Yesterday, the FT published an article highlighting the recent trend for lenders to agree to the inclusion of ‘portability’ language in leveraged loan agreements. Put simply, this means that a loan will not be due for automatic repayment if the borrower is acquired by a third party. Instead, the debt would transfer with the borrower to its new owner, potentially making it easier for a private equity sponsor to sell its portfolio company.
Whilst it is true that portability has featured in a number of recent deals, the concept is not new. Portability can prove useful to a sponsor looking to sell an asset as quickly and efficiently as possible, and on paper a debt package capable of being transferred can be appealing to prospective buyers as it simplifies an acquisition process. However, almost inevitably an acquiror of a business will have its own views as to an optimal debt structure, and typically will seek to refinance the facilities rather than assume the borrower’s existing liabilities.
In a liquid debt market which is well served by both private capital and traditional bank lenders, an acquiring sponsor can be almost certain that effecting a refinancing will be straightforward, but as markets evolve under pressure from Covid-19 and other external forces it may be that liquidity recedes, at which point portability will become ever more important.
As ever, the debt markets continue to evolve and it may be that a well advised sponsor will seek the inclusion of portability language in its deals to guard against markets tightening in the future. If lenders are prepared to accept that approach, care should be taken to ensure that the scope of the portability provisions are drawn relatively narrowly if possible. Lenders will want to ensure, as far as they can, that debt is ported only to acquirors of a similar nature and creditworthiness as the exiting sponsor, and a deal by deal analysis should be conducted.
The presence of portability language in a number of recent deals is noteworthy, but it does not mean that the construct is right for every transaction. Rather than being a “trend”, the inclusion of these provisions would usually be the result of analysis of the unique facts of a deal. A meaningful move away from that bespoke approach would be significant.