Portability has been a rarely spotted beast in the European leveraged loan market for over eight years. However, the alarming frequency of its appearance in term sheets reviewed by us in Q1 2025 indicates that it may be set to make an unwelcome comeback.

Portability 101

A portability mechanism allows a borrower group to preserve its existing financing package notwithstanding the occurrence of a de facto change in its ownership, which would otherwise have resulted in a change of control under its financing documentation and triggered a right for each individual lender (typically) to decide whether it wished to be repaid in full.

This feature is most likely to be proffered by sponsors when the M&A market offers them limited opportunities for a commercially viable exit, or when raising new debt financing is likely to be challenging for prospective buyers. Sponsors also often justify the presence of this right in a loan on the basis that they are merely seeking to align its terms with those of a co-existent bond.

Loan portability is understandably unpalatable to lenders, as they expect to be compensated for any restriction on their ability to exit a financing deal upon a sale, not to mention “know your customer” and other regulatory concerns, absent a compelling commercial rationale.

Consequently, portability has generally been rare and statistically insignificant in the European leveraged loan market over the last decade or so, with notable exceptions in 2014 and 2017 (post-Brexit), as illustrated by the graph below. (1)(2)(3)(4)

This is in stark contrast to what we have observed in loan deals reviewed in Q1 2025, (5) with over 13% (6) of the syndication term sheets reviewed containing this feature.

Unlike the leveraged loans market, portability is very much a staple of the European bond market (in contrast to the U.S. high yield bond market, where it is rarely observed), and we have covered this extensively in numerous Special Reports and annual high yield bond reviews. (7)

To be clear, the most prevalent form of “portability” in European high yield bonds is a somewhat different animal from that appearing in European syndicated leveraged loans. We refer to it as “leverage-based portability,” as it tends to have only one trigger or criterion: leverage.

Often termed a “Specified Change of Control Event,” it deprives bondholders of their 101% put option on a de facto change of ownership upon compliance with a leverage test, which is almost invariably a net leverage test.

In 2024, 60% of the high yield bond issuances we reviewed contained a form of portability. Seventeen percent of that cohort contained portability based on a ratings decline, with the balance (83% of portable high yield bonds) being based on a leverage test.

The Acid Test(s) for Portability

Any portability feature in a loan transaction should be subject to certain key criteria to ensure that lenders are adequately protected on its eventual use:

• Leverage Test: The loan should only be portable if a total leverage test (net or gross) is met and is set at a level that would require some meaningful deleveraging from opening leverage. Conversely, the test is frequently set at or above opening leverage.

• One-Time Use: The feature should be usable only once during the life of the SFA facilities.  In our experience, this condition is customarily included in almost all loan transactions with portability.

• Use Within a Specified Timeframe: The permitted change of control event should occur within a specified time period following closing. A period of 18 to 24 months is customary. Anything longer should be challenged.

Sponsors routinely seek to maximize their flexibility on this test, with the condition being tested at the time a deal is committed rather than at completion.

• Eligibility of Buyer: The new owner must be on a pre-approved list. In our experience, this may be generic (i.e., criteria that the buyer should be an industry buyer or a private equity buyer in the same or a related business with AUM of at least $1 to $2 billion) or a specific list with named entities.
• Minimum Equity: The buyer should make adequate equity contributions to meet a minimum equity-to-enterprise-value test. Typically, where present, we have observed this minimum equity test being in the range of 30% to 40%.
• Default Blocker: The use of the right should be subject to no continuing Event of Default, ideally both at the time the deal is committed and when it completes. Lenders achieve variable success with this condition, with aggressive sponsors insisting on a looser material Event of Default test (i.e., non-payment and insolvency Events of Default only).
• Satisfactory KYC: Each lender should be satisfied with its KYC checks on the buyer before the loan is “ported.” The mere provision of KYC information is not enough, and any suggestion that the KYC requirement can be waived with majority lender consent should be resisted.

Lenders should also be wary of any covenants and permissions in the SFA that allow “round-tripping,” i.e., new equity or subordinated debt being injected to reduce leverage immediately prior to the sale, which can be paid out again shortly after the sale. (8)

It is worth noting that the robustness and scope of the conditions proposed are invariably dictated by whether market conditions are in favor of the buyer, seller, or investor/lender.

Conclusion

While it is possible that the portability feature we’ve spotted in a number of term sheets year-to-date was negotiated out of the final documentation in one or more of these deals following lender pushback, its very presence at the term sheet stage is noteworthy and a sign of the direction in which sponsors are looking to take the market.

Even if lenders are amenable to the inclusion of portability in a loan transaction, it is critical that the scope of the provision agreed remains well delineated and that its use is subject to the various conditions we have highlighted in this Special Report.