant triggers define performance thresholds (maximum delinquency rate, maximum dilution rate, minimum tangible net worth) that the borrower must maintain. Reporting requirements detail the frequency and format of BBCs, aging reports, concentration reports, and compliance certificates.

Events of Default and Remedies

The facility agreement defines events of default that allow the lender to accelerate the facility, including: failure to submit a timely BBC, breach of a financial covenant, material misrepresentation in a compliance certificate, the borrower's insolvency or bankruptcy filing, a change of control, or a material adverse change in the borrower's business. Upon an event of default, the lender typically has the right to cease further advances, demand immediate repayment of outstanding amounts, take control of collections, and enforce its security interest in the receivables. The agreement may also specify cure periods for certain defaults, giving the borrower a window to remediate before the lender exercises its remedies.

Amendments and Annual Reviews

Facility agreements are living documents that evolve over time. Annual reviews provide an opportunity for both parties to renegotiate terms based on portfolio performance, borrowers with strong track records may secure higher advance rates, increased facility limits, or relaxed concentration caps. Amendments require formal documentation and typically the consent of all parties (and any rating agencies in a rated securitization). Common amendment requests include adding new eligible obligor categories, adjusting reserve formulas to reflect updated loss and dilution experience, and modifying reporting frequency. Platforms like Olycor maintain a complete audit trail of all facility parameters and their changes over time, ensuring full traceability for compliance and regulatory purposes.

Frequently Asked Questions

How long does a typical facility agreement last?+
Most AR securitization facilities have an initial term of 1-3 years, with options to renew or extend. Revolving facilities (where new receivables continuously replace collected ones) are designed to be ongoing programs. The facility agreement specifies the maturity date, any extension provisions, and the process for orderly wind-down if the facility is not renewed. Some programs include an amortization period after the revolving period ends, during which collections are used to repay investors rather than fund new purchases.
What is the difference between a facility agreement and an indenture?+
A facility agreement governs the bilateral relationship between the borrower and the lender (or a small group of lenders). An indenture governs the relationship between the SPV (issuer) and the investors (note holders) in a capital markets securitization. In a bank-sponsored conduit facility, the facility agreement is the primary document. In a term securitization with public note issuance, the indenture supplements the purchase agreement. Both documents must be consistent, but they serve different parties.
Can a borrower have multiple facility agreements?+
Yes. Larger companies often have multiple AR facilities with different lenders, each governed by its own facility agreement. Each facility may cover different receivable pools (by geography, business unit, or obligor segment), have different terms, and be independently managed. Managing multiple facilities requires careful tracking of which receivables are pledged to which facility to avoid double-pledging. Olycor supports multi-facility management with automated allocation and compliance tracking across all agreements.

Related Topics

What is an Advance Rate?What is Concentration Risk?What is a Borrowing Base Certificate?What is an Obligor Limit?

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