Four “portable” leveraged loans have hit the European leveraged loan market in recent weeks as private equity firms put pressure on banks to allow loans to stay in place when companies are sold, reducing the need for new financings.
Portability has been a regular feature of the high yield bond market for some time, but is rarely seen in the loan market, where the sale of a company and subsequent change of ownership usually triggers a loan repayment and a new deal.
By making loans portable, banks are effectively writing themselves and their peers out of lucrative new business and fees of up to 1.75% of the total deal size that follow sales. Refinancings, on the other hand, pay only 0.5%-0.75% or flat fees of around €200,000 to €300,000.
“Portability means less money for banks. It is very annoying as we are basically agreeing to forgo any good fees,” a senior banker said.
German metering group Techem and French jewelry retailer Thom Europe are both in the market with portable dividend deals totaling €1.75bn and €760m, respectively, that allow their private equity owners to withdraw cash from the businesses.
The two deals follow a €1bn portable loan financing for Swedish dialysis clinic operator iaverum that closed at the end of May and a €330m portable refinancing for Dutch gaming firm JVH, which private equity firm Waterland secured shortly before putting the company up for sale in June.
Sponsors are keen to secure portability on financing to improve the appeal of portfolio companies that they may put up for sale and drive up valuations in any future sales processes.
The move is yet another sign of a frothy market and shows private equity firms’ ability to wring further aggressive concessions out of banks, which have already cut pricing, removed loan covenants, imposed restrictions on transferability and installed looser bond style terms into loan documentation.
Portability was introduced in the high yield bond market to protect exiting and incoming owners from having to pay out expensive call protection on existing bonds, but is seen as an aggressive move in the loan market.
Loans do not have significant repayment penalties, which reduces the need for the need for portability and its recent inclusion is being interpreted as sponsors taking advantage of heated market conditions.
Although any new owners are free to raise new buyout financings, portable loans are expected to be used in some cases as the deals being locked in now are seen as having highly favorable ‘top of the market’ terms.
Techem is expected to be put up for sale later this year. Its current owner Macquarie is hoping that the company will fetch a higher valuation based on the attractiveness of the loans in place, sources said.
Techem’s portable loan has tight price guidance of 325bp-350bp over Euribor, with a 0% floor at par and its documentation also allows for extra leverage to be added to the deal. This means that any new buyer will be able to put additional debt onto the business from day one.
“There was a time when portability was offered but not used as sponsors wanted better terms. The market is so hot right now and it is hard to see where buyers could get a better deal. If a company is well known and has performed well, the idea of investors staying in a deal with a new owner is fine,” a head of leveraged finance said.
Thom, which is majority owned by private equity firm Bridgepoint alongside France-based Apax, hired Rothschild and Goldman Sachs for a dual-track sale or IPO process last year, which valued the company at around €1bn. A sale auction process was launched in February 2017.
After failing to sell the business, shareholders launched a dividend recapitalization to pay themselves €100m and included a portability clause, to make the company more attractive if it is put up for sale again. However, investors are not happy about all portability requests.
“Portability is a touchy subject for a lot of loan investors because there is no chance to make a new investment decision when a company is sold,” a second senior banker said.
In a highly competitive market, some banks are opting to offer portability in a bid to curry favor with current sponsors and position themselves well with new sponsors.
They are willing to take a short-term gain from companies that could leave the loan market altogether if they are sold to strategic corporate buyers, which are able to pay high prices and outbid private equity firms that are struggling to invest.
“Portability is not particularly nice but it positions you well for a next deal, if there is a next deal. There is no guarantee that the banks doing the portable refinancing would be the banks on an underwrite. There is also no guarantee the deal will stay in the leveraged loan market, it could sell to a trade buyer, so it is better to do something now,” a second leveraged finance head said.