As an example, the Available RP Capacity Amount addresses the economic realities of the following made-up transaction:

1. the issuer utilises RP capacity to make a dividend outside of the restricted group;
   
2. the amounts are then contributed back into the restricted group (i.e., as a shareholder loan or equity injection, etc.); and
   
3. the contribution builds the contribution debt basket (either 1:1 or, in some cases, 1:2), which the issuer then utilises to incur debt.
   

Rather than going through each of these steps, the Available RP Capacity Amount concept looks through these transactions and allows the issuer to directly convert the RP capacity that would have been utilised in step 1 in to debt capacity. Notably, however, the Available RP Capacity Amount is, by its nature, slightly more limited than the Contribution Debt basket, which is built via any qualifying equity contributions, as it requires RP Capacity.

Does the concept make sense?

At first glance, this structure may seem entirely logical, and one can easily understand why an issuer would want to avoid going through the steps listed above. However, these two concepts are not identical. For example, without having the Available RP Capacity Amount concept, the issuer would need cash to make the initial RP - which places some real limits on their ability to make the conversion, which is itself a sort of “health” check. Whereas when the concept is included, the issuer is converting theoretical RP capacity it has simply based on its covenant capacity (which may be rather loose, and not tied to its performance) to concrete debt capacity. It goes without saying that that the Available RP Capacity Amount conversion rate should be equal to, or tighter than (given no need to actually have cash - as seen in Arcaplanet), the Contribution Debt conversion rate.

A further point, is that while the inclusion of this concept may address the economic realities of the transaction, as discussed above, it only does so if the RP capacity that is converted into debt capacity is decreased by an equivalent amount. In the majority of deals, debt incurred using the Available RP Capacity Amount basket will reduce the RP capacity. In some cases this reduction is 50% (to account for the fact that the conversion occurred at a 1:2 conversion ratio, for example, McAfee), but in other cases every dollar of debt incurred simply reduces RP capacity by a dollar (for example, Modulaire Group).

How is it drafted?

The Available RP Capacity Amount concept tends to either be tucked away in the Contribution Debt basket or is set out in its own basket.

The quantum of RP capacity that can be converted into debt capacity varies from deal to deal. It is common to see only selected RP baskets such as the Builder Basket (including any starter amount), General RP Basket, Management Equity Repurchases, IPO market cap, Excluded Contributions and Leverage-Based RP baskets rather than all RP capacity. However, Lutech is an example where all RP capacity can be converted into debt capacity.

Conditions to Availability

One thing to be aware of is that given RP capacity is being utilised for incurring debt, the limitations that exist if the RP capacity were simply being used to make an RP still apply. In other words, if the RP covenant requires no Default, or no Event of Default (or if the ratio, then FCCR capacity, or the ratio is no worse, etc.), then when incurring debt using the Available RP Capacity Amount, any such limitations must be met.

For a quick refresher on the conditions to availability for RPs, see the 9fin Educational on “(Un)Restricted Payments - Part 1 - the Builder Basket”.

Can it be secured?

In some cases, debt incurred under the Available RP Capacity Amount concept can be secured. It could be secured on the collateral assets under the Permitted Collateral Liens definition, either on a junior or pari passu basis to the notes, or secured on the non-collateral assets under the Permitted Liens definition, meaning it will be effectively senior to the notes. Depending on which baskets can be secured and the amount that can be incurred under those baskets, the capacity to incur pari passu or effectively senior debt could be quite significant. For example, in Ceramtec, up to 1.1x of RP capacity can be converted into debt capacity and secured on a pari passu or effectively senior basis to the notes.

Developments

The inclusion of the Available RP Capacity Amount concept is growing year-on-year. In 2020, approximately 13% of sponsor deals included this concept, jumping to ~37% in 2021 and roughly 45% in 2022 (albeit on a small sample size as of publication).

Several recent US deals that have been at the very sharp end of sponsor aggressiveness - e.g., Medline (Blackstone / H&F / Carlyle), McAfee (Advent-led consortium), athenahealth (Bain / H&F) and SPX Flow (Lone Star) - included the Available RP Capacity Amount on a 1:2 basis, i.e., up to 2x RP capacity may be converted into debt capacity. One thing to bear in mind is that if the 200% Available RP Capacity Amount did not match the corresponding contribution debt covenant, it would undermine the general rationale for the inclusion of the concept in the first place - however, we’ve yet to see this mismatch occur.

Investor Pushback

Novel innovations in US deals have a tendency to float across the pond, and the 200% Available RP Capacity Amount concept attempted to make its bed in the European market. It appeared in Merlin Entertainments and Paysafe, which issued both EUR and USD tranches. However, the concept was tightened in Modulaire Group, Multiversity (each tightening from 200% to 100%) and Arcaplanet (200% to 150%, even though, unusually, the contribution debt basket remained at 200%) and was removed altogether in Birkenstock, Arxada (Lonza Specialty Ingredients), and Multi-color.

If you need to quickly review the Available RP Capacity Amount concept on a particular transaction, what should you look out for? The following is intended to be a short list to help you focus your review on the key points.

1. Can the Issuer / Borrower convert RP capacity into debt capacity? If so, which RP baskets can be converted into debt capacity?
   
2. Is the RP capacity converted on a 1:1 basis or a 1:2 basis?
   
3. Does the Available RP Capacity Amount ratio match the Contribution Debt percentage (or, is it at least smaller)?
   
4. Does the RP capacity correspondingly reduce when converted to debt capacity? If so, does it reduce equal to 100%, or 50%, of the RPs made?
   
5. Can the basket be secured on the collateral or non-collateral assets (i.e., does it convert RP capacity to debt which could be pari passu or effectively senior)?