9Questions — Patrick Ottersbach, Macquarie — If you got it, port it!

Josie Shillito

11 June 2023•3 min read

9Questions is our Q&A series featuring key decision-makers in the corporate credit markets — get in touch if you know who we should be talking to!

Portability provisions have become more attractive lately because of the high cost of debt — there’s a recent example in the form of UK waste management business Enva, which ported its existing debt (provided by Macquarie) when Exponent Private Equity sold the company to I Squared.

Patrick Ottersbach, head of Macquarie Capital Private Credit, talks 9fin’s Josie Shillito through the mechanics of debt portability.

1. How common are portability provisions in private debt deals?

Porting debt remains rare. According to [law firm] Proskauer’s 2022 Private Credit Insights Survey of 65 deals, it remains a niche feature with only 4% of private credit deals featuring portability in 2022.

However, since financing markets have become more difficult to navigate in 2023, we have seen the number of requests from borrowers for portability increase, especially for later-stage refinancings to facilitate an eventual exit.

2. But portability provisions aren’t often used. Why?

Incoming owners often have a very different take on what kind of financing they want, and I’d say nine out of 10 new sponsors will want to create their own capital structure, especially if deals move from, for example, a mid-market to a large cap deal or from corporate private equity to an infrastructure buyer.

When portability is used, it is when for whatever reason the financing side is difficult in an M&A process, or if the original terms still compare favourably to the current market conditions.

3. What are the advantages when portability takes place?

As a lender, you maintain exposure to a good credit. As the borrower, you have ready-made debt in place. As the seller, it may facilitate your exit process.

4. And the disadvantages?

For whatever reason, the lender may not want to maintain exposure to the credit, or, if the current market environment is more friendly to lenders than the conditions in which the original debt was done, may prefer to refinance at current market terms.

However, I’d say in the majority of cases the lender wants to stay in, and the disadvantage of portability is they may find out very late that the portability provision will not be used by the incoming sponsor as the lender has provided a free option to the incoming buyer.

5. Can you tell me about the sponsor whitelist in a portability provision?

When portability is put in place, the lender will typically negotiate a whitelist of buyers to whom they would be happy to port the debt. This whitelist will depend on the relationship between lender and various sponsors.

6. Does this make the seller’s job very restrictive?

Not really. In practice, that whitelist will often be amended in the sale process to accommodate the incoming sponsor.

7. What happens if a deal doesn’t contain a portability provision, but both lender and sponsor would like to continue the debt?

In reality, portability always exists as an option. If all parties want it, they can choose to port or at least amend the existing financing structure. But the balance of power is different.

8. In what kind of scenario does portability work best?

I’d say when the incoming buyer wants to continue with the same strategy as the outgoing sponsor. If in the next 6-12 months it will be business as usual, then why not port the current debt package, especially as the refinancing option is always there for the future.