Credit Agreement Restricted Payments

The loan agreement may also contain provisions that the net proceeds of certain authorized sales of assets must be used either (1) to reinvest in assets useful to the borrower`s business or (2) to repay the loan. Limited payments are amounts paid to shareholders, including distributions and withdrawals of capital or redemptions of the borrower`s capital shares. For lenders, limited payments (1) mean that the cash that could be used to repay or reign the loan comes from the credit group and (2) payments relating to subordinated bonds – that is, liabilities that are behind the lender in the capital structure – are made before the loan has been repaid. To address these issues, the restricted payment agreement prohibits the borrower from making limited payments while the loan has not been granted. Some lenders allow the borrower to make limited payments under a basket that can be a fixed amount or that, over time, can be built based on an income-based metric. Some lenders may authorize the payment of cash distributions subject to pro forma compliance with financial covenants, including a coverage ratio (distributions are deducted on the EBITDA side of the quota). For lenders, investments (including loans) in other persons or entities mean that cash is paid outside the credit group, where the lender is not directly entitled to it, and (2) excess cash that could have been used to repay the loan is used for other potentially speculative purposes. To remedy this, the investment agreement prohibits the borrower from making investments, including loans, advances, share purchases, ticket purchases and asset purchases. Exceptions to this prohibition are often as follows: for lenders, additional debts involve, among other things, (1) additional payments in principal and interest that reduce the cash flow available to serve the lender`s loan and (2) additional leverage that can weaken the lender (especially to the extent that it is not covered or undercover) with respect to the underlying assets. Most exceptions to negative covenants are designed in such a way that the borrower can continue to operate normally, given the general nature of the prohibitive rules. Other exceptions recognize that during the term of the loan, the borrower may be required to take certain otherwise prohibited measures, such as.B.

incur additional debt or sell assets to cope with changing market realities. When these contingencies are included in the credit agreement, they are usually well adapted or limited (either by the amount of the dollar or by reference to a financial ratio). However, with respect to bilateral loans to small-capacity borrowers, lenders often prefer not to accept waivers limited to covenant negatives and instead choose to require the borrower to obtain consent or modification each time it wishes to participate in a prohibited activity. Credit agreements often contain a number of other covenants, including, but not limited to, the following: Negative covenants, which generally apply to the borrower and each of its consolidated subsidiaries, usually begin with a broad prohibition before listing certain exceptions. The extent of these prohibitions and derogations depends on the size and nature of the loan concerned, the creditworthiness and relative bargaining power of the borrower, whether the credit is syndicated and the lender`s risk-taking. For an uninsured lender, the existence of a right of pledge means that another creditor is entitled to the borrower`s assets, which take precedence over the lender`s assets.. . . .

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