Baskets in a Credit Agreement
17. April 2023
When it comes to credit agreements, there are many important terms and clauses that borrowers need to be aware of. One such clause that plays a significant role in these agreements is a „basket.“
A basket refers to a set of conditions or limitations that a borrower needs to meet in order to access certain benefits or avoid certain penalties. In credit agreements, these baskets are often used to determine the maximum or minimum amount of debt that a borrower can take on. Lenders use these baskets to limit their exposure to risk and ensure that the borrower is able to meet their debt obligations.
There are different types of baskets that can be included in a credit agreement. One common type is the financial basket, which sets thresholds for various financial metrics such as leverage ratios, interest coverage ratios, or debt service coverage ratios. If the borrower`s financial performance fails to meet these thresholds, they may be restricted from taking on additional debt or face other penalties.
Another type of basket is the restricted payment basket, which limits the amount of dividends, distributions, or other payments that the borrower can make to its shareholders or affiliates. This basket is designed to ensure that the borrower has enough cash flow to meet its debt obligations before paying out to its investors.
Baskets can also be used to limit the amount of capital expenditures that a borrower can make or require that the borrower maintain certain levels of insurance coverage. All of these baskets are designed to protect the lender`s investment and ensure that the borrower can meet its debt obligations.
It is important for borrowers to understand the baskets in their credit agreements and ensure that they are able to meet the conditions or limitations set forth in these clauses. Failure to comply with these baskets can have serious consequences, including default, foreclosure, or other penalties.
In conclusion, baskets play a crucial role in credit agreements and help lenders minimize their risk while ensuring that borrowers can meet their debt obligations. Borrowers should pay close attention to these clauses and work with their lenders to ensure compliance with the terms of their agreement. By doing so, they can mitigate the risk of default and maintain a healthy financial relationship with their lender.