Parties and mechanics, who the borrower/issuer, guarantors, agent/trustee, and lenders/noteholders are, and the administrative machinery (payment mechanics, notices, amendment and voting thresholds).

Conditions precedent, what has to be true at closing (or at each draw, for a revolver) before money changes hands: security perfected, legal opinions delivered, no material adverse change, and so on. Almost entirely a closing-day concern, not something that gets revisited afterward.

Representations and warranties, factual statements the borrower makes about itself (organisation, no conflicts, financial statements are accurate, no undisclosed litigation). These matter most at signing and at each future borrowing, and a false representation can itself be a default.

Affirmative covenants, a shorter, less-negotiated list of things the borrower must do: deliver financial statements, maintain insurance, pay taxes, preserve corporate existence, comply with law. Largely uncontroversial boilerplate.

Negative covenants, the long list of things the borrower must not do without qualifying for an exception: incur debt, grant liens, make restricted payments, make investments, sell assets, transact with affiliates, agree to dividend-blocking restrictions, merge or consolidate.

Financial covenants, where applicable (typically pro rata bank tranches, not covenant-lite term loan Bs or bonds), an affirmative requirement to maintain a specified leverage or coverage ratio every quarter, tested regardless of whether the borrower has taken any action.

Events of default and remedies, the list of triggers (payment default, covenant breach, bankruptcy, cross-default, change of control, and others) that let lenders accelerate or noteholders demand repayment, and the voting thresholds required to declare or waive a default.

How much operating flexibility the borrower has, to make acquisitions, refinance opportunistically, return capital to sponsors, and run the business without going back to lenders for a waiver every time something happens.

How much cushion existing creditors have lost before anyone breaches anything, because a covenant “breach” only happens once available basket capacity is exhausted, baskets are really a pre-negotiated map of how much the credit can deteriorate, structurally subordinate itself, or bleed cash before a default is triggered.

How exposed the credit is to opportunistic use in distress. As the events of the last several years have shown, unused basket capacity is not just a governance issue for healthy companies, it is the primary tool sponsors and distressed borrowers use to execute liability management exercises (LMEs) without ever needing lender consent to amend the document (we look into this on a high level but I recommend RX focused resources like “Pari Passu Newsletter” if you want to learn more.

How is it sized? Is it a flat dollar amount, a “grower” that scales with total assets or EBITDA (or Net Income) (often drafted as “the greater of $X and Y% of EBITDA/total assets,” so it only ever grows), or is it uncapped and instead governed by a financial ratio test (so-called “ratio capacity”)? Uncapped, ratio-tested baskets are usually the largest source of real capacity in a document, because they grow automatically as the business grows, sometimes faster than anyone modelled at signing

What conditions gate its use? Common gates are: no default (or no payment/bankruptcy default) exists or would result, a financial ratio must be satisfied on a pro forma basis, or there are no conditions at all (a true “basket of right”). The fewer the conditions, the more useful, and more dangerous, the basket is in a stress scenario, because it remains available exactly when the company is least healthy

Does using it reduce (or “ding”) anything else? Some baskets are freestanding, others quietly reduce the capacity of a different basket when drawn (most notably, certain restricted payment carve-outs reduce builder-basket capacity in bond deals but typically do not in loan deals - we compare bonds and loans later)

Does it stack with other baskets, and can debt or a payment be reclassified later? As covered in Section 10, baskets generally stack (a company can use several simultaneously), and debt can often be reclassified into a different, newly available basket later on. This means the real headroom under a document is almost always larger than any single basket suggests, and it changes over time as EBITDA grows, debt is repaid, or ratios improve. And as mentioned we are in a strong market and lawyers on the deal side are thinking entrepreneurially, hence we are seeing more Omnibaskets (sometimes called a "combined basket" or "unified basket"), which is a single pool of capacity that can be drawn on for more than one type of covenant purpose, typically debt, restricted payments, and investments, rather than each of those having its own separate, siloed general basket. For creditors, it’s just another warning sign, and one that is not well liked in the market.

Ratio debt: Rather than a dollar cap, this basket permits unlimited additional debt so long as a financial ratio is satisfied on a pro forma basis, typically a coverage ratio (cash flow relative to interest expense, commonly tested at 2.00x) for issuers with more stable cash flows, or a leverage ratio (debt relative to EBITDA) for more capital-intensive businesses. Because the ratio is calculated using the issuer’s own EBITDA definition, which usually includes generous add-backs for non-recurring items and projected cost synergies, the true capacity under this basket can be much larger than it first appears. This is normally the single largest source of uncapped debt capacity in the document, and it grows automatically as EBITDA grows, without any need to renegotiate

Credit facility (or “bank debt”) basket, also referred to as the “freebie”. Covers borrowings under the company’s revolving and term loan facilities, sized as a fixed amount, a percentage of total assets, or both (whichever is greater, hence “freebie,” since it’s granted up front without a ratio test). This is usually the largest and most senior basket in the structure, and it is drafted to automatically cover refinancings, amendments, and upsizings of that facility without needing a separate carve-out

General (“rainy day”) basket. A flat, uncommitted amount available for any purpose, with no ratio test and typically no default condition, meant as a buffer for unanticipated needs, and one of the simplest baskets to use precisely because it comes with the fewest strings attached

Contribution debt basket. Lets the company incur additional debt in an amount matching new cash equity contributed to the business after closing, effectively rewarding fresh sponsor equity with matching debt capacity, dollar for dollar (or, in more aggressive deals, two dollars of debt for every dollar of new equity)

Acquisition debt basket. Permits debt that comes attached to a target company at the time of acquisition, generally conditioned on the combined entity being able to satisfy the debt or leverage test after the acquisition (or on the ratio at least not worsening)

Non-guarantor / foreign subsidiary debt basket. A capped pool of debt that subsidiaries outside the guarantor group may incur, which is significant because that debt sits structurally ahead of the bonds or loans at the parent, it gets paid before value can flow up to the credit group that actually benefits from the covenant package

The builder basket. Capacity that accrues over the life of the deal, typically crediting 50% of cumulative net income (with equity proceeds, converted debt, and similar items usually credited dollar-for-dollar rather than at 50%). Use of the builder basket is normally conditioned on there being no default and on the company still being able to incur at least a nominal amount of ratio debt, a rough proxy for financial health at the time of the payment

The starter amount. Most builder baskets don’t begin at zero. Documents typically include a fixed “starter” or “available amount”, a defined dollar figure (or a formula tied to EBITDA at closing) that is available on day one, before any net income has had time to accrue. This matters because it gives a company real, immediate capacity to pay dividends shortly after closing, independent of how the business performs afterward

The general (fixed-dollar) basket. A flat, capped amount of restricted payments permitted regardless of the builder basket balance or the company’s financial health at the time, often the first basket a company reaches for because it typically carries the fewest conditions

Unlimited restricted payments subject to a leverage ratio. Many documents include ratio-based RP capacity structured just like ratio debt: if pro forma leverage (after giving effect to the payment) is at or below a specified level, restricted payments are permitted without dollar limit. As with ratio debt, this can become the largest source of real capacity in a strong credit, because it scales with EBITDA rather than being fixed at signing

Debt prepayments (junior debt buybacks). A specific carve-out, separate from the general dividend basket, permitting the company to repay, redeem, or repurchase subordinated or junior debt, often subject to its own leverage-ratio test or a dedicated dollar cap. This matters because repaying junior debt at a discount is economically similar to a dividend from the senior creditors’ perspective (cash leaves the credit group) but is drafted and negotiated as its own line item

Dividends to the sponsor / owner. A cluster of carve-outs specifically aimed at sponsor-owned structures: customary management fee baskets (letting the company pay agreed fees to the sponsor’s management company), tax distribution baskets (for pass-through entities, letting the company distribute cash to cover owners’ tax liability on the entity’s income), and a post-IPO dividend basket (a running annual percentage of market capitalisation, once the company goes public). These exist alongside, not instead of, the builder and general baskets, and stack with them

Intercompany investments within the restricted group, cash and cash equivalents, and ordinary-course trade credit, largely mechanical carve-outs needed for the business to function day to day

Joint venture baskets, permitting a capped amount of investment in entities the company doesn’t wholly control

The general investment basket. A flat, uncommitted dollar amount (sometimes a grower tied to total assets) available for any investment purpose

Investments in unrestricted subsidiaries. This is the basket that matters most for basket-driven risk. Unrestricted subsidiaries sit outside the covenant package entirely, they are not bound by the negative covenants and are not counted in the leverage or coverage ratios. A basket permitting investment in an unrestricted subsidiary is therefore a mechanism for moving value (cash, or assets contributed in kind) out of the restricted group and beyond creditors’ reach under the existing document, without violating any covenant on its face. This is the basket that, combined with an unrestricted subsidiary designation, underlies the asset-transfer style liability management transactions discussed later on.

Unrestricted subsidiary designation plus investment baskets. If a company has investment or restricted payment capacity available (often via the builder basket, a JV basket, or the basket specifically permitting investment in unrestricted subsidiaries), it can move valuable assets, brands, IP, key subsidiaries, and into an unrestricted subsidiary that sits outside the covenant package entirely. Once there, that subsidiary can raise new, structurally senior financing secured against the transferred assets, effectively priming the existing lenders without violating a single covenant on its face. Once there, that subsidiary can raise new, structurally senior financing secured against the transferred assets, effectively priming the existing lenders without violating a single covenant on its face. This is the mechanic behind the well-known 2016–2017 J.Crew transaction, in which J.Crew moved its trademark IP into a Cayman Islands subsidiary, and it's why "IP transfer blockers" are now common requests from lenders in new deals

Non-guarantor debt baskets plus intercompany investment capacity. Even without an unrestricted subsidiary designation, capacity to invest in non-guarantor subsidiaries combined with those subsidiaries’ own debt basket can be used to build a new pool of structurally senior debt at a subsidiary that existing lenders have no direct claim on

Contribution debt and general debt baskets stacking with the ratio debt basket. In an uptier or “drop-up” style transaction, a subset of existing lenders agrees to provide new, superpriority financing to the company, which is often sized using a combination of unused general and contribution debt baskets alongside ratio capacity, sometimes executed through a non-pro-rata amendment that a bare majority of lenders can approve under the credit agreement’s voting mechanics, leaving the minority priced out of their original position. This is the mechanic behind the well-publicized 2020 uptier transactions executed by Serta Simmons Bedding (mattresses), Boardriders (the apparel and footwear group behind Quiksilver and Billabong), and TriMark USA (foodservice equipment distribution), which is why "uptier blockers" requiring more-than-majority consent for non-pro-rata priming are now a standard lender ask

Restricted payment capacity used to dividend value out ahead of a restructuring. Where a builder basket or excluded contributions basket has quietly accumulated capacity over the life of a credit, sometimes for years without anyone drawing it down, a company or sponsor facing a difficult refinancing can use that capacity to distribute cash or assets to equity before creditors negotiate a restructuring, shrinking the recovery pool before talks even start

Make-whole redemption. Allows redemption during the no-call period at a price equal to the present value of remaining payments through the first call date, discounted at the Treasury rate plus a small spread, an expensive option, but one that removes tender-offer uncertainty

The equity clawback (“equity claw”). Permits redeeming a capped portion of the notes (traditionally 35%, increasingly 40%) with the proceeds of an equity offering within three years of issuance, at a fixed premium, letting an issuer tell a deleveraging story after an IPO or capital raise, provided a minimum percentage of the original notes remains outstanding afterward

Clean-up redemption. Lets an issuer redeem all remaining notes once 90% or more of a series has already been tendered in a change of control, asset sale, or other tender offer, avoiding an illiquid stub tranche with outsized negotiating leverage over future covenant waivers.

Indebtedness. Before any ratio can be calculated, the document has to define what actually counts as debt in the numerator. This sounds mechanical but is heavily negotiated, because items sitting on the boundary, capital lease obligations, purchase-money obligations, guarantees of third-party debt, off-balance-sheet financing, preferred stock with mandatory redemption features, and lease obligations, can each be defined in or out. What’s excluded from “Indebtedness” doesn’t just affect optics, it directly determines how much ratio debt, secured debt, and often restricted payment capacity the company can access, because the leverage ratio is nothing more than Indebtedness (as defined) divided by EBITDA (as defined). Move an item out of the numerator, and every ratio-gated basket in the document gets easier to use, without the company’s actual economic leverage changing at all.

Consolidated Net Income. The GAAP starting point, adjusted to exclude items like income from unrestricted subsidiaries (unless cash is actually received), income blocked by contractual or regulatory restrictions, and extraordinary gains or losses, and it is the base for the RP builder basket, which credits 50% of cumulative net income.

Consolidated EBITDA. Builds from Consolidated Net Income by adding back interest, taxes, depreciation, and amortisation, plus negotiated items such as non-cash charges and, often contentiously, projected cost synergies from acquisitions (subject to time limits and dollar or percentage caps). Because an issuer generally cannot double-count the same adjustment in both definitions, negotiations over where a given add-back lives. Consolidated Net Income or Consolidated EBITDA, are not academic: an exclusion from net income increases both RP capacity and EBITDA-based debt capacity, while an EBITDA-only add-back affects debt capacity but not the RP builder basket.

Non-recurring or extraordinary charges, restructuring costs, litigation settlements, transaction expenses, one-time asset write-downs. Conceptually reasonable (these genuinely don’t reflect ongoing operations), but “non-recurring” is doing a lot of work in that sentence, issuers routinely have a “non-recurring” charge in every single quarter, just a different one each time

Non-cash charges, stock-based compensation, unrealised mark-to-market losses, non-cash impairments. Also conceptually defensible, since these don’t consume cash, but they permanently reduce reported net income (and, for stock comp in particular, represent a real economic cost to existing shareholders even though no cash leaves the business)

Pro forma cost savings and synergies, the most aggressive category. These let a company add back cost savings or acquisition synergies that management projects will be realised, before they’ve actually shown up in the financials. Because the issuer’s own management team estimates the number, and because these add-backs are typically subject only to a good-faith or “reasonably expected” standard rather than actual proof, this is the category most associated with EBITDA inflation in practice, and the category creditors push hardest to cap.

Three covenants instead of one. Indentures fold dividends, junior debt paydowns, and investments into a single restricted payments definition. Credit agreements typically split these into three separate covenants, each with its own leverage test. Investments usually get the most permissive ratio, since they're seen as more accretive than dividends or debt paydowns.

The builder basket, loan-style. Credit agreements often let borrowers choose between 50% of cumulative net income or retained Excess Cash Flow as the accrual base. Unlike in bonds, using other baskets typically doesn't reduce the builder basket, it's walled off on its own.

Incremental facilities and MFN. The loan-market equivalent of the bond Debt Facility basket is the "incremental" facility, sized off a fixed EBITDA amount plus voluntary prepayments plus additional pari passu debt. Debt raised outside the credit agreement usually escapes MFN, the protection that gives existing lenders a pricing step-up if new debt is priced too much cheaper (commonly within 50bps).

Mandatory prepayments. Unlike bonds, loans typically require prepayment from an annual Excess Cash Flow sweep (50–75%, stepping down as leverage improves) and from asset sale proceeds. Since the same leverage tests gate both the sweep and the builder basket, a borrower's incentives to limit cash flow and to maximise EBITDA tend to point the same way.

Maintenance covenants. Term loan Bs are incurrence-tested like bonds, but a revolver or term loan A in the same deal usually carries a maintenance covenant tested every quarter. Only those lenders vote on it, so they can accelerate on a breach the term loan B never sees, though it will typically cross-default.

Intercreditor arrangements. Where secured loans and secured bonds coexist, an intercreditor agreement decides who controls enforcement. In first lien/second lien deals, the first lien agent controls, subject to a standstill. In pari passu deals, a single "controlling collateral agent" is designated instead, usually based on debt size or seniority in time.