Restricted Payments
Corporate Credit Analysis glossary · Credit Agreements & Covenants
Definition
Dividends, buybacks, subordinated debt prepayments, and certain other payments to junior stakeholders, typically limited by a covenant basket that grows with cumulative earnings (the 'builder basket').
Restricted Payments in plain English
When a company borrows money, lenders worry the owners will quietly drain cash out — paying themselves dividends, buying back their own shares, or paying off insider loans — leaving too little to repay the lenders. So loan contracts include 'restricted payments' rules: a cap on how much money is allowed to flow out to shareholders and other junior stakeholders. Think of a parent who lets a teen spend their allowance only after chores are done — and the more the company actually earns over time, the bigger the allowed spending pot grows (that growing allowance is nicknamed the 'builder basket'). It ties owner payouts to real performance, protecting the people who lent the money.
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