Private equity owners remove obstacle to M&A deals
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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.”
Traditionally, buyers of a debt-laden company have to make new financing arrangements. Existing creditors could still be lenders to the company under new ownership, but because they are formally paid back under the old agreement, they have an opportunity to change the terms if there are new risks after the takeover — either by demanding higher interest payments, forcing the company to limit 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.
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.”
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