Portability has become a standard feature in European high yield deals, allowing the company to be sold without a 101% put offer requirement if a leverage ratio can be met. In this ELFA Covenant Tip, we explain how the use of net leverage ratios present “round-tripping” risks, what’s been done to address this, and how to find the risk.
Round-tripping risk exists when a net leverage ratio is used for portability because the sponsors can inject cash to meet the portability ratio, and following closing extract the cash back out using Restricted Payments capacity.
Because cash contributions build capacity under the build-up basket and excluded contributions basket, protection against “round-tripping” is present in the “Excluded Amounts” concept, which prevents this cash from building capacity under these baskets.
While this is an essential protection to check for, it is not a perfect solution, however, because the sponsor can always use other available Restricted Payments capacity (whether under the build-up basket or other available baskets) to pull the cash back out.
Investors can find this provision by using ctrl+F to find “Excluded Amounts” in the Restricted Payments covenant (it is generally at the end of the provision on the build-up basket and prior to the Restricted Payments carveouts).
BONUS POINT: Even portability based on gross leverage can present round tripping risk, as the newly injected cash could allow the issuer to temporarily repay debt (reducing the leverage ratio) and subsequently re-borrow such amounts under an existing (revolving) credit facility.
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