The private credit market is witnessing a notable shift in loan documentation, with an increasing focus on provisions that grant borrowers greater flexibility to increase leverage post-closing. A key feature gaining traction in these negotiations is the so-called "freebie basket," a mechanism that allows for the incurrence of additional debt outside of standard leverage ratio tests. This development is driven by intense competition between the broadly syndicated loan and direct lending markets, with sponsors seeking terms that are more commonly associated with the high-yield bond market. The trend is particularly evident in mid-market leveraged loans and is becoming a point of contention in new core and upper mid-market private credit deals.
The Rise of the Freebie Basket
The freebie basket is a cash-capped basket that permits a borrower to incur incremental debt without needing to comply with the applicable leverage ratio test. This provision has long been a staple in the high-yield market, providing headroom for additional debt under a Credit Facilities basket. Its prevalence has been increasing in mid-cap leveraged loan documents, and private equity sponsors are now pushing for similar flexibility in private credit deals. According to market sources, there have been an increasing number of deals over the past 18 months that have added freebie flexibility to certain provisions.
The demand for this flexibility stems from sponsors' desire to increase leverage once an M&A deal has closed. As noted by Henri Lusa, managing director private debt Europe at Partners Group, "In most mid-market deals leverage is moderate." This moderate starting leverage creates an opportunity for sponsors to request the ability to add 0.5-1x of leverage post-closing, often to fund subsequent acquisitions. Mark Bickerstaffe, co-head of direct lending at Hayfin, confirms that sponsors sometimes prefer a lower opening leverage with the ability to increase it later, and that lenders are open to providing that flexibility under the right controls.
Negotiations and Market Acceptance
The implementation of the freebie basket in new private credit deals is a subject of tough negotiations. Market sources indicate that a number of lenders have already agreed to these new terms. Megan Lawrence, leveraged finance partner at Proskauer, observes that "In some instances, on very good credits with strong sponsors, we are seeing unitranche and private debt deals done with high-yield style covenant packages." She further notes that in the large-cap private credit space, legal document terms are, in some instances, converging with the syndicated loan markets.
Despite the increasing number of requests, acceptance of freebie baskets is currently restricted. The provision is typically offered only to the strongest, best-known credits in the private credit space, backed by the biggest sponsors. For the most part, the majority of direct lenders are reticent to offer the provision to would-be-borrowers. Those willing to include it may suggest a compromise. Lenders must be confident that the borrower can handle the additional load and trust the sponsor to provide support in times of stress. The mathematics must also work; neither banks nor debt funds can accept the prospect of higher debt in documents if the opening leverage has already reached a critical level at closing.
Interplay with Other Provisions
The freebie basket does not exist in isolation and interacts with other common debt incurrence permissions. For instance, sponsors may also seek to include a de minimis threshold amount—commonly ranging from 0.5x to 1.0x of consolidated group EBITDA—such that any incremental debt incurrence below that level does not trigger a Most Favoured Nation (MFN) provision. The likelihood of lenders accepting this may hinge on the size of the freebie basket itself.
Furthermore, the freebie basket concept can be applied to other permissions, such as those for acquiring debt. In some cases, there may be a separate "freebie" basket applicable to the acquired debt permission, in addition to the main incremental freebie basket. This allows for greater flexibility when assuming debt from an acquired company. Assumptions of acquired debt are relatively customary, usually subject to conditions such as requiring refinancing within a certain period, often six months.
Practical Implications and Future Outlook
The inclusion of a freebie basket has tangible practical benefits for borrowers. Activating the basket is typically dependent on positive EBITDA performance of the company. Having this flexibility pre-negotiated in the documents can eliminate the need for further rounds of negotiations between parties if new capital is needed for an acquisition. As Henri Lusa of Partners Group states, this capacity means both lenders and sponsors are ready to move quickly when the time comes, especially assuming an uptick in M&A activity.
For now, activity is largely restricted to the private credit market behemoths, but there are indications that the door is ajar for smaller borrowers in the months ahead. Sponsors are likely to remember which private credit fund managers have accepted freebie basket provisions on larger deals and will request the same terms from those lenders for smaller deals.
Conclusion
The freebie basket represents a significant evolution in private credit loan documentation, offering borrowers a valuable tool for post-closing leverage flexibility. While its adoption is currently concentrated among top-tier sponsors and credits, the trend reflects a broader market convergence between private credit and other debt markets, such as high-yield bonds and syndicated loans. The ongoing negotiations highlight the delicate balance between sponsor demands for flexibility and lender concerns over credit risk. As the private credit market continues to grow and compete, provisions like the freebie basket will likely remain a key focus in deal structuring, potentially becoming more standardised and accessible over time.