Existing credit agreement: Overview, definition, and example
What is an existing credit agreement?
An existing credit agreement refers to a loan or financing arrangement that a borrower has already entered into with a lender before executing a new contract. This agreement outlines the terms of an outstanding credit facility, such as repayment schedules, interest rates, covenants, and security interests.
For example, if a company has a revolving credit facility with a bank and later seeks additional financing, the new lender may require disclosure of the existing credit agreement to assess financial risk and ensure compliance with existing obligations.
Why is an existing credit agreement important?
Understanding an existing credit agreement is crucial in financial transactions because it affects a borrower’s ability to take on new debt, comply with financial covenants, and manage repayment obligations. Many credit agreements include restrictions on additional borrowing, meaning a borrower may need lender approval before securing new financing.
For lenders and investors, reviewing existing credit agreements helps evaluate the borrower’s financial health, existing debt obligations, and potential risks associated with lending additional funds.
Understanding an existing credit agreement through an example
Imagine a company secures a $5 million term loan from Bank A. Later, the company applies for a $2 million line of credit from Bank B. Before approving the new loan, Bank B requests a copy of the existing credit agreement with Bank A to:
- Confirm that taking on additional debt does not violate any loan covenants.
- Understand the repayment structure and priority of claims.
- Assess the company’s ability to service multiple loans.
If the existing credit agreement includes a debt restriction clause, the company may need to obtain consent from Bank A before proceeding with the new financing.
An example of an existing credit agreement clause
Here’s how an existing credit agreement clause might appear in a contract:
"The Borrower represents and warrants that it has disclosed all existing credit agreements and outstanding debt obligations. The Borrower shall not enter into any new financing arrangements that would conflict with or result in a breach of the terms of any existing credit agreement without prior written consent from the applicable lender(s)."
Conclusion
An existing credit agreement refers to a borrower’s prior financing arrangements that impact future lending decisions. It is a key consideration in financial transactions to ensure compliance with debt covenants and assess credit risk.
By including an existing credit agreement clause in contracts, lenders and borrowers can clarify financial obligations, prevent conflicts between multiple loans, and maintain transparency in credit arrangements.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.