Banking and Finance Q&As: The use of "soft cap" covenant baskets in loan documentation
In this issue of Banking and Finance, we focus on the introduction of "grower" baskets and other types of "soft cap" covenant baskets in loan documentation. The use of soft cap baskets is a good example of the enhanced flexibility for borrowers (and private equity sponsors) that has characterised part of the loan market in recent years.
Usually, a facilities agreement contains covenants that place a fixed-amount limit on activities such as the raising of debt, acquisition or divestment of assets throughout the term of the facilities agreement – a so-called “hard cap” basket. Unless it is fixed at a generous level with substantial borrower headroom, a hard cap basket does not offer much flexibility, especially in situations in which the borrower is growing its business and therefore requires larger baskets than it did when the loan agreement was made. Such flexibility may be obtained through so-called soft cap baskets such as an EBITDA-based grower basket that grows by the same percentage as the business’ EBITDA increases.
In this Q&A, Plesner Banking and Finance seeks to answer some of the key questions about using soft cap baskets in loan documentation. You are very welcome to contact us should you have any questions or require advisory services.
Read Banking and Finance Q&A: The use of "soft cap" covenant baskets in loan documentation (in Danish)