Credit Agreement Baskets

2021 April 9

Credit contracts generally allow the borrower to acquire a certain amount of debt related to (and only for financing) an authorized acquisition or investment. Larger transactions generally allow borrowers to formulate the most flexible wording and allow the absorption of a business debt, provided that the obligation of the company or its subsidiaries is acquired. The upper middle market takes a similar (but more restrictive) approach to the large ceiling, but may also require that the borrower, after making the acquisition debt effective, meet pro forma financial obligations and/or complete a leverage test (usually the same test that applies to proportional debt). While it is not uncommon for this type of debt to be allowed in the lower middle market, it will be subject to additional restrictions, including subordination conditions and dollar ceilings. With regard to lower-middle-class activities, the preference remains to allow acquisition debts only to the extent that they are subject to a dollar ceiling. Like proportional debt, for which the traditional average market authorizes acquisition debt, it requires that all applicable provisions of the MFN apply to any pari passu acquisition debt for existing credit facilities. The activities of the upper middle class have also increasingly taken this protection with regard to acquisition debts. Local credit lines/unsecured credit baskets: Local credit baskets may be relevant to companies with international operations, which often results in debts from an unsecured subsidiary. In addition, a basket of unsecured liabilities can be a source of capacity for structurally priority debt securities (as explained below, it is often permissible to cover this liability with assets of a non-subsidiary subsidiary as an issuer/borrower or guarantor).

Capitalized leasing contract: The basket of capitalized leasing commitments may represent potential capacity based on the expected use of the company`s revenues, as this basket is increasingly formulated to include debt created to finance the acquisition, improvement, repair, renewal, etc. of real estate (including the purchase of shares of a person owning the property). Moreover, these baskets are generally relatively unused by many European companies; As with ifRS definitions frozen before IFRS 16, the term “leaseback” excludes the definition of debt in general. As with producer baskets for European transactions, there is no common approach that will contain negative evolutionary baskets. It is also important to note that the concept of a scalable basket seems to be primarily a feature of the average market. As a result, arrangers could, predictably, apply for a documentary flexing fee to replace breeder/scalable baskets with traditional hardcap baskets. Large Cap`s maturities assume a profitable and sustainable economic model and a stable economic climate. Given the continuing uncertainty towards the end of the current credit cycle, SME lenders continue to react cautiously to the introduction of broad-based conditions with conditionality and risk reduction. Although the appetite of SME lenders for some of these financing conditions for significant ceilings is different on the basis of institutional distortions, the integration of these financing conditions with significant ceilings can be summarized according to the extent of the borrower`s consolidated EBITDA.

Our data show that the inclusion of broad heading conditions is generally less widespread, as a borrower`s consolidated EBITDA decreases. In addition, the inclusion of broad heading conditions with conditionality and provisions for mitigating inherent risks is becoming more common in such terms, due to the decrease in a borrower`s consolidated EBITDA. The result is a new distribution of the average market between the `lower middle market`, `traditional average market` and `upper average market`.

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