Musings on the Intersection Between Tax Reform and Leveraged Finance Terms

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An interesting consequence of the recently passed (but as yet unsigned) tax reform bill, is its impact on the available cash flow of borrowers—in particular the differing effects it will have on the relative after-tax cash flow of domestic corporate borrowers relative to domestic pass-through borrowers. Historically, the restricted payment covenants of leveraged loan credit agreements have generally permitted borrowers to distribute enough cash to the borrower’s consolidated parent (for a corporate borrower that is a member of a combined, consolidated or unitary tax group) and beneficial owners (for a pass-through borrower) to provide liquidity to those owners to pay their income tax liabilities attributable to the income of the borrower. Obviously, where the corporate borrower is itself a taxpayer, such tax payments are permitted.

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