Determining Restricted Payments capacity isn’t as easy as adding up baskets – a short provision (usually) found between the definition of “Restricted Payment” and the build-up basket has a significant impact on total capacity. In this ELFA Covenant Tip, we explain how it works.
Capacity to make Restricted Payments is derived from the build-up basket (usually half of consolidated net income plus a few other components) and the Permitted Payments baskets.
When an issuer uses some of the Permitted Payments baskets, this will reduce capacity in the build-up basket, while for others it won’t. The approach varies widely from deal to deal, so it’s an important term to check.
To find it, check the cross-references to the Permitted Payment carveouts in the clause just before the build-up basket, get our your red pen and circle the baskets. Ideally, all of the cash baskets should reduce build-up basket capacity (though this is rarely the case now).
Usually, any baskets not listed there will NOT reduce build-up basket capacity when they are used, meaning this is capacity the issuer can access above and beyond the accumulated net income, increasing aggregate capacity.
An important basket to get on the list of carveouts that reduce builder basket capacity is the leveraged-based Restricted Payments carveout – if RPs from that carveout are not deducted from the CNI basket, investors might find that issuers have far more Restricted Payments capacity than they might expect!