Sizing debt, investment and payment baskets at the greater of a fixed amount and a percentage of EBITDA, what add-backs do to them, and what happens when EBITDA falls.
A grower basket permits debt, investments or payments up to the greater of a fixed amount and a percentage of Consolidated EBITDA, so the capacity rises with earnings and never falls below the floor. On an illustrative borrower with three baskets set at 75, 50 and 30 per cent of a closing EBITDA of €50.0m, total capacity grows from €77.5m to €111.6m as Consolidated EBITDA reaches €72.0m, and €18.6m of that growth comes from add-backs alone.
Worked in full in How to Read a Credit Agreement by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A grower basket is written as "the greater of (a) €25,000,000 and (b) 50 per cent of Consolidated EBITDA for the most recently ended test period". The fixed amount is usually the percentage applied to EBITDA at closing, so the two legs are equal on day one and the basket is designed to grow. Three things decide its size later: the percentage, the definition of Consolidated EBITDA it is applied to, and the date at which it is measured.
| Basket | Fixed amount | Percentage of Consolidated EBITDA | Crossover EBITDA |
|---|---|---|---|
| General debt | 37.5 | 75% | 50.0 |
| General investments | 25.0 | 50% | 50.0 |
| General restricted payments | 15.0 | 30% | 50.0 |
| Total | 77.5 | 155% |
Basket capacity = MAX(fixed amount, percentage × Consolidated EBITDA)
Available = capacity − amounts already used under that basket
Excel: =MAX(Fixed,Pct*EBITDA)-Used
Above the crossover, every euro of Consolidated EBITDA adds 1.55 euros of capacity across the three baskets. Below it, the floors hold capacity at 77.5 whatever happens to earnings.
The borrower trades up for two years, with add-backs growing alongside, then has a bad year.
| Year | Reported EBITDA | Add-backs | Consolidated EBITDA | Debt | Investments | Payments | Total | Total on reported EBITDA | Created by add-backs |
|---|---|---|---|---|---|---|---|---|---|
| Closing | 50.0 | 0.0 | 50.0 | 37.5 | 25.0 | 15.0 | 77.5 | 77.5 | 0.0 |
| Year 1 | 54.0 | 6.0 | 60.0 | 45.0 | 30.0 | 18.0 | 93.0 | 83.7 | 9.3 |
| Year 2 | 60.0 | 12.0 | 72.0 | 54.0 | 36.0 | 21.6 | 111.6 | 93.0 | 18.6 |
| Year 3 | 40.0 | 4.0 | 44.0 | 37.5 | 25.0 | 15.0 | 77.5 | 77.5 | 0.0 |
From closing to year 2 total capacity grows by 34.1, or 44.0 per cent, while reported EBITDA grows 20.0 per cent. The difference is the add-back: the basket is a percentage of Consolidated EBITDA as the agreement defines it, so every euro of pro forma savings or synergies that the definition allows also enlarges the baskets. In year 2 that is 18.6 of capacity, 6.0 of it in the investments basket alone.
In year 2 the borrower uses the whole investments basket, 36.0, on an acquisition. In year 3 Consolidated EBITDA falls to 44.0. The percentage leg is now 22.0, below the 25.0 floor, so capacity is 25.0. The borrower has used 11.0 more than the basket would permit today.
That is not a breach. Credit agreements generally test basket usage at the time the transaction is made, and most say expressly that a transaction permitted when made does not become a default because the basket later shrinks. The 36.0 stays out of the credit group. What the borrower loses is any further use of the basket until the percentage leg climbs back above 36.0, which needs Consolidated EBITDA of 72.0 again.
The floor works against the lender in a downturn. At closing the three baskets total 1.55 times EBITDA. At 44.0 of EBITDA the same 77.5 is 1.76 times, and at 30.0 it is 2.58 times. A grower basket grows with good years and does not shrink proportionately with bad ones.
| Consolidated EBITDA | Debt | Investments | Payments | Total |
|---|---|---|---|---|
| 30.0 | 37.5 | 25.0 | 15.0 | 77.5 |
| 40.0 | 37.5 | 25.0 | 15.0 | 77.5 |
| 50.0 | 37.5 | 25.0 | 15.0 | 77.5 |
| 60.0 | 45.0 | 30.0 | 18.0 | 93.0 |
| 72.0 | 54.0 | 36.0 | 21.6 | 111.6 |
| 80.0 | 60.0 | 40.0 | 24.0 | 124.0 |
The general debt basket at year 2 is 54.0, or 0.90 of a turn of reported EBITDA of 60.0, available without any ratio test. That is the number to set against the leverage covenant and the incremental facility: debt permitted under a grower basket is debt that the ratio-based capacity, worked in how to calculate incremental facility capacity, does not have to accommodate.
A grower basket is MAX(fixed, percentage × Consolidated EBITDA), measured when it is used: 77.5 at closing, 111.6 at the peak, 18.6 of it from add-backs, and back to the 77.5 floor in the trough with nothing clawed back. The book's own four grower baskets are sized at every quarter on defined and unadjusted EBITDA in the free workbook for this case. How the same add-backs flatter the leverage covenant is in how to calculate covenant headroom.
It means the basket is the higher of two amounts at the test date: a fixed sum and a percentage of a financial metric, usually Consolidated EBITDA or total assets. A basket of the greater of €25.0m and 50 per cent of EBITDA is €25.0m at €50.0m of EBITDA or less, and €36.0m at €72.0m.
Generally no. Usage is tested when the transaction is made, and agreements usually say a transaction permitted when made stays permitted. Here an investment of €36.0m made at the peak exceeds the €25.0m capacity a year later by €11.0m; the borrower is not in default but cannot use the basket again until capacity recovers.
The percentage leg is applied to Consolidated EBITDA as defined, so add-backs enlarge every grower basket. In this example €12.0m of add-backs in year 2 increase total capacity across three baskets by €18.6m, because the percentages add up to 155 per cent of EBITDA.
This article is one calculation from How to Read a Credit Agreement. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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