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A-Z of banking and finance: A is for acceleration

A-Z of banking and finance: A is for acceleration

The world of banking and financial law is full of legal jargon. Over the coming months, we will be bringing you an A-Z of key banking terms to explain these concepts in plain English. Our A-Z will be covered in a mix of articles and podcasts, drawing on the full breadth of our banking practice, with experience advising banks, financial institutions, large PLCs, private equity houses and smaller SMEs.

In our first instalment Matthew Padian and Lucy Trott discuss the term "acceleration".

Acceleration in the context of a loan agreement typically refers to the time at which a lender fast-tracks the repayment of the debt.  

Closely related to the events of default, acceleration happens when a borrower defaults on its obligations in some way and the lender elects to invoke its rights to bring forwards the time when the borrower must repay the loan.

Acceleration is often preceded by a period when an event of default occurs, the borrower asks the lender for a degree of forbearance and then for whatever reason the situation is not resolved to the satisfaction of the lender. For this reason, lenders often look upon acceleration as representing the end of the line.  

An acceleration clause is typically found in an events of default provision and often follows a long list of defaults. Once any one or more of those defaults occur, the acceleration clause will often set out a menu of rights which the lender may elect to exercise. These rights may enable the lender:

  1. to cancel any undrawn commitments
  2. to declare that the loan be payable upon demand (following which demand the loan shall be immediately repayable)
  3. to demand immediate repayment of the outstanding loan
  4. to exercise any other rights under the loan documentation (which may include enforcement of any security or guarantee interests)

The ability for a lender to accelerate a loan as described above may be restricted by an overriding intercreditor arrangement with one or more other (senior) creditors of the borrower.  

Beyond the loan agreement, acceleration can have adverse implications for other commercial arrangements – especially if contracts with third parties contain termination rights which allow one party to terminate if acceleration-type rights are exercised under a key lending document. And in the insolvency context, acceleration may be the straw which finally breaks the camel’s back – acting as a trigger which may compel directors to file for insolvency.

To learn more about this topic, please listen to our podcast from our specialists below.

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