Restricted payments basket

Restricted payments is the covenant that governs value leaving the group to its owners: dividends, share redemptions, and payments on shareholder debt. It is an incurrence covenant, so it is tested when the company acts rather than on a schedule.

Capacity normally comes from three sources at once. A fixed basket agreed at closing, sometimes called free and clear, available regardless of performance. A builder basket, or cumulative credit, that accumulates a stated share of retained excess cash flow or consolidated net income from closing, so it grows as the company performs. And an unlimited permission that opens if pro forma leverage sits below an agreed level.

The leverage based limb is why a recapitalisation tends to happen partway through a hold rather than at either end. Early on leverage is too high to open it. Late on the sponsor is usually selling instead. In the middle, after two or three years of deleveraging, the test opens exactly when the sponsor most wants liquidity.

The asymmetry against a maintenance covenant is the point worth making. A company can miss its plan for years without going anywhere near this covenant, because it is not doing anything. It binds the moment the sponsor tries to take money out, which is exactly what lenders intended when they wrote it.