Read on Twitter
*NERDY #HighYield COVENANT THREAD* 
1/ Portability began as one-off deal-specific term. No 101 put option for investors because everyone knew the biz would be sold in near term. But like all covenant erosion what starts as a deal-specific ask becomes a market standard.
1/ Portability began as one-off deal-specific term. No 101 put option for investors because everyone knew the biz would be sold in near term. But like all covenant erosion what starts as a deal-specific ask becomes a market standard.
2/ It goes something like this.
A) Deal-specific ask for a good credit, tightly constrained
B) Sneaks into a second deal for a good credit
C) Becomes a standard in all good credit deals
D) Becomes a standard in all deals
E) Return to A with a new variant with more flexibility
A) Deal-specific ask for a good credit, tightly constrained
B) Sneaks into a second deal for a good credit
C) Becomes a standard in all good credit deals
D) Becomes a standard in all deals
E) Return to A with a new variant with more flexibility
3/ This matters because the original logical reason for a covenant disappears. Take portability. Investors want a 101 put because they are signing off on a sponsor's biz plan & financial profile for a deal during the bond's life.
4/ New management = new plans, potentially more leverage, M&A etc, investors want option to get money back and re-evaluate the credit profile under the new owner
5/ The 101 Change of Control is a put option. So it isn't always exercised, if the biz has improved thru develeraging or has a better profile after the CoC -> lower cost of debt which means bonds trade up above 101
6/ In these instances, there is no reason to take a 101 put, if you can sell in secondary market at a higher price, or keep your exposure to a good credit
7/ The original logical argument for portability - when the business performs well and de-levers, the bonds should trade well, above 101, which means you wouldn't have taken the 101 put in a CoC anyway. So portability with leverage step down gets you to the same place
8/ This leverage based step down is now disappearing. Portability triggers are increasingly set at opening leverage. IMA attempted to go further in this deal by allowing the business to *increase* leverage while still retaining portability optionality for a selling sponsor.
9/ And, this is a business which is a fresh LBO, just been acquired, not something which is foreseen as being sold imminently. Other portability limitations such as 'one-time use', and multiple leverage step downs based on 12, 18, 24 months post-deal are also disappearing.
10/ Next stop? Removal of leverage requirement for portability or change to looser trigger like FCCR > 2.0x. With that said, worth nothing that calc of leverage under portability already loose. Reported leverage is NOT the same as leverage under covenants (see HEMA)
*END*
*END*
