You thought it was for shareholder treats. Now it's funding debt you didn't price.
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Highlights
- Available Restricted Payment Capacity baskets let borrowers repurpose dividend capacity into new, often pari-ranking debt.
- Noetica found no instances of the term in publicly filed high-yield credit agreements in Q3 2024 or Q3 2023.
- The term remains largely confined to sponsor deals, but private-market terms often creep into liquid credit markets over time.
By Dan Wertman, originally published on the Noetica blog, now part of Thomson Reuters. November 2024.
Credit deals and Halloween have at least one thing in common: sometimes, you get tricked. Let me explain.
Last Halloween, I left a bowl of Kit-Kats out for trick-or-treaters. While I fully expected all of the candy to be transferred to trick-or-treater bags by the end of the night, what I didn’t expect was to see the entire bowl, Kit-Kats and all, in front of another house that had apparently forgotten to buy its own candy.
Did I care about the candy? Of course not — I was willing to part with it in the first place. But somehow it feels different when it’s “repurposed” by someone else, even if it’s going to the same trick-or-treaters.
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The trick in the covenant
“Available Restricted Payment Capacity” baskets in debt covenants permit borrowers to incur additional debt, often on a pari basis with the credit facility, by repurposing dividend capacity from the restricted payments covenant.
A lender might not have minded parting with cash being distributed to stockholders — but the prospect of that capacity being repurposed to incur diluting or priming debt that significantly affects lender recovery: well, that can feel like a trick.
A term to watch
At Noetica, we’ve primarily seen this term relegated to sponsor deals, remaining rare in liquid credit markets: no instances of the term appeared in publicly filed high-yield credit agreements in Q3 2024 or Q3 2023. However, it remains a term to watch, as creep from the private to the liquid market is common.
For more deal-term benchmarking like this, explore the latest Capital Markets Radar Report from Noetica.
