24/09/2020 Private equity owners remove obstacle to M&A deals | Financial Times

Private equity
Private equity owners remove obstacle to M&A deals
More creditors agree to ‘portability’, meaning they will not have to be paid back if company is acquired

Five loans marketed in September have portability clauses, the same number as were sold in the whole of 2019 © Getty Images

Joe Rennison in London 4 HOURS AGO

Creditors are giving up their historic right to have their loans paid back when a
company is sold, in the latest example of their weakening power in an era of ultra-
low interest rates.

Private equity groups have been able to insert so-called portability language into
loan documentation in recent deals, which would mean the debt transfers with the
company to its new owner.

The development makes it easier for private equity to sell their debt-laden
companies but removes an important potential check on leverage in the financial
system.

A provision that was once rare has started appearing with increasing frequency,
according to bankers, investors and analysts, and while debt investors are not
happy about giving up power, they are finding they have little choice.

There are few loans on offer and lots of investors who want to buy them, given that
other assets have such low interest rates.

“We don’t like it at all,” said Ron Launsbach, a portfolio manager at Columbia
Threadneedle. “The standard for decades has been that we get our money back
when a company we lent to is sold. Now that language is getting looser. This is
another example of issuer-friendly terms finding their way into the market.”

https://www.ft.com/content/a1f44fe1-c784-46bc-9e55-e30921a4a8e5 1/3
24/09/2020 Private equity owners remove obstacle to M&A deals | Financial Times

Traditionally, buyers of a debt-laden

company have to make new financing
Portability makes a arrangements. Existing creditors could still
company a much more be lenders to the company under new
attractive opportunity ownership, but because they are formally
for buyers because they paid back under the old agreement, they
can be assured that have an opportunity to change the terms if
financing is in place there are new risks after the takeover —
either by demanding higher interest
already
payments, forcing the company to limit
Charles Tricomi, Xtract Research leverage, or other conditions.

The introduction of portability language

removes their seat at the table during a takeover.

In one recent example, broadband company Radiate Holdco — which is owned by

the private equity group TPG — raised $2.7bn in the loan market last week in a
refinancing deal that increased leverage, funded a payment to TPG and slid
portability language into the loan documents.

A person with knowledge of the transaction said TPG was seeking to make the
company more attractive to potential buyers.

“Portability makes a company a much more attractive opportunity for buyers

because they can be assured that financing is in place already,” said Charles
Tricomi, head of leveraged loan research at Xtract Research. “It also makes them
attractive because it decreases the time for the transaction, and as a result, it also
reduces the cost of the transaction.”

John Bell, a portfolio manager at Loomis Sayles, said portability meant an acquirer
could “buy a capital structure at a price they may not get themselves”, since they
might otherwise have to pay higher interest on new debt.

TPG declined to comment on Radiate.

Other companies to have raised money this month with portability clauses in the
loan documents include cloud computing company ECi Software, owned by Apax
Partners, and communications company Avaya, according to people familiar with
the deals.

Two more companies are marketing loans at the moment with similar deals,
according to people familiar with the loan terms, taking the total for September to
five — the same as for all of 2019, according to data from LevFin Insights.

https://www.ft.com/content/a1f44fe1-c784-46bc-9e55-e30921a4a8e5 2/3
24/09/2020 Private equity owners remove obstacle to M&A deals | Financial Times

The investor protections in loan deals have been loosening for several years, and
after the global pandemic struck in March, some hoped that borrowers’ desperate
need for cash would shift the balance of power back to investors and improve
lending standards.

In fact, the sharp recovery in credit markets, underpinned by support from the
Federal Reserve, has seen conditions deteriorate further, according to analysts and
investors.

“There has been basically no covenant tightening of note,” said Mr Bell of Loomis
Sayles. “Portability is the one we particularly hate.”

Copyright The Financial Times Limited 2020. All rights reserved.

https://www.ft.com/content/a1f44fe1-c784-46bc-9e55-e30921a4a8e5 3/3