The return of billion-dollar M&A deals was supposed to reignite leveraged finance activities. Instead, a seemingly technical feature – portability clauses – is having a significant impact on LBO transactions.
What is the Portability Clause?
A portability clause allows a sponsor to transfer ownership of the group to a new owner without triggering repayment of the debt due to the change of control. In practice, this means a buyer can acquire a business and keep the existing financing in place – with no need to raise fresh debt for the sale.
Why does it matter?
For PE Sponsors, portability is a game-changer as it creates pre-packaged financing, making assets more attractive, reduces execution risk by avoiding volatile credit markets at exit and can preserve favourable rates in a rising interest rate environment. It also significantly simplifies and speeds up the exit process, which is critical in a tight M&A market.
For Lenders, however, it’s a different story as portability avoids refinancing and raising new debt, eating into arrangement fees that can reach 1–3% on an LBO. Further, there is a risk for lenders of who ultimately owns the company. To manage that uncertainty, lenders are pushing for time limits (typically 18-24 months), one-time use and whitelists of pre-approved buyers.
Why now?
Sponsors crave flexibility. With IPO windows closed and credit markets volatile, locking in debt and offering pre-packaged financing makes assets easier to sell. For that purpose, portability is the perfect ingredient.
How big is the trend?
- In European high-yield bonds, portability appeared in ~50% of deals in H1 2024,
- In leveraged loans, its share tripled – from 4% to 12% by Q3 2024. This is no longer niche – it’s mainstream in sponsor-driven transactions,
- Lately, +2b$ deals such as Cognita or Urbaser have been the subject of heavy portability clause discussions.
The Fine Print: Negotiation Points around such clauses
From recent legal analysis (Baker McKenzie, White & Case), the main points are as follows:
- Leverage ratio tests (pro forma) to protect lenders;
- Pre-approved buyers (white-list) or minimum AUM requirements;
- KYC processes built into the timeline;
- Ratings triggers in bonds, less common in loans; and
- Duration for the clause implementation.
The Bigger Picture
Portability clauses change the traditional dynamic, especially in a challenging environment for exits. Lenders lose a critical revenue stream whilst sponsors gain deal certainty and cost savings. For lenders, it also introduces governance challenges and credit risks
The question is: Will portability become a permanent feature in the leveraged finance landscape – or will lenders manage to push back on its rise?
Source: Bloomberg