Covenants
Permitted payments
The permitted payments schedule sets what cash may leave the business while the debt is outstanding. It reaches further than dividends, and it is settled in the long-form documents rather than in the term sheet.
Also called restricted payments · permitted baskets · distribution restrictions · dividend blocker · permitted payments schedule
Borrowers read this as the dividend clause. It reaches most of the ways cash can leave a business, and the ones nearest the shareholders are controlled hardest.
| Payment | How tightly controlled |
|---|---|
| Ordinary trading payments | Not constrained |
| Management salaries at current levels | 20–42 on the scale |
| Shareholder loan repayment | 42–66 on the scale |
| Dividends and distributions | 60–84 on the scale |
| Payments to a junior lender | Stopped first |
What a permitted payments schedule typically reaches, ranked by how tightly each is controlled. Illustrative of market practice; the guides publish no standard schedule and every agreement differs.
What it is
The part of a facility agreement that sets what cash may leave the business while the debt is outstanding.
The logic is straightforward from a lender's side. A facility is repaid out of the cash a business generates, so any cash leaving for another purpose is competing with that repayment. The schedule is where the agreement says which of those departures are acceptable and on what conditions.
It appears under various headings, permitted payments, restricted payments, distributions, and sometimes as a set of baskets scattered through the covenants. The name matters less than the effect, which is the same in each case.
What it reaches
Further than dividends, and this is the part borrowers most often discover late.
Ordinary trading payments in the normal course are not constrained; the schedule is not trying to run your business. Management salaries at existing levels are usually permitted, sometimes with increases capped or made subject to consent.
Beyond that it tightens. Repayment of shareholder or director loans is controlled, which surprises owners who regard that money as theirs and lent temporarily. Dividends and distributions are controlled harder. And payments to a junior lender or a connected party are controlled hardest of all, because those are exactly the payments a senior lender wants to stop when things go wrong.
The practical consequence is that a business with an informal habit of moving cash to shareholders, whether as dividends, loan repayments or ad hoc arrangements, needs to convert that habit into something the schedule permits before signing.
A basket is built from conditions, not from a single number. Each one narrows what you can use.
| Condition | How much it restricts |
|---|---|
| Notice to the lender | 4–24 on the scale |
| A capped amount | 30–54 on the scale |
| No default continuing | 50–74 on the scale |
| Only below a stated leverage level | Gone when you want it |
The conditions commonly attached to a permitted payment, ranked by how much each restricts a borrower in practice. No basket size, leverage gate or cap is published in our canon, so none is asserted here. Not legal advice.
How a basket is built
From conditions rather than from a single number, and each condition narrows what is usable.
The simplest is notice, which restricts very little. A capped amount restricts more, and erodes over time if it is not indexed, so a cap agreed today is a smaller permission in five years.
A requirement that no default is continuing restricts more again, and it is entirely standard. The one that does the real work is a leverage condition, where the payment is permitted only while leverage sits below a stated level.
That last construction deserves attention because of when it bites. Leverage is highest in the years when trading disappoints, which is when shareholders most want cash out and when the permission has just disappeared. A basket that is only available in good years is a much weaker thing than its headline suggests.
We publish no standard basket size, leverage gate or cap level, and there is no market convention specific enough to quote. What can be said is which conditions cost the most, which is the question worth asking of any draft.
Why it tightens on a recap
Because a lender that has just funded one payment to shareholders will control the next one closely.
Where the purpose of a facility is a distribution, lenders price the purpose, and expect distribution restrictions in the documents alongside more conservative leverage and headroom. That is not a penalty; it is the same logic applied consistently, since the transaction has already demonstrated the shareholders' appetite for taking cash out.
The practical effect is that a business intending a further distribution during the facility should negotiate for it explicitly at the outset rather than expecting to ask later. Consent requested against a schedule that does not contemplate the payment is a much weaker position than a permission negotiated when the lender wanted the deal.
Where it drifts
In the schedules, after the commercial negotiation is over.
A term sheet fixes the facility amount and the margin and rarely moves on them afterwards. It usually flags in principle that distributions will be restricted. What it almost never contains is the detail, and the detail is the term.
Permitted baskets are named among the items that shrink between the signed sheet and the executed agreement, alongside an EBITDA definition acquiring add-back caps and a conditions-precedent list that grows. Each change is small and defensible on its own, and they are cumulative.
The defence is a terms grid tracked line by line from the sheet through to completion, so a basket that narrows is spotted as a change rather than absorbed as drafting. This is unglamorous and it is the only thing that works.
This is a long-form term, not a term-sheet term. Where it ends up depends on whether anyone was watching the drafts.
| Element | When it is fixed |
|---|---|
| Facility amount and margin | The term sheet |
| That a restriction will exist | 24–46 on the scale |
| The shape of the schedule | 50–74 on the scale |
| The conditions and the cap levels | In the schedules |
Where the permitted payments position is settled across a financing. Following the published account of drift: the headline terms are fixed by the sheet, and permitted baskets are among the items that shrink in the long form.
What a blocked payment means
A postponement, not a default, and the distinction matters more than it sounds.
Where a payment is not permitted, it does not happen. Nothing is breached, no acceleration follows, and the business continues. On instruments that accrue, such as a preference return, the entitlement rolls up and is settled later. A blocked dividend that accrues is a postponement, not a default.
That is worth understanding for two reasons. First, a borrower encountering a blocked payment has not done anything wrong and should not treat it as a crisis. Second, and less comfortably, a shareholder relying on regular distributions for their own income has a real exposure here, because the mechanism that protects the lender operates automatically and without warning.
Anyone in that position should model what happens to their personal cash flow if the permission closes for two years, before signing rather than afterwards.
What to negotiate
The conditions before the amounts, and one specific permission if you know you will need it.
On conditions, the leverage gate is the term worth most attention. Ask what level it is set at, how much headroom that leaves against the base case, and what the position looks like in a year where EBITDA falls twenty per cent. A gate set close to the covenant is a permission that disappears at the first difficulty.
On amounts, ask whether the cap is fixed or grows, since a static cap is a shrinking permission over a five-year facility. A basket that builds with retained earnings is considerably more useful than a flat number.
And on specifics, if there is a payment you know is coming, a planned distribution, a shareholder loan repayment on a defined date, a payment to a departing shareholder, name it and get it permitted expressly. Specific permissions are much easier to obtain during a competitive process than as a consent request afterwards.
Living with it
The position has to be known before a payment is made, and kept current.
The failure mode is not usually a deliberate breach. It is a payment made in the ordinary course by someone who did not know the agreement constrained it, most often a shareholder loan repayment or a bonus structured as a distribution.
Whoever authorises payments should know what the schedule permits, which means the relevant part of the agreement needs to leave the lawyer's file and reach the finance function in a usable form. A one-page summary of what is permitted, on what conditions, and who must be told, is worth more than the clause itself.
Where a payment is close to the line, ask. A lender asked in advance is usually accommodating about something reasonable; the same lender discovering it afterwards is dealing with a breach, and the conversation is different.
Common questions
What is a permitted payments schedule?
The part of a facility agreement setting what cash may leave the business while the debt is outstanding. A facility is repaid out of the cash the business generates, so any cash leaving for another purpose competes with that repayment, and the schedule says which departures are acceptable and on what conditions.
Does it only cover dividends?
No, and that is the common surprise. It typically reaches shareholder and director loan repayments, management salary increases, payments to any junior lender and payments to connected parties. Ordinary trading payments are not constrained; the payments nearest the shareholders are controlled hardest.
How big is a typical permitted basket?
There is no published size, leverage gate or cap level, and no convention specific enough to quote. What is worth knowing is which conditions cost the most: a leverage gate restricts far more than a notice requirement, because it removes the permission in exactly the years you would want to use it.
Can I still repay my director's loan?
Only if the schedule permits it, and this catches owners out because they regard that money as theirs and lent temporarily. Repayment of shareholder and director loans is commonly controlled. If you expect to repay one, get it permitted expressly rather than assuming.
What happens if a payment is not permitted?
It does not happen, which is a postponement rather than a default. Nothing is breached and nothing accelerates. On instruments that accrue, the entitlement rolls up and is settled later. But a shareholder relying on distributions for personal income has a real exposure, because the block operates automatically.
Why are the restrictions tighter after a dividend recap?
Because a lender that has just funded one payment to shareholders will control the next closely. Where the purpose of a facility is a distribution, lenders price the purpose and expect distribution restrictions in the documents alongside more conservative leverage and headroom.
When is this term settled?
In the long-form schedules, not the term sheet. The sheet fixes the amount and margin and may flag that distributions will be restricted, but the conditions and cap levels are drafted late. Permitted baskets are among the terms that shrink between the sheet and signing when nobody is tracking the drafts.
What should I negotiate on the schedule?
The conditions before the amounts. Ask where the leverage gate sits and what it looks like after a 20% fall in EBITDA, since a gate close to the covenant is a permission that vanishes at the first difficulty. Ask whether the cap grows or is static. And name any payment you know is coming so it is permitted expressly.
The full treatment sits in the guide: debt term sheet negotiation.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.