Renowned hedge fund manager Ray Dalio has argued that “cash is garbage” when companies keep it. But the pandemic has called his line of thinking into question. Stacks of silver are now an industry advantage. US-based buyout groups hold nearly $ 847 billion in dry powder, according to data provider Preqin. This has given them unprecedented bargaining power, as evidenced by the growing portability of buyout loans.
Private equity groups have started to insert what is known as “portability language” in the documentation. These clauses allow issuers to bypass change of control clauses. Characteristic of high yield bonds, they were previously rare in the loan market.
Traditional loans have a change of control provision that requires debt to be repaid at par when a business is sold. In the event of over-indebtedness, holders are always paid 100 cents on the dollar, perhaps more for bonds where there is a full allowance.
This explains why private equity firms struggled to find buyers for energy companies this year when oil prices plummeted. Any sale would require refinancing all that debt – which would have been next to impossible given market conditions.
By making the debt of the holding companies transferable, and therefore transferable to the new owner, private equity firms make it easier to secure a lucrative sale. This increases the risk for the lenders. The job of loan management falls to an unknown management team with a different business plan.
Portability also means less business for banks – fewer fees are involved when debts are transferred. Thus, some complaints against portability are interested.
They have a helpless ring. Regulators have been monitoring debt more closely since the financial crisis. But the extremely low interest rates made it easy for private equity to extract further concessions from lenders. Banks have already cut prices and relaxed other covenants. Laptop loans are another step in the same direction.
This trend underlines the emergence of alternative asset managers as power plants close to pre-crisis investment banks. Buyout companies are now also adept at harnessing their market power and information asymmetries to tip trading conditions in their favor.