A one-stop shop for all your restructuring needs 

Distressed and Restructuring

Benchmark prior transactions, bonds, loans or company profiles using over 300 credit metrics.

Comparables

Full Financial profiles with 3 statements, KPIs, segment splits & credit metrics. All traced to source documents.

Financials

AI transcripts & instant analysis, making earnings season easier than ever.

Earnings

Say goodbye to CTRL + F with our powerful search. Thousands of documents text searchable for any keyword or phrase.

Search

A full suite of ESG data and analysis. Built for your workflow

We use AI to aggregate newsflow from 2,000 sources, and deliver it to your inbox quicker than anyone else.

News

New deal analysis & covenant comparison tools, understand key risks in seconds not days.

Covenants

We've successfully predicted more than 65 price sensitive events - before they happened.

Deal predictions

Track high yield deals from issuance through to maturity, with integrated legal, credit and ESG analysis.

High Yield Bonds

Unlock new business with the most impactful CLO market content married with elegant data analysis tools.

Structured Credit 

Shine a light on private markets with 9fin's news and legal analysis of syndicated loans

Leveraged Loans

Find information others can't see in one of the fastest growing corners of finance

Private Credit 

Oliva Mantock

Brian Dearing

In this topical report, we take a close look at the trends we’ve seen in portability terms across European High Yield since 2020.

Before we dive in to portability, let’s quickly recap what it is. Following a change of control, portability allows an issuer to avoid triggering the put right that bondholders typically have to force an issuer to buy back bonds at 101%.

If portability is included in a transaction, it is typically only available when certain conditions are met, such as meeting a minimum ratings threshold or being below a stated leverage ratio. The concept is included in bonds because following a change of control, the argument goes, bondholders ought to have the flexibility to reconsider their investment, and if they want, get their money back early. But on the flip side, sponsors and issuers may argue that if the portability conditions are met (i.e., the business is meeting some metric that indicates it is successful or at least stable), this option should not be available, and the business should be allowed to keep its current capital structure and avoid refinancing.

To read more about the change of control put right, as well as portability, check out our 9fin Educational article “Who’s in Control? A quick look at the Change of Control provision.”

Portability Trends Across European HY Bonds

Over the years we have seen the increased use of portability in European HY transactions, with it being consistently included in the majority of sponsor deals since 2016 (see chart below), in fact it has appeared in all sponsor deals so far in 2022.

The justification for leverage-based portability is that if the company is sufficiently strong (i.e., leverage is below set thresholds which act as a proxy for success or stability), there should be no reason to allow investors to exercise the put. The question is no longer whether to include portability (at least in sponsor deals), but what the appropriate threshold is for it to be available.

In the early days of portability, the leverage ratio was often set below opening net leverage, meaning the issuer had to de-lever (at least a bit) before portability was available. Nowadays, it’s common to see portability available at issuance, with 48% of sponsored deals since the beginning of 2020 having portability available day one, and 18% only requiring minimal de-levering to access it (i.e., up to a quarter turn of EBITDA). But still, as the chart below shows, 19% of sponsored deals still had to de-lever more than 0.75x EBITDA before accessing portability, so portability that actually requires de-leveraging isn’t completely a relic of the past ... yet. This chart also shows the ratings breakdown of deals within each leverage range. For illustrative purposes, the CCCs and BBs are each presented on a combined basis, while the single Bs are broken down further.

Source: 9fin.com. The above data is available for reference in our “Covenant Capacity” tool. Years covered: FY 2020, FY 2021, 2022 YTD.

Breaking this down further on a year-by-year basis, we see that over 2020 and 2021, the market standard for the availability of portability has stayed relatively stable, with most deals clustering around or slightly above opening leverage.

Source: 9fin.com. Note that 2022 was excluded because there have only been 9 sponsored deals with portability of the date of publication.

Across 2020, 2021 and YTD 2022, only 11 deals had portability set at 0.5x EBITDA or more above opening leverage — as displayed in the following graph (note that three of the 11 deals were United Group, but the chart below only shows the most recent deal (January 2022)).

The deal with the most portability headroom is BUT SA, with portability set 1.7x EBITDA above opening net leverage, perhaps unsurprising given the company’s low opening net leverage of 2.3x. Coming in second and third, United Group and Cerved had 1.3x and 1.15x of portability headroom, respectively. Unlike BUT, both deals had relatively high opening leverage ratios, at 4.7x and 4.6x.

Portability step-downs: less in vogue but still around

When leverage-based portability first appeared, it was common to see step-down conditions attached, meaning that in order to access, the company was expected to de-leverage over time. While step-downs are becoming less common as time passes, it’s still a feature we saw throughout 2020 and 2021.

However, none of the portable deals we’ve seen so far in 2022 had step-downs. In addition, we have seen deals with step-ups (i.e., the leverage at which portability is available increases over time). Apollo-sponsored plastics firm Kem One offers one example.

Our Covenant Capacity screener is a great way to keep track of which deals have step-downs over time, but the big picture for now is that approximately 15% of sponsored and portable deals in 2020 had step-downs against approximately 11% in 2021.

Once, twice or thrice: single-use or multiple-use portability?

Generally, portability clauses contain “one-time only” wording that limits the feature to a single use over the lifetime of the bonds. This is a restriction on portability that protects bondholders since it avoids the issuer changing hands multiple times over the lifetime of the bond (even if that situation is unlikely). The share of portable deals with multiple use was fairly stable throughout 2020, 2021 and 2022 YTD, as the chart below shows.

Source: 9fin.com. The above data is available for reference in our “Covenant Capacity” tool.

All deals since 2020 with multiple use portability were sponsored deals:

2020: Empark (Macquarie), Synlab (Cinven), Lowell GFKL (Permira / Ontario Teachers' Pension Plan), IMA (BC Partners), Merlin Entertainments (Blackstone, CPPIB, KKB).


2021: Ahlstrom-Munksjö (Bain Capital / Ahlstrom Invest B.V. / Viknum AB), Cedacri (ION), Nobian (Carlyle / GIC), Modulaire Group (TDR Capital), Keepmoat (Aermont).


2022 YTD: Cerved (ION), Ceramtec (CPPIB / BC Partners).

Leverage-based portability risks: a closer look at how leverage is calculated

Gross v. net calculations and round-tripping

Given leverage-based portability is (as the name implies) contingent on the issuer meeting a certain leverage ratio, it is important for bondholders to pay close attention to how this leverage figure is calculated. Most deals will use net, rather than gross leverage ratios for covenant purposes. Net leverage deducts cash and cash equivalents from debt, since any cash could theoretically be used to pay down debt anyway.

Practically, that creates a risk of ‘round-tripping’: the issuer could inject cash without paying down debt to temporarily reduce the net leverage ratio. That temporary reduction in net leverage can then be used to access portability before sending the cash back to the sponsors/owners as a restricted payment (this is also a bit worrisome when connected with the fact that there is significant flexibility in the timing of when the issuer calculates leverage for purposes of accessing portability).

The chart below illustrates how round-tripping works:

Usually, the covenants will include some form of round-tripping protection, for example, by resetting the builder-basket upon a change of control (note this doesn’t protect against other Restricted Payments), or by utilising the “Excluded Amounts” concept, which blocks round-tripping by preventing cash injected for the purpose of avoiding a Change of Control from being distributed back out via the builder-basket or contribution RP basket.

But round-tripping protection can be deficient (and often is), for example, in Kem One, Worldwide Flight Services, Zenith Leasedrive (and others) where the “Excluded Amounts” concept, only applies to the builder basket. This means that any amounts contributed to achieve portability don’t build the RP builder basket, but they could be designated as “Excluded Contributions” simultaneously, and then the issuer could simply utilise the separate RP basket that allows for the distribution of all Excluded Contributions. Deals protect against this, for example, by including a line in the definition of “Excluded Contributions” that excludes from the calculation all “Excluded Amounts”.

Excluding key baskets from the leverage ratio

Another interesting development occurred in Modulaire Group’s covenants where the leverage calculations exclude most debt outstanding under the Debt covenant (other than for purposes of calculating Restricted Payments capacity). So far, we haven’t seen these expansive exclusions make it past marketing in any other deals in the bond universe (for example, Multiversity had similar drafting which was removed during marketing). But we have seen similar flexibility in at least one loan in 2022. This type of flexible drafting creates a serious discrepancy between the financial leverage ratios and the covenant leverage ratios, meaning the issuer could access portability when the financial leverage ratios are well-above the portability threshold (which would be calculated utilising covenant leverage).

The Modulaire Group drafting has implications beyond the portability feature as well, which we noted in our Q3 2021 Covenant Trends report.

What’s going on across the pond - is it “no worse”?

One final point to discuss in the portability realm, is the rise of “no worse” portability — which has been seen in two recent US deals, Medline Industries (Sept. 2021) and Athenaheath (Jan. 2022).

No worse portability means that portability is always accessible to the issuer no matter how leveraged they are so long as the change of control does not increase (or “worsen”) their leverage ratio. The portability feature is drafted such that it is not considered a Change of Control if the leverage ratio, on a pro forma basis, is “not greater than” the leverage ratio “immediately prior” to the Change of Control.

This is notable because what happens across the pond tends to be imported to European HY eventually, so this is a trend we’ll be keeping an eye on here at 9fin. It may be worth saving the “no worse” search link to our Description of the Notes search tool so that you can keep an eye on whether new deals have this feature.

If you have enjoyed our summary of portability trends, you may be interested in more of our covenant analysis. 9fin has recently launched 9fin Educational - a series of articles which shine a light on specific topics in the leveraged finance market. 

Down and Dirty with the “Available Amount"

Asset Sale - or is it?



Portability Trends in European HY

9fin team

Cat Corey joins 9fin’s US distressed team

Ryan Daniel

European LevFin Wrap — Carnival lands as party resumes, MasOrange sweet execution

Joe Lomas

European Private Credit Q1 2024 Review

Video interview — Alan Schrager, Oak Hill Advisors — Private credit’s hopes and fears

Turbocharge your trading desk P&L, with the market's fastest news alerts.

Sales & Trading

Save time, react faster to news, outperform your peers.

Asset Managers & Hedge funds

Save time, pitch more efficiently, and win business.

Investment Banks

Spot novel covenants, save time drafting and win business.

Portability Trends in European HY

Read all our public content for free

Recently Published

Cat Corey joins 9fin’s US distressed team

European LevFin Wrap — Carnival lands as party resumes, MasOrange sweet execution

European Private Credit Q1 2024 Review

Video interview — Alan Schrager, Oak Hill Advisors — Private credit’s hopes and fears

What are you waiting for?

Cookies & Privacy