Restricted Payments: What You Can (and Cannot) Do With Your Cash
March 2025 · 3 min read
Before you instruct your finance team to prepare for a dividend recap, shareholder loan, or management fee payment, check the restricted payments basket. The credit agreement already has an answer. You should know what it is before you ask.
What restricted payments actually covers
The restricted payments provision controls what you can do with cash generated inside the credit group. It covers:
- ✓Dividends and distributions to shareholders (including the sponsor)
- ✓Repurchase or redemption of equity
- ✓Payments on subordinated debt
- ✓Management fees and advisory fees to the sponsor or affiliates
- ✓Intercompany loans to entities outside the restricted group
If you want to move cash in any of these directions, you need either a permitted payment or available basket capacity.
Permitted payments: the baseline
Most credit agreements allow a set of payments without using basket capacity. These are allowed regardless of financial performance:
- ✓Management fees up to an agreed annual cap (typically €1-2m or a percentage of EBITDA)
- ✓Tax payments required by applicable law
- ✓Repayment of intra-group loans documented at origination
- ✓Distributions to fund tax liabilities of shareholders on pass-through income
The builder basket
Most modern leveraged credit agreements include a cumulative builder basket that grows over time - typically at 50% of Consolidated Net Income for each completed fiscal year, plus any equity contributions made to the restricted group. The basket is available as long as no event of default exists and, in many agreements, as long as a leverage or liquidity condition test is met.
If the basket is available and large enough, you can make a restricted payment - including a dividend recap - without breaching the covenant. If it is not, you cannot, regardless of what the sponsor or the board has agreed.
What to negotiate at origination
- ✓A leverage-based ratio basket allowing unrestricted payments if net leverage is below a defined threshold (often 0.5x inside opening leverage).
- ✓A general restricted payments basket of at least €10-15m or 5% of EBITDA for operational flexibility.
- ✓Broad permitted management fee language that captures the actual fee structure - not just a capped headline amount.
- ✓A clean equity cure carve-out: equity injected to cure a covenant breach should not reduce future basket availability.
When a lender says you can always run a dividend recap if performance supports it, what they mean is: if the documentation supports it and performance supports it. The documentation is the first test. Run it.
Subscribe
Want more briefings like this one?
Beyond Multiples delivers weekly reads on debt mechanics - covenants, baskets, definitions, and how lenders think. Free to join. Admission is selective.
Request access