What is a facility letter?

A lender issues a facility letter after pricing and credit approval. Borrowers use it to get board sign-off, to see what has to happen before drawdown, and to start negotiating the long-form facility agreement and security deeds. The parties named are usually the borrower (a company or trust), one or more lenders (banks or non-bank lenders, sometimes a syndicate), a facility agent where there is one, and any guarantors or security providers such as directors, parent companies or related entities.

A single letter can cover several facilities: a term loan, a revolving credit facility for working capital, an overdraft or line of credit, a guarantee facility, an invoice finance facility, or equipment finance. The letter records the economic terms; the facility agreement and the executed security documents are what actually create the right to draw funds and the lender's security.

Start with the facility amount and the permitted purpose, which can be drawn narrowly or broadly, then the availability period and expiry, which set the deadline for signing the documents and drawing down. The pricing clause tells you the base rate, the margin above it, how often it resets and whether that margin ratchets up on a downgrade or a covenant breach. The fee schedule covers establishment, commitment, line and break or exit fees, and whether the break-cost formula is spelled out.

The conditions precedent then list everything that must be done before drawdown, typically a signed facility agreement, registered security, ASIC searches, director certificates and no material adverse change. The security and guarantee clauses say when security must be granted and registered on the PPSR. Read the representations, covenants and events of default together, because cross-default and acceleration decide how far a small breach can travel, and check which provisions the letter says are binding and how freely the assignment clause lets the lender transfer the exposure.

The common traps are subjective CPs that the lender alone decides are satisfied, all-assets security that sweeps in unrelated entities, cross-default clauses that accelerate the facility for minor group issues, automatic acceleration on technical breaches, unlimited guarantees from directors or related companies, undefined break costs, and PPSR registration timing that leaves priority exposed.

Each has a standard fix: convert subjective CPs into objective deliverables with a time limit for the lender to respond, limit security to business-relevant assets, add materiality thresholds to defaults and cross-defaults, negotiate notice and cure periods, cap any personal guarantee by amount or time, and require an itemised fee schedule. Because the CP and default mechanics are legal terrain, and duty can still apply to transfers of dutiable property in the wider transaction, borrowers typically involve their lawyer and accountant, and check the relevant state or territory revenue office, before signing rather than after.