Limitation on Restricted Payments Negative Covenant Clauses
(Credit Agreement)

Summary

These Limitation on Restricted Payments Negative Covenant clauses for a credit agreement are used in a syndicated loan transaction. These clauses are used to prohibit the borrower and loan parties from making restricted payments that result in value leaving the loan group. These clauses include practical guidance, drafting notes, and alternate and optional clauses. The restricted payments covenant prohibits the borrower and its subsidiaries from distributing dividends and other distributions to equity holders, including sinking fund payments, repurchases of stock, and "phantom stock" payments, subject to certain negotiated exceptions. Restricted payments are perhaps the biggest area of focus for lenders because, unlike the other transactions restricted by negative covenants, the borrower is unlikely to receive any value in return for sending dividends out to their shareholders that will benefit the lenders. Lenders carefully negotiate the size of each basket because they generally view all dividend capacity as potential lost loan repayment and collateral value. There are restricted payments that do not represent that same leakage risk and are often included as unlimited carve-outs, but all others are generally capped. These clauses should be read in conjunction with the practice notes Negative Covenants in Credit Agreements and The Client Asks: Is a Dividend Permitted? For additional guidance, see Negative Covenants in Credit Agreements Video. For a full listing of key content covering a credit agreement, see Credit Agreement Resource Kit.