Drawing down on the full availability under a revolving credit facility can be a useful source of liquidity. However, in order to do so, a borrower must carefully analyze whether they can satisfy all conditions precedent to drawing on their revolving credit facility, including making representations as to no “material adverse effect” having occurred. To read more on material adverse effects in loan agreements, please click here.

The borrower will also need to consider potential ramifications under financial maintenance covenants if they choose to draw down on the full revolving credit facility, either due to an increase in leverage as a result of fully drawing the revolver or due to financial maintenance covenants that may spring into effect upon the revolving credit facility being drawn above a certain level. In addition, to the extent the borrower has an asset backed revolving credit facility, while borrowings might be available under the facility in the near term, as receivables and inventory decline, availability will become tighter and prepayments might be required as a result of decreases in the borrowing base. Furthermore, in most asset backed revolving credit facilities, the lenders have discretion to implement blocks on availability based on their good faith, reasonable credit judgment.