Credit Agreement Baskets: An Overview
In the world of finance, a credit agreement is a legally binding document that outlines the terms and conditions of loans or credit facilities extended to borrowers. Credit agreements can be complex and involve a variety of different terms and provisions, including financial covenants, security interests, and representations and warranties.
One important feature of many credit agreements is the inclusion of credit agreement baskets. Credit agreement baskets are provisions in a credit agreement that allow borrowers to undertake certain actions or incur certain expenses without triggering a default under the agreement.
Types of Credit Agreement Baskets
The most common types of credit agreement baskets are:
1. Leverage Ratio Baskets: These baskets allow borrowers to exceed the specified leverage ratio without triggering a default. The leverage ratio is a measure of a company`s debt relative to its earnings before interest, taxes, depreciation, and amortization (EBITDA).
2. Capex Baskets: These baskets allow borrowers to spend a certain amount of money on capital expenditures without triggering a default. Capital expenditures are expenses incurred to acquire or improve long-term assets, such as property, plant, and equipment.
3. Restricted Payments Baskets: These baskets allow borrowers to make certain payments to shareholders or other parties without triggering a default. These payments may include dividends, share buybacks, or other distributions.
Benefits of Credit Agreement Baskets
Credit agreement baskets provide flexibility for borrowers and allow them to undertake certain activities without triggering a default. This can be particularly useful for companies that are undergoing significant changes, such as a major acquisition or a restructuring.
By allowing borrowers to exceed certain financial ratios or incur certain expenses, credit agreement baskets also give lenders a level of comfort that the borrower is operating within reasonable limits. This can help to mitigate the risk of default and protect the lender`s investment.
Limitations of Credit Agreement Baskets
While credit agreement baskets can be useful, they are not without limitations. Excessive use of baskets can undermine the lender`s confidence in the borrower and may ultimately lead to a default.
Additionally, credit agreement baskets may be subject to negotiation between the borrower and the lender. This negotiation can be complex and time-consuming, and may result in less favorable terms for the borrower.
Conclusion
Credit agreement baskets are an important feature of many credit agreements. They provide borrowers with flexibility and allow them to undertake certain activities without triggering a default. However, the use of credit agreement baskets should be carefully considered and negotiated between the borrower and lender to ensure that they are used appropriately and do not undermine the lender`s confidence in the borrower.
