Portability – To Port or Not?

Portability provisions – which allow a target company to be sold without the target's debt financing arrangements becoming automatically 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.

Incoming buyers often prefer to negotiate their own financing packages as part of any acquisition of a target but with interest rates rising to a 15-year high and lending appetite decreased due to macro-economic factors, portability can materially help to facilitate M&A transactions since the existing debt financing could transfer with the borrower group, meaning that the incoming buyer may not need to raise any new financing. This can also ensure a private credit lender retains its deployment in the portfolio company which could well be attractive.

Private credit lenders who are asked to accept portability are likely to consider the inclusion of some or all of the following controls: (1) incoming buyer to be from a pre-approved list, (2) call protection to restart from the date of the change of control, (3) pro forma leverage compliance (likely set below covenanted leverage), (4) minimum cash equity investment from an incoming buyer, (5) sunset clause, (6) only one "porting" of the debt during the life of the facilities, (7) payment of a portability event fee and (8) KYC protection.