The builder basket, or Available Amount, worked over three years of net income, with the three readings of the 50 per cent clause and the leverage condition that usually binds first.
Builder basket capacity, the "Available Amount", is a starter amount plus 50 per cent of cumulative Consolidated Net Income since closing, plus equity contributed to the borrower, less what has already been used. On an illustrative borrower with a 20.0 starter, three years of net income of 14.0, −6.0 and 20.0, 10.0 of new equity and 8.0 already paid out, the basket holds 36.0, but only 30.0 can be paid as a dividend, because the 5.00x leverage condition attached to its use binds first.
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 typical definition reads: the Available Amount is the sum of (a) a starter amount, (b) 50 per cent of Consolidated Net Income for the period, taken as one accounting period, from the closing date to the end of the latest fiscal year for which financial statements have been delivered, or, if that figure is a deficit, minus 100 per cent of the deficit, (c) the net cash proceeds of equity contributed to the borrower, other than amounts used for an equity cure, and (d) retained declined proceeds, less (e) all prior uses. Restricted payments made from it are allowed only if no event of default is continuing and pro forma total net leverage is no higher than a stated level. All figures below are illustrative, in millions of euro.
| Item | Value |
|---|---|
| Starter amount | 20.0 |
| Consolidated Net Income, year 1 | 14.0 |
| Consolidated Net Income, year 2 (impairment) | −6.0 |
| Consolidated Net Income, year 3 | 20.0 |
| Builder percentage | 50% |
| Equity contributed, not used for a cure | 10.0 |
| Already used (dividend in year 2) | 8.0 |
| Consolidated EBITDA, last four quarters | 60.0 |
| Net debt | 270.0 |
| Leverage condition for dividends | 5.00x |
"Taken as one accounting period" means the three years are added before the percentage is applied. The loss year is not floored; it offsets the profits around it.
CNI builder = 50% × (14.0 − 6.0 + 20.0) = 50% × 28.0 = 14.0
Excel, yearly CNI in B2:B4: =IF(SUM(B2:B4)>0,50%*SUM(B2:B4),SUM(B2:B4))
Available Amount = starter + CNI builder + equity − used
= 20.0 + 14.0 + 10.0 − 8.0 = 36.0
Retained declined proceeds, asset sale or excess cash flow sweep amounts that lenders chose not to take, would add to this if the definition includes them: 3.0 of declined proceeds would take it to 39.0. Equity used for a covenant cure is normally excluded, so the same 10.0 cannot both cure a breach and fund a dividend; if it had been a cure, the basket would be 26.0.
The basket measures how much may be paid; the condition says whether anything may be paid now. A dividend funded with cash or new debt raises net debt one for one.
Current leverage = 270.0 / 60.0 = 4.50x
Room under the condition = 5.00 × 60.0 − 270.0 = 30.0
Payable today = min(36.0, 30.0) = 30.0, leaving pro forma leverage at exactly 5.00x
The condition binds before the basket. The 6.0 left in the basket is real capacity, but it is usable only when EBITDA grows or debt falls.
The net income clause is where drafting moves the number. The same three years give three different builders depending on how losses are treated.
| Convention | Year terms | CNI builder | Available Amount |
|---|---|---|---|
| One cumulative period, deficit at 100% (usual) | 50% of 28.0 | 14.0 | 36.0 |
| Each year separately, losses at 100% (lender-friendly) | 7.0, −6.0, 10.0 | 11.0 | 33.0 |
| Each year separately, floored at zero (borrower-friendly) | 7.0, 0, 10.0 | 17.0 | 39.0 |
The spread is 6.0 on three years of results. It widens with a bad year. Add a fourth year with a loss of 12.0: cumulative income falls to 16.0 and the usual builder to 8.0, so the Available Amount drops to 30.0. Under the floored reading the builder stays at 17.0 and the Available Amount at 39.0, though the company has just lost money. The floored version is a builder that only ever builds.
| Case | Leverage | Room under condition | Payable |
|---|---|---|---|
| Condition 4.50x | 4.50x | 0.0 | 0.0 |
| Condition 4.75x | 4.50x | 15.0 | 15.0 |
| Condition 5.00x (base) | 4.50x | 30.0 | 30.0 |
| Condition 5.25x | 4.50x | 45.0 | 36.0 |
| 5.00x, EBITDA down 5% to 57.0 | 4.74x | 15.0 | 15.0 |
| 5.00x, EBITDA down 10% to 54.0 | 5.00x | 0.0 | 0.0 |
Each quarter of a turn on the condition is worth 15.0 of dividend capacity here, a quarter of EBITDA. A 10 per cent fall in EBITDA closes the door entirely, whatever the basket says. In a negotiation the leverage level is usually worth more to the sponsor than the starter amount, and the definition of Consolidated EBITDA used in that test, with its add-backs, is worth more than both.
Many agreements let the builder fund investments and junior debt repayments with lighter conditions than dividends, sometimes none. The same 36.0 can leave the credit group as an investment in an unrestricted subsidiary on a day when a dividend would be blocked.
Baskets, incremental capacity and the MFN are worked on one borrower in the free workbook for this case.
A grower basket is a fixed amount or a percentage of EBITDA, whichever is greater, and it resets with each test date. A builder basket accumulates: it starts with a starter amount and grows with retained net income and new equity, and shrinks as it is used. Here a 20.0 starter has become 36.0 of capacity after three years, net of 8.0 already spent.
Under the usual drafting, yes. Net income is measured as one cumulative period, so a loss year offsets earlier profits: 14.0, -6.0 and 20.0 build 50 per cent of 28.0, or 14.0. If the agreement measures each year separately and floors it at zero, the same years build 17.0, and a later loss of 12.0 would not reduce it at all.
Only if the conditions attached to its use are met. Most agreements require no event of default and a pro forma leverage test for dividends. At 270.0 of net debt and 60.0 of EBITDA, a 5.00x condition leaves room for 30.0 of debt-funded payment, less than the 36.0 in the basket. A 10 per cent fall in EBITDA would leave none.
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.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: credit, private credit and distressed debt → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.