Lenders Beware: The EBITDA ‘G.O.A.T.’ You Definitely Don’t Want on Your Team

As football season kicks off, both professional scouts and fantasy football enthusiasts are on the hunt for the next Brady, Sanders, or Taylor. Everyone is eager to find the next G.O.A.T. (Greatest of All Time) in their respective positions. But for lenders, there’s a different kind of G.O.A.T. lurking in credit agreements that you should steer clear of: high-water mark provisions.

Although still relatively rare, even in the broadly syndicated loan (BSL) market, high-water mark provisions can be a game changer—and not in a good way. These clauses effectively lock in a fixed dollar basket based on a percentage of EBITDA, calculated at the borrower’s peak EBITDA level following the closing of the financing. In other words, if a borrower reaches a high EBITDA at any point, the provision disregards any subsequent declines in EBITDA, keeping the basket size as though the company were still performing at its peak.

Typically, negative covenant provisions that use fixed dollar baskets tied to a percentage of EBITDA are designed to give borrowers greater flexibility, allowing for expanded borrowing capacity if their performance improves after the financing closes. But high-water mark provisions operate under the flawed assumption that past performance will remain a reliable indicator of future performance, at least when it comes to setting limits on permissive baskets.

While BSL deals are most prone to contain high-water mark provisions, all lenders and their legal teams should be vigilant. Even in private credit deals, where a BSL form may be used as precedent in the documentation principles, it’s crucial to ensure that this problematic G.O.A.T. doesn’t sneak into the terms. An example of a high-water mark provision from a recent publicly filed BSL deal:

High Water Provision. With respect to any fixed dollar basket that is determined by reference to a percentage of Consolidated EBITDA as of the most recently ended Test Period as of such time of determination (including on a “greater of” basis), the Consolidated EBITDA shall be deemed to be the greater of (x) Consolidated EBITDA as of the applicable most recently ended Test Period as of such time of determination as set forth in such fixed dollar basket and (y) the greatest Consolidated EBITDA of the Borrower for the most recently ended Test Period.

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The Mayer Brown Private Credit Team is available to answer any questions and provide further guidance on this topic.