Speaking the Language of Portability: How Portability Clauses Help Indebted Companies Conclude M&A Transactions – Corporate / Commercial Law


Canada: Speaking the Language of Portability: How Portability Covenants Help Indebted Companies Conclude M&A Transactions

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There is no doubt that the Covid-19 pandemic has resulted in unprecedented social and economic ramifications, including a decrease in M&A activity in Canada. The pandemic has also brought about changes in the way agreements are drafted in light of what has become our new standard. Earlier, we reported that the pandemic has led to an increased focus on earn-out clauses in existing and new M&A transactions. A a recent trend has also emerged in loan transactions, where lenders agree to include portability language in loan documents, which can remove a barrier for private equity groups looking to engage in merger and merger activity. acquisition.

Credit agreements generally include change of control provisions that trigger an event of default when the borrower is sold or acquired by a third party. Lenders typically require those provisions that require the borrower to repay the existing loan, and if the existing lender wishes to continue providing credit, they have the flexibility to reassess the risks associated with a change in ownership and make any necessary adjustments. to credit agreements. While the change of control provisions offer protection to existing lenders, they can also make M&A more difficult, as the borrower will have to enter into new financing arrangements either by refinancing their current loan with a existing lender, or by finding new lenders and paying off existing loans. Recently, more and more lenders have agreed to include a portability clause in loan agreements which allows the borrower to be sold without refinancing or repayment and the existing loan is transferred to the buyer on the same terms. and conditions only with the current borrower. As businesses rack up more debt due to the economic downturn linked to Covid, portability clauses in loan agreements can make it easier for the company to engage in merger and acquisition transactions. . The portability clause is also an attractive option for buyers, who would otherwise be required to enter into new financing agreements.

While lenders who agree to include the language of portability risk having the borrower’s outstanding loans taken over by a third party whose management of the borrower could negatively affect its creditworthiness, lenders may be able to protect against such risks by ensuring that the portability of existing loans is available to buyers who have been deemed appropriate by the lender. This would require careful drafting on the part of the lenders to ensure that the carry criteria were clearly defined in the loan agreement. In a merger and acquisition transaction, it may also mean that the borrower may be required to ensure that the lender has given their consent to the transaction to ensure that there will be no problem with the transaction. debt carry at closing. While this trend may be encouraging for some borrowers who wish to discuss the possibility of including portability clauses in loan agreements with their creditors, the inclusion of such clauses will depend on the circumstances of the borrower and the loan agreement.

The author would like to thank Moosa Syed, Intern, for his contribution to this legal update.


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