EMEA Middle Market Industry Update
Sponsors Seek More Portability to Exit Positions, Repay Shareholder Loans in Direct Lending Deals; Funds Look to Secure Ability to Transfer Holdings
Thu 04/01/2021 08:59 AM
Private credit middle market lenders are increasingly willing to provide loans with portability features to secure their position in the deal, market participants told Reorg. The rise of portability, however, is counterbalanced by lenders seeking to make sure they can transfer their positions to a pre-approved list of investors after an exit.
More sponsors are requesting portability in bolt-on acquisitions in order to facilitate a swift exit, sources said. The portability feature allows sponsors to roll over existing debt to the buyer's lender, which saves costs and avoids refinancing the debt before the sponsor exits the deal.
The feature is also useful in a dividend recapitalization, where the loan makes it easier for sponsors to repay shareholder loans. Sponsors can also increase leverage to pay dividends to its shareholders.
“We’ve seen a gentle rise in this feature, often where a sponsor is executing a dividend recap and an exit is on the horizon,” Alexander Robb partner at Ropes & Gray said.
Some general examples include Alcentra providing about €250 million in a senior facility, which included a portability feature, to support private equity firm Ardian’s acquisition of German laboratory testing provider GBA Group.
CVC Credit and Alcentra provided a £165 million senior debt facility to back U.K. digital foreign exchange and payment services provider Currencies Direct’s dividend recapitalization, which also included a senior portable facility at 5.5x.
“Increasing competition among credit funds for quality assets and a desire to ensure capital continues to be put to work has meant portability is increasingly accepted,” Robb added.
Portability is usually discussed when debt financing is being structured to support private equity-backed acquisitions, but hardly included in the final debt structure, market participants said. This is mainly due to the acceptable investor list.
“A challenging aspect of portable loans is the list of acceptable buyers which can only include household names. Those potential investors have to be pre-approved by the lenders,” Robert von Finckenstein, managing partner at Alantra said.
This is because lenders may want to have the ability to transfer their position to another creditor after the sponsor has exited the investment.
The record level of capital available in the current private credit market environment has led to a shift in the acceptance of portability in loan facilities, despite challenges, such as limited acceptance of potential buyers. As of December 2020, dry powder stood at $320 billion, an increase by 19% compared to the previous year, a 2021 private debt report from Preqin said.
Sponsors are taking advantage of the fact that they have to negotiate with only one lender when involving a debt fund, compared to several lenders involved in a pool of banks. Often, a single debt provider would be willing to agree on a list of appropriate loan buyers, market participants said.
“In this day and age, it is easier to agree on a portability feature in a mid-market loan with a debt fund than with a bank syndicate,” Paul Kim, managing partner at financial advisory Herter & Co. said.
According to Reorg data in European leveraged loans available HERE over the last five years, 20% of the facilities with portability permitted a transfer only to entities that are on an acceptable investor list.
Similar to the leveraged loan market, portability in private credit loans is still rare. While data for that part of the alternative investment space is hardly available, data by Reorg on the European leveraged loan market suggests that, over the last five years, only 6% of the loans included portability.
Market participants said they expect the inclusion of portability to increase further in the future with competition in the private debt space intensifying.
--Kerstin Kubanek
More sponsors are requesting portability in bolt-on acquisitions in order to facilitate a swift exit, sources said. The portability feature allows sponsors to roll over existing debt to the buyer's lender, which saves costs and avoids refinancing the debt before the sponsor exits the deal.
The feature is also useful in a dividend recapitalization, where the loan makes it easier for sponsors to repay shareholder loans. Sponsors can also increase leverage to pay dividends to its shareholders.
“We’ve seen a gentle rise in this feature, often where a sponsor is executing a dividend recap and an exit is on the horizon,” Alexander Robb partner at Ropes & Gray said.
Some general examples include Alcentra providing about €250 million in a senior facility, which included a portability feature, to support private equity firm Ardian’s acquisition of German laboratory testing provider GBA Group.
CVC Credit and Alcentra provided a £165 million senior debt facility to back U.K. digital foreign exchange and payment services provider Currencies Direct’s dividend recapitalization, which also included a senior portable facility at 5.5x.
“Increasing competition among credit funds for quality assets and a desire to ensure capital continues to be put to work has meant portability is increasingly accepted,” Robb added.
Portability is usually discussed when debt financing is being structured to support private equity-backed acquisitions, but hardly included in the final debt structure, market participants said. This is mainly due to the acceptable investor list.
“A challenging aspect of portable loans is the list of acceptable buyers which can only include household names. Those potential investors have to be pre-approved by the lenders,” Robert von Finckenstein, managing partner at Alantra said.
This is because lenders may want to have the ability to transfer their position to another creditor after the sponsor has exited the investment.
The record level of capital available in the current private credit market environment has led to a shift in the acceptance of portability in loan facilities, despite challenges, such as limited acceptance of potential buyers. As of December 2020, dry powder stood at $320 billion, an increase by 19% compared to the previous year, a 2021 private debt report from Preqin said.
Sponsors are taking advantage of the fact that they have to negotiate with only one lender when involving a debt fund, compared to several lenders involved in a pool of banks. Often, a single debt provider would be willing to agree on a list of appropriate loan buyers, market participants said.
“In this day and age, it is easier to agree on a portability feature in a mid-market loan with a debt fund than with a bank syndicate,” Paul Kim, managing partner at financial advisory Herter & Co. said.
According to Reorg data in European leveraged loans available HERE over the last five years, 20% of the facilities with portability permitted a transfer only to entities that are on an acceptable investor list.
Similar to the leveraged loan market, portability in private credit loans is still rare. While data for that part of the alternative investment space is hardly available, data by Reorg on the European leveraged loan market suggests that, over the last five years, only 6% of the loans included portability.
Market participants said they expect the inclusion of portability to increase further in the future with competition in the private debt space intensifying.
--Kerstin Kubanek
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