The Canadian dollar high yield market continues to provide
flexibility to public dividend-paying issuers to implement and
maintain their distribution policies through specific and
customized dividend baskets that are in addition to an issuer's
general restricted payment basket and other customary baskets and
exceptions.1 This flexibility has also been available
not only to the darlings of the high yield market (those with the
highest of the high yield credit ratings) but to lower rated
issuers, with growing examples of B-rated public issuers
negotiating broad and flexible dividend baskets.
The dividend baskets are currently taking the following
basket: Permits the issuer to pay dividends based on a
percentage (often 80 or 90 percent) of "excess cash" for
the preceding four fiscal quarters, where excess cash is based on
consolidated EBITDA less fixed charges, cash taxes and maintenance
capex. The issuer is also required to satisfy a leverage
basket: Provides the issuer with flexibility to pay
dividends at a level generally consistent with the issuer's
existing dividend policy on the issue date. For example,
AutoCanada's covenant pattern for its May 2014 issue permits
payment of quarterly dividends in an amount up to $0.27 per share
(at a time when AutoCanada was paying $0.23 per share and therefore
also allowing for modest growth consistent with AutoCanada's
Fixed cap basket:
This type of basket permits dividends up to a specified amount in
each fiscal year and may provide a carry-forward option for unused
amounts subject to satisfaction of certain conditions. Generally
the issuer would also be required to satisfy a leverage ratio or be
permitted to incur $1 under its debt incurrence test.
The cash flow-based basket is the most prevalent and generally
provides the most bondholder protection as it employs a focused
financial test that evaluates the issuer's overall financial
health and ability to generate free cash flow, and although it
provides the prospect for unlimited growth in distributions it also
protects bondholders against deterioration in the issuer's
To the extent the issuer intends to pay dividends in excess of
the amount available in its dividend basket it will have the
flexibility to "tap into" or allocate the excess (or any)
portion of the dividend payment to its general restricted payment
basket or to any other applicable basket or exception that has
availability, permitting significant flexibility for
dividend-paying issuers to increase their distributions in the
future. Note as well that an issuer is not required to first
allocate dividends to its dividend basket and has the flexibility
to allocate and reallocate dividends to any available
baskets/exceptions (and in some cases an issuer may have strategic
reasons for doing so).
Issuers that negotiate a dividend basket will, of course,
continue to be subject to any restrictions on distributions
contained in their credit facilities and other debt instruments,
but the added flexibility from including a dividend basket is
nevertheless helpful given the relative hassle and lack of
certainty associated with obtaining amendments to the indenture and
the importance of dividends and dividend growth to these
1.Note on terminology: The term
"dividend basket" is sometimes used to describe an
issuer's general restricted payment basket, but here we use the
term to refer to a specific exception to the restricted payment
covenant that relates specifically to payment of dividends on
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