Portability isn’t a typical feature of loan documents, but in a market where refinancing remains expensive and at times tricky, stakeholders are exploring how portability terms can help maintain M&A activity

Given that the debt and M&A markets can be challenging or a resetting of debt terms in the context of a refinancing can be expensive, investors, dealmakers and borrowers are looking to either take advantage of or build into the document debt portability to help get deals over the line or facilitate an M&A transaction. Portability allows companies to carry over or “port” existing debt facilities when company ownership changes. Without a portability feature, loan agreements typically force a company to repay existing debt when being sold to a new owner by including a “change of control” event of default.

Although portability has not been a common feature of loan documentation, during the past 12 months, private equity sponsors have increasingly looked to take advantage of portable debt facilities to support M&A transaction flow.

For example, recent high-profile deals that have featured portable financing packages include Veritas Capital’s US$5.3 billion sale of consulting firm Guidehouse to Bain Capital Private Equity and Blackstone’s acquisition of software company Civica from Partners Group for almost £2 billion. Meanwhile, Aquiline Capital Partners secured portability terms when refinancing a US$575 million Term Loan B facility for HR services portfolio company CoAdvantage.

Reducing uncertainty

In the current market, portability is appealing to dealmakers on both the buy-side and the sell-side. For buyers, a target asset with a portable debt facility offers a way to avoid raising new financing, which can be expensive and may be challenging depending on market conditions. Existing debt facilities may also include more borrower-friendly terms, which may not be available given present market conditions. Buyers can also save on the fees that would be payable to lenders when putting a new facility in place.

From a sponsor’s perspective, a portable debt structure reduces the risk of incurring prepayment penalties if a deal is exited early and also reduces the risk of a sale process breaking if a preferred bidder is unable to secure financing.

Even lenders, particularly private credit providers, have benefited from portability. Normally, lenders prefer to have the debt repaid when a new owner comes in—but in an M&A market in which lenders have had limited opportunities to deploy capital in new deals, portability has allowed them to keep money at work and stay invested in quality assets with which they are already familiar.

Understanding the risks

Portable debt structures come with risks. Agreeing to make a debt structure portable, but having limited visibility and control over who the owner of the borrower will be if an asset changes hands can put lenders in an uncomfortable position. Lenders may also grow anxious in situations where an underperforming company is changing ownership but with no opportunity for the lenders to renegotiate terms.

Lenders can secure some protection by including portability terms that specify eligible buyers, or at least require that a buyer have the necessary sector or deal experience if an existing debt facility is to roll over. Know-your-client provisions, “no default” clauses, and leverage tests can also be included in portability terms. These conditions are usually negotiated on a deal-by-deal basis.

Even with these protections in place, portability can still cause anxiety for lenders who are lending as much on the basis of their relationship with a sponsor as they are against a specific company. Fundamentally, lenders still want to understand who owns a company and how that owner plans to drive profitability. This remains a key part of a credit decision.

Portability is not necessarily a magic wand for buyers either, many of whom will want to negotiate their own debt packages on terms they are familiar and comfortable with rather than just rolling into a structure negotiated by another sponsor. In addition, they may have a different view around ultimate leverage in the transaction. The certainty of capital that portable debt structures provide can be beneficial to close a deal, though the new owners may seek to upsize, reprice or refinance an inherited structure post-closing.

A feature of the market for the short-term

Despite these caveats, portability is set to remain a feature of financing in the short to mid-term. Owners that must refinance existing debt but have plans to sell within the next year may seek to make any newly refinanced debt facilities portable to build momentum for impending exit plans.

Lenders are responding to this demand by structuring “pre-capitalization” deals, according to Bloomberg. These funding packages are designed to address current, short-term refinancing requirements, but also put companies on a pathway to being sold. Lenders will pitch these structures to companies that are gearing up for a sale and could benefit from having portable financing in place when a formal auction process commences.

If M&A markets rally and debt in connection with M&A becomes accessible at reasonable pricing and terms, the appeal of portability may not be as readily apparent, but until then, sponsors and lenders will continue to explore how portable debt can help keep sluggish deal activity moving.

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