Welcome to the November edition of In the Know, Baker McKenzie's Leveraged Finance newsletter, which analyses significant trends and salient legal issues for participants in leveraged finance and high-yield markets in Europe and around the globe.
Key takeaways
Portability — the ability to sell a company or group without triggering a requirement to prepay (or, in the case of bonds, make an offer to prepay) financing pursuant to a change of control — can be an attractive feature for private equity shareholders for whom an exit is on the horizon. To date, lenders have typically been slow to agree to its inclusion in European loans, despite its acceptance in the high-yield bond market (particularly in sponsor deals). However, there are signs that this may be changing.
The key conditions for exercising one's rights under a portability clause typically include some or all of the following: restrictions on the timing and number of uses, compliance with financial covenants (usually leverage ratio-based), adverse credit rating development (standing ratings double trigger) and minimum financial and legal conditions relating to the acquirer. In the bond market to date, sponsor transactions mainly use leverage-based triggers (along with timing and number of uses restrictions), whereas corporate transactions use adverse credit rating triggers (especially in emerging markets and investment grade). While portability enhances flexibility for borrowers and existing shareholders, this optionality must be supported by documentation that can survive a change of control without requiring further waivers, consents or amendments upon exercise.
Without portability features, an acquisition or exit-based transaction may be prohibitively costly due to the need to refinance existing indebtedness at a premium or establish expensive “back-stop” arrangements. In this edition, we look at what portability is, its use in the current market and the key factors involved when negotiating the inclusion of portability into loan documentation.
* Gabby White, Senior Knowledge Lawyer, contributed to this article.