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Tuesday, February 15, 2011

Lenders Ease Up on Restricted Payments

Companies are increasingly able to renegotiate restricted payment covenants, enabling them to pay dividends and institute buybacks.

In another sign of looser creditor protections and greater flexibility for borrowers, a growing number of companies are getting lenders to relax the restricted payment covenants on their debt. In numerous public filings during the past three months, companies have detailed changes to credit agreements that will give them more freedom to return some of the cash on their balance sheets to shareholders and private-equity sponsors. That's a marked change from two years ago, when many lenders tightened the screws on restricted payments in order to keep borrowers from reducing their cash cushions.

Restricted payment covenants prevent a company from paying dividends, buying back stock, prepaying subordinated debt, or paying management fees to a private-equity sponsor. "They are set up to limit what the company can do with cash or assets it has generated from operations, the idea being that creditors want to preserve the value at the borrower and not see it flow out to third parties in a way that wouldn't benefit the creditors," says Vanessa Spiro, a partner in banking and finance at law firm Jones Day.

Read entire article at CFO.com

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