Builder Basket Missing Carve-Outs

Impossible to calculate Restricted Payment and Investment limits

$1.5B Revolver · Semiconductor Manufacturer

Portfolio Management & Audit Headaches

The abilities to pay dividends and make acquisitions are standard asks for a large corporate borrower. They negotiate carve-outs with lenders to permit these cash outflows. Typical corporate revolver. But it becomes a problem when the calculations behind these provisions are not properly documented.

How can portfolio managers approve these transactions — that the borrower needs — if the credit agreement doesn't clearly explain the calculation? How many meetings and emails will it take to resolve this issue when this name lands on audit's list?

Two Non-Existent Exceptions

In this credit agreement, Section 6.04 is the Restricted Payments covenant. Its exceptions run (a) through (v) — but (o) and (r) are missing.

The covenant's list of exceptions goes straight from (q) to (s)

Section 6.04Restricted Payments. The Borrower will not, and will not permit any of its Restricted Subsidiaries to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, except: …
(q)the Borrower and its Restricted Subsidiaries may make Restricted Payments comprised of payments upon the conversion of any Junior Financing to cash or Equity Interests (other than Disqualified Equity Interests) of the Borrower;
(s)the Borrower may purchase its capital stock from present or former officers, directors, employees or consultants of the Borrower or any of its Subsidiaries upon the death, disability or termination of employment or services of such individual;

If there were no references to these missing clauses, these would still be errors, but with minimal consequences. In this agreement, however, a critical defined term — Available Amount — relies on 6.04(r).

The Available Amount definition relies on 6.04(r)

“Available Amount” means, at any time (the “Reference Period”), an amount equal to: …
(c)the sum, without duplication, of:
(i)the aggregate amount of Restricted Payments made pursuant to Section 6.04(a) of this Agreement prior to the Reference Period; plus
(ii)the aggregate amount of Investments made in reliance on Section 6.05(a) of this Agreement prior to the Reference Period; plus
(iii)the aggregate amount of prepayments of Junior Financing made in reliance on Section 6.04(r)(B) of this Agreement prior to the Reference Period.

So the agreement computes a number from a clause it never printed. This error went undetected through legal reviews at 15+ banks.

Ambiguity & Data Corruption

A lawyer may be able to sort this out and move on. But that does not fix the document.

And lawyers are not regularly running this calculation — it's bankers and auditors who need this sum. What they supply in place of the missing clause is what enters the credit file.

Ask a document AI or query your data warehouse and it gets worse. Back comes a number, arithmetic and all, built on a clause that does not exist. No error, no flag.

Catch These Errors Before Close

Traverse checks an agreement's numbering against itself, across the whole document. Here it surfaced both missing letters.

That is the difference between finding nothing and knowing there is nothing to find.

This is just one agreement. Traverse has run across more than $1T of bank loans and found more than $50B that are error-exposed. Contact us for an audit on the credit documents in your loan portfolio.