By Dennis Lamont, Charles Armstrong, Jennifer Cadet, Howard Sobel, and Scott Ollivierre

Debt portability provisions — reasonably common in high yield lending but historically rare in bank financing — have been recently seen in an increased number of US transactions, as deal terms react to a buoyant financing market. What should deal teams consider when seeking to include such provisions on European deals?

What Are Debt Portability Provisions?

Debt financing documents typically contain a change of control feature that triggers an event of default, or requires a mandatory prepayment or offer to purchase, upon the sale of the borrower or issuer of the debt (referred to in this article as the company) to a third party. As a result, the credit markets generally expect that all material existing debt will be refinanced on the sale of the company.

In some cases, the need or obligation to prepay debt is coupled with call protection for particular tranches of debt, which adds a premium to the cost of refinancing existing facilities. The total amount of this cost — underwriting fees for the new replacement facilities and call protection payments — is effectively borne by the seller, as a prospective buyer will factor costs into the purchase price. Debt portability provisions waive the change of control provisions if certain criteria (including leverage ratios and ratings conditions) are satisfied.