There is no doubt that the Covid-19 pandemic has resulted in unprecedented social and economic ramifications, including a decline in M&A activity in Canada. The pandemic has also brought in changes to the way agreements are being drafted in light of what has become our new normal. Earlier, we reported that the pandemic has led to an increased focus on earn-out provisions in both existing and new M&A deals. A recent trend also emerged in lending transactions, where lenders are agreeing to include portability language in loan documents, which may remove an obstacle for private equity groups that are looking to engage in M&A activity.
Credit agreements typically include change of control provisions that trigger an event of default upon the sale or acquisition of the borrower by a third party. Lenders typically require these provisions which require the borrower to pay out the existing loan and, if the existing lender wants to continue providing credit, they get a chance to reassess the risks associated with a change in ownership and make necessary adjustment to the credit arrangements. While change of control provisions offer protection to existing lenders, they can also make M&A transactions more difficult since the borrower will need to make new financing arrangements either by refinancing its current loan with existing lender or finding new lenders and paying off existing loans. Recently, 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 purchaser on the same terms and conditions as with the current borrower. As companies amass more debt due to Covid related economic downturn, portability clauses in loan agreements can make it easier for the company to engage in M&A transactions. The portability clause is also an attractive option for buyers, who would otherwise be required to enter into new financing arrangements.
While lenders who agree to include portability language risk having the borrower’s outstanding loans assumed by a third party whose management of the borrower could negatively affect its creditworthiness, lenders may be able to protect themselves from such risks by ensuring that portability of existing loans will only be available to those buyers that have been deemed suitable by the lender. This would require careful drafting on the part of the lenders to make sure that porting criteria have been clearly outlined in the loan agreement. In an M&A transaction, it may also mean that the borrower may be expected to ensure that the lender has provided consent to the transaction to ensure there will be no issue with debt porting at on closing. While this trend may be encouraging for some borrowers who may wish to discuss possibility of including portability clauses in loan arrangements with their creditors, inclusion of such clauses will depend on the circumstances of the borrower and the loan arrangement.
The author would like to thank Moosa Syed, Articling Student, for his contribution to this legal update.
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