Portability in Private Credit (Europe)

Portability provisions—which allow a sponsor to sell a portfolio company without the existing financing arrangements becoming due for repayment—are becoming an increasingly common feature of European private credit loan documentation, particularly on refinancings where sponsors have a short-to-medium term exit planned for a portfolio company. This trend is driven by a slowdown in M&A markets leading to sponsors holding onto assets for longer and hence needing to refinance existing financing arrangements as loans reach maturity whilst continuing to need their buy and build strategy to be financed.

Historically, portability provisions have not been a common feature of loan documentation—the concept is not new but rarely used as lenders have traditionally resisted a change of ownership without a right of prepayment. However, this resistance has softened recently, particularly for private credit funds. In a market with limited opportunities to deploy capital in new deals, the portability option allows money to stay invested in quality assets if the right terms can be agreed upon. The combination of the pressure on private equity sponsors to realise value and the lender pressure to deploy capital by keeping money at work has led to a more successful usage of the portability feature.

Perceived Advantages of Portability

• Reducing uncertainty: The portability feature can be important to the seller as it reduces the risk of a failed sale process. If a bidder is unable to secure financing, it provides a backstop of debt, subject to certain criteria.
• Simplicity: Portability creates a more streamlined process for a sponsor to sell an asset to a preferred bidder without requiring the bidder to secure their own financing package. This can provide greater certainty of deal closure and can also be used as a marketing tool as it makes the asset more attractive to potential buyers.
• Potentially lower cost: A portable debt facility avoids the need to refinance the loan on the sale with new financing, which reduces associated costs such as prepayment fees, arrangement fees, legal fees, and potentially higher interest rates, subject to negotiating preferred fees relating to the port itself.
• Favorable terms: Given how volatile market conditions can be, the existing debt facilities may include more borrower-friendly terms, which may not otherwise be available around the time of the proposed port. The preferred bidder on certain deals may also be able to negotiate amendments to the existing debt facilities as part of the sale process.
• "Priority" to lender: Portability provides a position of "priority" to the existing lender(s) in a sale where there is a possibility in which they could lose the loan.

Terms

The loan agreement will include a list of conditions that need to be met to allow a “change of control” to occur without triggering a mandatory prepayment event:

• Time period: The portability of the loan is usually subject to a time limit (e.g., up to two years after signing. This helps to reduce risk from a lender's perspective and align interests in terms of investment horizon and the original maturity of the loan.
• Approved New Investor: A pre-approved list of incoming sponsors that may benefit from the portability option.
• Leverage: A condition requiring that the portability option is subject to a leverage test on a pro forma basis. This will likely be set at a leverage level that ensures the facilities cannot be ported if the group is facing financial difficulties.
• No EoD: In order for the portability right to be exercised, an event of default blocker should apply at the time the deal is committed and when it completes; albeit certain larger deals may include a looser material event of default test.
• Minimum Equity: A specified minimum equity condition should be met. The bidder to make adequate equity contributions must meet a minimum equity to enterprise value test (e.g., a pro forma equity cushion of 45% or 50% following the preferred bidder’s investment).
• Cost: A portability fee may be payable at the time the portability option is exercised. Whether a fee is payable and at what level, will be affected by what fees have been paid when the port was put in place and whether the non-call protection for the facilities is to be reset following the port.
• One-time use: The portability option should be usable only once during the life of the facilities.
• KYC: the lender(s) should be satisfied with its KYC checks on the preferred bidder before the loan is “ported.”

When Would It Make Sense to Refinance With Portability vs. Doing a Staple?

• Portability is most common in refinancing scenarios where a sponsor has a short-to-medium term exit planned.
• Usually the sponsor will also want to reset its economics and bolster the terms of its buy and build strategy ahead of any sale.
• Good asset as opposed to trophy asset—trophy assets will likely receive better terms for a new financing on a sale, even in a volatile market, in comparison to a good asset.
• If the sponsors' outlook on the market is continued volatility and divergence on valuations between sellers and buyers, then a refinancing with portability will assist in avoiding a failed sale process.

Challenges of Portability Provisions

• Know your borrower: Banks and some private credit funds remain less comfortable with the portability option because they remain focused as much as their sponsor counterparty on the borrower's plan and management team as they are on the credit.
• Usage: Whilst the inclusion of portability provisions in loan documents has increased, its actual use is less prevalent. In practice, most bidders will have their own preferred structuring and terms, which push the boundaries of leverage and terms to win the bid. Hence, it will likely involve refinancing the existing facilities under their own debt package, rather than “porting” the prior sponsor’s negotiated terms.
• Certain funds: Portability may simplify the debt-raise process as part of the sale, but the conditionality around the exercise of the portability option can impact the certainty of funds.

Conclusion

The portability feature is being requested more frequently in the market as a result of the current market conditions which have depressed M&A already and hence exits and deployment for sponsors and lenders alike. While portability enhances flexibility for sellers, the right conditionality package is essential to ensure that lenders are willing to agree to its inclusion to mitigate the risks involved with porting. Hence, whilst these market conditions continue, the portability option is likely to be used more often. It is not a panacea for the effect of a depressed M&A market. The usage of the portability will remain deal-specific and subject to the relevant lender’s view of the credit, desire to deploy, and need for a strong sponsor relationship.