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.
Negative covenants usually prohibit first and permit second
A typical credit agreement broadly limits dividends, stock repurchases and other transfers of value to equity holders.
The detailed exceptions then determine what the borrower is actually allowed to do. Those exceptions are often called baskets.
Fixed and grower baskets can expand over time
A fixed basket may permit a stated dollar amount. A grower basket uses the greater of a fixed amount and a percentage of EBITDA or another financial measure.
As the business grows, the contractual capacity can therefore increase without an amendment.
Available-amount baskets can build with performance
Some agreements create a cumulative basket funded by retained excess cash flow, positive net income, equity contributions or other specified amounts.
Prior investments, debt payments or restricted payments using that basket reduce the remaining capacity.
Conditions can restrict access
The borrower may need to satisfy a leverage ratio and have no payment or bankruptcy default before using certain basket components for dividends.
Capacity shown by the formula is therefore not necessarily immediately usable.
Restricted-payment capacity can matter directly to sponsor returns
In a sponsor-backed company, the ability to distribute cash before exit can increase realized returns through dividends or dividend recapitalizations.
Assume a company has $150 million of restricted-payment capacity but only $40 million of free cash. The legal basket is not the binding constraint; liquidity is. Reverse the figures—$150 million of cash but only $40 million of basket capacity—and the covenant becomes the constraint.
A complete analysis therefore compares legal capacity, cash availability and leverage conditions.
The borrower may also preserve one basket for future use while relying on another for the current distribution. Basket selection and reclassification can materially affect future flexibility even when the immediate payment amount is unchanged.
Common mistakes
Treating the restricted-payments covenant as an absolute ban Baskets create negotiated exceptions.
Looking only at one basket Multiple sources of capacity can coexist.
Ignoring prior use Cumulative baskets can be depleted by earlier transactions.
Example
A credit agreement allows restricted payments using an Available Amount Basket equal to the greater of $80 million and 25% of EBITDA, plus 50% of positive net income, reduced by prior uses. A $40 million dividend may be permitted even though the agreement generally restricts distributions, provided the applicable conditions are satisfied.
Example
A credit agreement allows restricted payments using an Available Amount Basket equal to the greater of $80 million and 25% of EBITDA, plus 50% of positive net income, reduced by prior uses. A $40 million dividend may be permitted even though the agreement generally restricts distributions, provided the applicable conditions are satisfied.
Professional note
Do not analyze distributions from the covenant headline alone. Build a basket schedule showing each source of capacity, prior usage, replenishment, ratio conditions and whether baskets can be reclassified or combined.
Related terms
- Leveraged Loan
A leveraged loan is a corporate loan to a borrower whose leverage or credit profile places the financing within a lender’s or market participant’s leveraged-lending criteria, commonly in connection with buyouts, acquisitions, recapitalizations or highly leveraged companies.
- Incurrence Covenant
An incurrence covenant is a credit-agreement restriction that is tested when a borrower proposes to take a specified action—such as incurring debt, making an investment, granting a lien or paying a restricted payment—rather than automatically on every recurring reporting date.
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