Grower Basket
A grower basket is a covenant basket whose permitted amount is tied wholly or partly to a financial measure such as EBITDA, allowing capacity to expand as the borrower grows.
Grower baskets reduce the need for future amendments
A fixed $50 million basket can become immaterial as a company doubles in size. Linking capacity to EBITDA allows the covenant to scale with the borrower.
That flexibility is valuable in long-dated credit agreements.
The greater-of structure creates a floor
If the basket is the greater of $100 million and 20% of EBITDA, a drop in EBITDA does not automatically reduce capacity below $100 million.
The fixed amount is therefore a built-in minimum.
Measurement timing can lock in capacity
Credit agreements can specify when EBITDA is measured and whether baskets are retested after use.
Some documents also protect transactions that were permitted when made from becoming violations merely because EBITDA later declines.
Grower baskets appear throughout covenant packages
Current agreements use EBITDA-linked amounts for restricted payments, investments, incremental debt and other negative-covenant exceptions.
The borrower can therefore gain flexibility across several provisions as earnings grow.
Grower baskets can compound the effect of EBITDA adjustments
Assume a general investment basket equals the greater of $100 million and 25% of covenant EBITDA. With $400 million of EBITDA, both sides equal $100 million.
If permitted add-backs increase covenant EBITDA to $520 million, the grower side becomes $130 million. The borrower gains $30 million of additional investment capacity without changing the fixed basket.
That interaction is important because EBITDA adjustments do more than lower leverage ratios. They can also enlarge multiple baskets simultaneously.
Analysts should therefore map which covenant capacities use the same EBITDA definition and test how sensitive those baskets are to aggressive adjustments.
Common mistakes
Treating the percentage as the basket The fixed amount may be larger.
Assuming capacity always shrinks when EBITDA falls The agreement may protect prior usage.
Ignoring covenant EBITDA adjustments Add-backs can increase the grower amount.
Example
A restricted-payment basket permits the greater of $115 million or 25% of Adjusted EBITDA. If EBITDA is $400 million, the basket is $115 million because 25% equals $100 million. If EBITDA rises to $600 million, the basket grows to $150 million.
Example
A restricted-payment basket permits the greater of $115 million or 25% of Adjusted EBITDA. If EBITDA is $400 million, the basket is $115 million because 25% equals $100 million. If EBITDA rises to $600 million, the basket grows to $150 million.
Professional note
A grower basket can expand borrower flexibility automatically without lender consent. Analysts should identify the EBITDA definition used, when the basket is measured and whether a later EBITDA decline can shrink previously established capacity.
Related terms
- Restricted Payments Basket
A restricted payments basket is contractual capacity within a credit agreement or indenture that permits a borrower or restricted subsidiary to make specified dividends, distributions, equity repurchases or other restricted payments despite a broader negative covenant limiting those actions.
- Incremental Facility
An incremental facility is additional term-loan or revolving-credit capacity that a borrower can add under an existing credit agreement, subject to the agreement’s specified limits, lender participation and conditions.
- EBITDA Add-Back
An EBITDA add-back is an adjustment permitted by a credit agreement that increases covenant or adjusted EBITDA by reversing specified expenses, losses or charges or by including certain expected cost savings, synergies or other contractually allowed amounts.
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