Mandatory Prepayment Provisions and Secondaries - Is It a Change of Control?

In the current economic climate, the disposal of portfolio companies to continuation funds has become one strategy for private equity sponsors to create a liquidity event for some of their investors – this has resulted in the “change of control” provisions in their portfolio company loan agreements becoming an area of increased focus for those portfolio companies and indeed the lenders under those loan agreements.

Typically, a “change of control” is defined in leveraged loan documentation to occur when the Sponsor ceases to directly or indirectly have voting control or economic control of the parent entity of the banking group (or the parent entity of the banking group ceases to hold (directly) the entire issued equity of the borrower (which protects the “single point of enforcement”)).

The occurrence of a “change of control” normally results in all amounts outstanding under the finance documents (including principal and all accrued but unpaid interest under the loan agreement) to become immediately due and payable (or to be capable of being required to be prepaid). In addition, many private credit transactions in the European market include call protection such that if the “change of control” occurs within the call protection period, a prepayment premium would also crystallise and become due and payable at that time.

The inclusion of a flexible (or indeed to some a standard) definition of Sponsor for the purposes of the “change of control” might well result in what some would think should trigger the “change of control” prepayment obligation actually proving technically not to trigger any such “change of control”.