A revolving credit facility is like a credit card or line of credit. It can be drawn anytime as long as the maximum limit is not reached. It’s commonly used to cover cash shortfalls, net working capital needs, and acquisitions.
For example, if the maximum limit is $100M and if the company is short of cash by $50M one year, they can draw $50M from the revolver. Going forward, they can pay the interest expense, draw more on the revolver as needed as long as they don’t exceed the maximum, or eventually pay back the revolver balance to reduce their interest expense.
After the LBO closes, the revolver can either be partially drawn or completely undrawn. The drawn amount (if any) and maximum are determined by the bank typically as a multiple of LTM EBITDA.
Usually, the borrower also has to pay a commitment fee on the undrawn portion of the revolver, usually equal to 0.25% to 0.5% of the undrawn amount.