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(Bloomberg) — Non-public fairness corporations, desperate to promote debt-laden companies, are discovering personal credit score corporations more and more prepared to maintain excellent loans intact, even for corporations which will quickly have new homeowners.
The development, referred to as portability, describes loans that stay primarily unchanged when an organization will get new possession. It carries rewards and dangers for companies and particularly for lenders. Normally a change of management would permit lenders to renegotiate phrases to cowl potential dangers from a brand new father or mother, equivalent to completely different plans for progress or profitability of a enterprise.
After two years of rising curiosity prices hindering asset gross sales, homeowners are seizing on current fee stability to push for portability to get offers performed. Protecting the prevailing mortgage bundle in place removes the necessity for any new purchaser to seek out financing, making the acquisition much more alluring.
“The market has pivoted to incorporate a portability function,” mentioned Invoice Eckmann, head of principal finance within the Americas and senior managing director at Macquarie Capital. “We’re seeing extra of this as a result of sponsors are taking a look at near-term maturities and interested by their exits.”
For direct lenders going through rising competitors in a market that’s tripled to $1.6 trillion since 2015, portability provisions permit them to remain invested in property they’ve already vetted and endorsed.
“In the event you’ve discovered a horny enterprise then you could be prepared to let the debt journey to a different proprietor,” mentioned Jon Bock, senior managing director at Blackstone Credit score. “From a self-selection standpoint, this is a chance for managers to increase the lives of the mortgage.”
Usually reserved for sturdy companies, portability can keep away from the necessity for a mortgage to be refinanced within the broadly syndicated market or by a competitor.
Portability Offers
Whereas information displaying the entire quantity of debt with portability options is tough to return by, such provisions are clearly changing into extra commonplace.
Veritas Capital, for instance, bought its consulting enterprise, Guidehouse Inc., to Bain Capital Non-public Fairness and the corporate’s $3.1 billion mortgage bundle was transferred over. A bunch of personal credit score lenders sweetened the phrases of their transportable facility to entice Bain to maintain it in place, slightly than threat the prospect of dropping the mortgage to a refinancing by banks.
Antares Capital just lately led a $1.2 billion transportable mortgage facility to BC Companions’ NAVEX International, an organization the personal fairness agency has owned since 2018. The proceeds had been used to help a dividend recapitalization.
As a part of a mortgage improve offered to AWP Security final yr for add-on acquisitions, direct lenders agreed to AWP proprietor Kohlberg & Co.’s request for a portability provision, in line with an individual conversant in the matter. The enterprise has been owned by Kohlberg since 2020.
Kohlberg declined to remark. AWP didn’t reply to a request for remark.
Good Phrases
Sponsors acknowledge the advantages to sustaining mortgage phrases or leverage ranges that got in an period of low-cost cash and are sometimes unavailable now.
“In some transactions, portability is sort of precious to sponsors as a result of it removes market threat each by way of leverage and pricing,” mentioned Salman Mukhtar, a managing director at Barings. “It’s a robust device by way of getting leverage and phrases that may not be supported by the market sooner or later.”
In a $2.25 billion refinancing final yr for Enverus Inc., the debt was made transportable by lenders Hellman & Friedman and Genstar Capital, an investor within the enterprise since 2018.
Not For All
Regardless of the current reputation, portability provisions nonetheless face hurdles. Some direct lenders merely don’t settle for dropping the flexibility to renegotiate phrases if a enterprise underperforms or its trade loses luster.
And granting portability to a sponsor with out consciousness of who its successor will likely be can elevate a purple flag.
“Portability isn’t one thing direct lenders need in documentation since you by no means know who the corporate could be bought to, what the technique will likely be, what modifications will likely be made or if the administration crew will keep in place,” mentioned Carolyn Hastings, a companion within the personal credit score group inside Bain Capital Credit score. “There’s all the time a threat {that a} new purchaser may not help the enterprise, ought to issues goes sideways.”
So personal credit score corporations are taking steps to revive the stability of energy. When agreeing so as to add a portability function, some direct lenders stipulate a listing of authorised subsequent patrons, leaving out any that make them uncomfortable.
“When negotiating portability, typically it’s important to define patrons and potential patrons to make sure an organization goes to a collaborative companion in a transaction,” Hastings mentioned.
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