Portable refis pave way for smoother sponsor exits in rocky market

Portability helps pave the way for smooth exits in a bumpy market hampered by rising interest rates, muted leverage, and yawning valuation gaps. This increasingly common ploy by sellers, bolsters buyer confidence by ensuring debt is transferable to the next leveraged buyout – sparing suitors from scrambling to secure financing mid-process.

”If you’re trying to affect a transaction and you know the debt package has already been secured, this is a much easier way to approach any M&A discussion than when a transaction is contingent on external financing,” said one investment banker.

One of the latest examples of a buyout shop seeking to ease the burden on bidders in anticipation of an exit is Partners Group, which is on the cusp of securing more than GBP 1bn of portable financing for Civica. Amid ongoing fireside chats, the oven-ready private debt package is being touted to sponsors, whetting appetites for the UK-based software provider ahead of a sale slated to launch in 3Q23.

The concept of portability is not new, but the increasing prevalence of the clause in legal documentation underpinning direct lending deals is. Over the past 12 months, at least five private equity-owned companies have been refinanced by portable direct loans in advance of being sold, according to Debtwire reporting.

Issuer	Deal Description
Azets	Hg refinanced the UK-based business services provider with a portable debt facility before selling down a stake in the company to PAI Partners
Acuity Knowledge Partners	In February, Acuity's new owner Permira ported hundreds of millions of dollars of debt provided by Apollo Global Management to finance its leveraged buyout of the UK-based research provider
Civica	Sponsor-owner Partners Group in process of securing more than GBP 1bn of portable debt ahead of an auction it is slated to launch in 3Q23 via Arma Partners
Enva	In April, I Squared Capital acquired the business using a portable debt package put in place via a refinancing led by the UK-based waste-management services provider's former sponsor-owner, Exponent
Moneycorp	Incumbent direct lender Apollo Global Management refinanced the UK-based payments provider with a GBP 125m portable debt package ahead of a planned sale by Bridgepoint, which Goldman Sachs and Perella Weinberg Partners have been mandated to oversee

Don’t abort, just port
Proponents of portability argue that the feature can bolster auction processes that would otherwise be at risk of collapse amid volatile market conditions. In the case of auctions that faltered or failed during the heady times of the bull market, portability could prove crucial in getting these transactions over the line during a downturn.

“For a broken deal in particular, I see it as a necessity to have portability to ease a subsequent transaction,” said a European debt advisor.

Portability adds an extra layer of comfort by eliminating the need for private equity suitors to raise fresh debt when leveraged finance markets remain constricted. Portable private debt packages do not require refinancing under a change of ownership, providing that the pre-determined leverage ceiling is not breached at the time of a transaction. Civica, for instance, is expected to carry opening leverage of 5x–5.5x, with portability permitted up to 6.25x. Portability comes at a price for vendors, however, as they incur refinancing costs instead of passing them onto buyers.

While portability is rising in popularity among sponsors seeking the path of least resistance to an exit, debt financing is not a one-size-fits-all solution.

“In the mid-market, we find that buyers will more often than not decline to port debt,” said another European investment banker, adding: “But in the large-cap space, it makes sense, because that market is not fully functional right now,” referring to roadblocks that remain in the syndicated sphere.

Another M&A advisor at a bulge-bracket bank concurs. “We are seeing it more, but it’s not like this is something that comes up every time we win a sellside mandate. Plus, the buyer might choose to put in place a very different capital structure to the one crafted by the seller.”

Market PIKs
While portability supports deals such as Civica, elsewhere in Europe other buyouts and refinancings have taken place or are heating up.

In the UK, Key Retirement Group’s private equity backer Partners Group is seeking to refinance the company’s bank-supplied debt with private credit facilities. It secured a GBP 80m term loan B, which matures in 2H24, to reduce its equity commitment. Credit Suisse underwrote it initially and then brought in BlackRock, Hermes Investment Management and NatWest Group, forming a four-strong bank club.

A lender education for Caledonia-owned 7IM was hosted recently by debt advisor Tatsu Partners, as bidders gear up to table non-binding offers for the UK-based fund manager. Sellside advisor Evercore is marketing the asset off FY23 EBITDA of around GBP 22m while targeting a reported GBP 400m valuation – indicating a minimum multiple expectation of 18x.

New to the pipeline is Montagu Private Equity’s Open GI, with a sale launched for the insurance-software specialist in an auction guided by Bank of America and Arma Partners. Open GI generates core earnings in the region of GBP 30m and could be valued at around 12x.

In France, GTCR is among sponsors shortlisted in the second round of bidding for Once For All, as direct lenders are offering up to GBP 270m of financing to back a leveraged buyout. Private credit providers tabled leverage indications of 5x–6x based off structuring EBITDA of around GBP 45m following a lender education for the Paris-headquartered software provider.

In the Netherlands, Hayfin and Capital Four have provided more than EUR 100m of private debt to GoodLife Foods to support its leveraged buyout by IK Partners. Based off structuring EBITDA of at least EUR 25m, the senior facility carries opening leverage of roughly 4.5x, with pricing of 625bps–650bps over the European base rate.

The sale of Dutch engineering equipment wholesaler Eriks has entered the second round with KKR & Co. and CVC Capital Partners keen on placing bids for the SHV Holdings-backed company. SHV announced in March that it intended to divest Eriks with BNP Paribas subsequently hired to manage the process for the company with around EUR 1bn in sales.

In Germany, TSG Consumer-backed outdoor gear specialist Backcountry is selling Bergfreunde with JPMorgan guiding an auction process. The online retailer of outdoor clothing and equipment is expected to generate FY23 EBITDA of EUR 13m to EUR 16m, depending on adjustments.

Also new to the pipeline is VALLEY IT GROUP which has hit the market with Carlsquare managing an auction of the German IT services provider. The business, which is backed German investment company BayBG among others, is generating annual EBITDA of around EUR 9m on sales of around EUR 80m.

On the flipside, VR Equitypartner, the sponsor backing Ostertag DeTeWe, has handed the keys of the German telecommunications provider to lender Apera. Similarly, Apheon, formerly known as Ergon Capital, is set to hand the keys in the German restaurant chain Sausalitos to creditor Arcmont.

 

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• Topics
• Financing
• Investments
• Benelux
• CEE
• DACH
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• Nordics
• Southern Europe
• UK / Ireland
• Partners Group
• Permira
• Bridgepoint
• Arma Partners
• Goldman Sachs