Basket Mechanics in Practice: Builder Basket and CNI Basket Wording for Professional English Negotiations

1) Grounding the concepts

In leveraged finance documents and high‑yield bond indentures, companies are often restricted from moving value out of the borrower group. Two provisions govern this flow of value: the Restricted Payments covenant (controlling dividends, share buybacks, junior debt prepayments, and certain distributions) and the Investments covenant (controlling cash or asset transfers into non‑loan parties and other investments). Within these covenants, negotiated “baskets” define permitted capacity. Two of the most important—and most negotiated—are the Builder Basket and the CNI (Consolidated Net Income) Basket.

The Builder Basket allows capacity to grow over time based on a defined measure of the group’s performance or value accretion. It “builds” from a starting point and typically accumulates additional capacity as profits or equity increase. Because it accretes, its future size depends on both business results and the exact wording of the clause. A small drafting shift can materially change the capacity, either allowing more “leakage” (value leaving the restricted group) or creating “blockers” that freeze capacity.

The CNI Basket is a performance‑linked basket, usually within the same covenants, tied specifically to Consolidated Net Income as defined in the document. Unlike a purely static dollar basket, the CNI Basket fluctuates with profitability. If the group performs well, capacity expands; if performance declines, capacity may shrink or reset. The two names (Builder vs CNI) are sometimes used interchangeably in market discussions, but in careful drafting they are not identical: a builder mechanic can be anchored to CNI, to EBITDA, to retained excess cash flow, or to equity contributions; the CNI Basket is explicitly tied to Consolidated Net Income.

Wording precision matters because the capacity formula, the treatment of losses, and the hierarchy of usage determine whether cash can be upstreamed to sponsors, used for investments in unrestricted subsidiaries, or locked inside the borrower group. A single phrase—like “net of losses,” “cumulative,” or “reset to zero on the closing date”—can swing the economics of a deal. For professionals negotiating in English, choosing verbs (accrue, accumulate, carry forward), connectors (net of, subject to, after giving effect to), and qualifiers (positive CNI only, cumulative from the first day of the fiscal quarter including the closing date) is decisive.

2) Dissecting basket wording

When you read or draft a Builder Basket or a CNI Basket, you should look for five core components: the capacity formula, accretion mechanics, resets, usage hierarchy and priority, and carve‑outs.

Capacity formula

• Builder Basket (typical formula):

  • A fixed starter amount (the “starter basket”), often a dollar amount or a percentage of total assets.
  • Plus an accreting component linked to performance or equity movements, such as: (i) a percentage of Consolidated Net Income, (ii) a percentage of Consolidated EBITDA, (iii) retained Excess Cash Flow, or (iv) net equity contributions (new money from shareholders).
  • Sometimes reduced by negative items, such as losses, write‑downs, or restricted payments previously made using this basket.

• CNI Basket (typical formula):

  • A specified percentage (e.g., 50%) of Consolidated Net Income, often “cumulative” from a defined start date.
  • Clarifies how losses are treated: some formulations count only positive CNI periods; others subtract negative CNI; others apply a floor at zero.
  • May add equity contributions to increase capacity even when CNI is negative.

Precise wording to observe: “cumulative,” “net of losses,” “no carry‑forward of deficits,” “positive CNI for each period only,” “calculated on an LTM basis,” or “from the first day after the Closing Date.” These phrases define how quickly the basket grows and whether downturns erase prior accretion.

Accretion mechanics

• Accrual basis: The basket generally “accretes” over time as results are reported. Wording should state whether accretion occurs when financial statements are delivered, when results are determined, or continuously.
• Gross vs net accretion: Some clauses accrete gross positive amounts and ignore losses; others net losses against gains; tighter versions require deficits to reduce capacity.
• Equity contribution add‑ons: Equity contributions may permanently increase capacity, sometimes on a 1:1 basis, sometimes multiplied (for example, 100% of cash equity contributions).
• Debt‑for‑equity exchanges: Check whether “equity credit” from exchanges can increase the basket, and whether it counts as a true equity contribution.

The selection of “netting” and “equity add‑on” language is a core leverage point: sponsors seek growth that is resilient in downturns; lenders seek symmetrical treatment that reduces capacity when performance suffers.

Resets

• Reset to zero: In some agreements, the basket starts from the closing date with no historical period included. Others allow a “lookback” that captures historical performance.
• Deemed resets on restructuring events: Amendments may add a reset upon a refinancing, new tranche, or covenant restart. Clear wording is needed to prevent double counting.
• Partial resets: Some deals “lock” previously built capacity (it becomes fixed and no longer fluctuates), while future accretion resets. Language like “from and after the Reset Date, the CNI component shall be calculated anew and prior accretion shall not be reduced by subsequent losses” can materially increase future flexibility.

Resets determine whether the past protects future capacity. Ambiguity creates disputes; exact time anchors (e.g., “from the first day of the fiscal quarter ending immediately before the Closing Date”) avoid confusion.

Usage hierarchy and priority

• Waterfall of usage: The drafting typically specifies whether capacity must be used from free‑and‑clear (builder) capacity first, from fixed baskets, or from ratio‑based baskets. Lenders prefer “use ratio capacity first” to limit leakage; sponsors prefer “use builder first” to preserve ratio capacity for acquisitions.
• Sharing between RP and Investments: Many agreements allow the builder/CNI capacity to be used for either Restricted Payments or Investments. Clear cross‑references prevent double counting.
• Designations and re‑designations: If an unrestricted subsidiary is designated using builder capacity, can it be re‑designated without refreshing capacity? A precise line like “capacity used upon designation shall not be restored upon re‑designation” avoids recycling.

Priority language shapes real outcomes: in practice, the same dollar can be “spent” differently depending on whether it funds a dividend, repays junior debt, or invests in a joint venture. The wording must specify which actions consume the builder/CNI capacity and when.

Typical carve‑outs

Even with tight baskets, certain payments and investments are typically carved out as “permitted” and do not consume builder/CNI capacity:

• De minimis baskets (small fixed dollar amounts)
• Employee‑related payments (tax distributions for pass‑through entities, repurchases upon employee death/disability)
• Specified intercompany transactions within the restricted group
• Capital expenditures funded with equity proceeds
• Redemptions of equity with proceeds of a substantially concurrent equity issuance

Including or excluding a carve‑out changes how often the builder/CNI basket is touched. Precise cross‑references ensure carve‑outs operate as intended and do not override other limits.

3) Compare and negotiate

Differences in scope and volatility

• Scope: A Builder Basket is a broader concept that may include multiple sources of accretion (CNI, EBITDA, ECF, equity). A CNI Basket is narrower because it relies on one metric—Consolidated Net Income as defined in the document. As a result, Builder Baskets can be engineered to perform even when CNI is weak (for example, by using EBITDA or equity contributions), while a pure CNI Basket closely tracks accounting profit.
• Volatility: CNI can be volatile and sensitive to non‑cash items (impairments, mark‑to‑market). EBITDA‑based builder mechanics tend to be smoother. If the clause nets losses, CNI volatility will reduce capacity in bad periods; if it ignores losses, capacity may only ratchet upward. The choice affects lenders’ downside protection.
• Negotiation leverage: Borrowers argue for growth‑friendly mechanics—positive CNI only, equity add‑ons, and lock‑ins after resets. Lenders argue for symmetry—netting losses, excluding non‑cash add‑backs, and aligning capacity usage with credit metrics. The market position (sponsor leverage, rating, deal demand) determines the outcome, but the language signals risk tolerance.

Tightening variables (lender‑friendly)

• Percentage: Reduce the CNI percentage (e.g., 25% instead of 50%).
• Net vs gross: Require losses to be netted against gains and allow negative CNI to reduce accumulated capacity.
• Deductions: Deduct prior restricted payments and certain investments from the builder capacity to avoid double counting.
• Resets: Disallow partial resets that lock in past accretion; require full recalculation, including losses, post‑reset.
• Step‑downs: Introduce step‑downs tied to leverage thresholds; above a leverage cap, the builder is frozen.
• Blockers: Tie usage to no‑default and pro forma covenant compliance; block usage if a payment default or bankruptcy event exists.

Professional phrasing: “The CNI Basket shall equal 25% of cumulative Consolidated Net Income from and after the Closing Date, net of cumulative losses, and shall be reduced by the aggregate amount of Restricted Payments and Investments made in reliance thereon.”

Loosening variables (borrower‑friendly)

• Percentage: Increase to 50% (or higher in aggressive markets).
• Positive‑only: Exclude negative CNI periods; do not net losses.
• Equity add‑ons: Add 100% of cash equity contributions (and optionally equity credit from exchanges) to capacity.
• Partial resets: Lock in accrued capacity at reset dates and calculate new accretion prospectively only.
• Usage priority: Permit use of builder capacity before ratio baskets to conserve headroom under maintenance/ratio incurrence tests.
• Deduction limitations: Do not reduce the builder basket for amounts spent under separate fixed baskets or carve‑outs.

Professional phrasing: “The Builder Basket shall consist of (i) a $X starter amount and (ii) an amount equal to 50% of cumulative positive Consolidated Net Income (with no reduction for losses), plus 100% of cash Equity Contributions, calculated from the first day of the fiscal quarter in which the Closing Date occurs.”

Blockers and upstreaming cash

• No‑default blocker: Usage conditioned on no Event of Default and, sometimes, no Default. Tighter versions use “no Default or Event of Default has occurred and is continuing.” Looser versions use “no Event of Default of the type described in Sections [payment] or [insolvency].”
• Pro forma tests: Some documents require pro forma compliance with leverage or fixed charge coverage as a condition to using builder/CNI capacity. Looser versions limit the test to certain payments.
• Upstreaming cash: For dividends to a holding company, wording should confirm that upstreamed cash is a Restricted Payment and specify which basket it uses. If the holdco is outside the restricted group, ensure the Investment covenant permits any intermediate transfer.

Professional phrasing for blockers: “Notwithstanding the foregoing, no Restricted Payment may be made in reliance on the Builder Basket if a Default or Event of Default has occurred and is continuing or would result therefrom.”

4) Apply and check

Reading scenarios and interpretation checks

When you apply these clauses, always decode the mechanics in a fixed order:

1) Identify the computation base and date anchors. Confirm whether the basket is cumulative from the Closing Date or includes pre‑closing periods. Note whether accretion is recognized upon delivery of financial statements or continuously.

2) Confirm positive‑only or netting rules. If the clause says “net of cumulative losses,” compute CNI with both positive and negative periods. If it says “positive CNI only,” ignore deficits. This single step can change the capacity outcome dramatically.

3) Map deductions and offsets. Determine whether prior Restricted Payments or Investments made “in reliance thereon” reduce the basket. Ensure you are not double reducing by also deducting payments that came from separate fixed baskets.

4) Check the treatment of equity contributions. Verify whether equity injections are included at 100% and whether they must be in cash. Confirm if debt‑for‑equity exchanges qualify and whether they must be contributed to the borrower versus an intermediate holdco.

5) Test blockers and conditions precedent. Confirm no Default/Event of Default blocker, and any pro forma ratio requirements. If the clause blocks usage during a Payment Event of Default only, capacity may still be usable during other defaults—unless the drafting says otherwise.

6) Verify usage hierarchy. If the clause requires using ratio baskets first, recalculate whether sufficient headroom exists before touching the builder/CNI capacity. If it allows builder‑first, ensure you preserve ratio capacity for acquisitions or junior debt paydowns.

7) Align RP and Investment cross‑references. When an upstream dividend to a holdco is paired with a downstream Investment back into an unrestricted subsidiary, check that each leg has permitted capacity and that using one basket does not assume availability in the other without explicit allowance.

8) Confirm reset effects. If there has been a refinancing or covenant reset, carefully read whether prior accretion remains locked or is re‑opened to losses. Avoid assuming that a “re‑pricing” is a reset—formal definitions matter.

Mini checklist for drafting and negotiation

• Definitions:

  • Is Consolidated Net Income defined with clear add‑backs and exclusions? Are non‑cash charges treated consistently? Are extraordinary items included or excluded?
  • Are “Equity Contributions” defined to include only cash? Are exchanges allowed? Are contributions to subsidiaries included?

• Capacity formula:

  • Is the percentage stated (e.g., 50%) and is it cumulative “from and after” a clear date?
  • Are losses netted or ignored? Is there a zero floor? Are prior RPs/Investments deducted?

• Accretion mechanics:

  • When does capacity accrete—continuously, upon delivery of financials, or at quarter‑end?
  • Is there a mechanism to adjust for restatements?

• Resets:

  • Are there reset triggers (refinancing, covenant restart)? Does prior accretion lock or reopen? Are lookback periods defined?

• Usage and priority:

  • Is there a clear usage order between builder/CNI, ratio baskets, and fixed baskets? Are cross‑references to RP and Investment covenants explicit? Is double counting prohibited?

• Blockers and conditions:

  • Is usage conditioned on no Default or Event of Default? Are specific defaults (payment/insolvency) singled out? Are pro forma tests required?

• Carve‑outs:

  • Which payments do not consume capacity? Are employee tax distributions and concurrent equity‑funded redemptions clearly covered? Are intercompany items ring‑fenced inside the restricted group?

• Leakage controls:

  • Are unrestricted subsidiary designations irreversible for capacity purposes? Is recycling prohibited? Are re‑designations addressed?

• Governance:

  • Are reporting and certification requirements linked to usage (e.g., officer’s certificate, pro forma compliance certificate)? Are timing requirements for financial delivery tied to accretion?

By following this structure, professionals can read, draft, and negotiate Builder Basket and CNI Basket wording with precision. The central skills are: identify the metric that drives growth; control how losses, add‑backs, and equity contributions modify that metric; police resets and usage hierarchy; and embed clear blockers to prevent leakage during stress. In English negotiations, success depends not on abstract theory but on exact phrases—cumulative vs positive‑only, net of losses vs zero floor, builder‑first vs ratio‑first—that turn broad economic intentions into enforceable capacity rules.