Corporate democracy, sort of

Every time I vote, I’m amazed at how it can be both so simple and yet so powerful:

1. Submit a ballot for a person you want to have the job,
2. If that person wins, they will have that job for a specified period of time, and
3. At the end of that term, you can submit a new ballot for the same person or a new person for that job

But, what if the rules were more complicated? What if the person who won the election could unilaterally decide:

1. Whether 𝙩𝙝𝙚𝙮 wanted to keep the job, or
2. Whether they wanted to give it to 𝙨𝙤𝙢𝙚𝙤𝙣𝙚 𝙚𝙡𝙨𝙚—not their running mate, but someone random, someone not diligenced by voters, and someone who would have that job for the rest of the term

Welcome to the dystopian world of lenders with “𝗖𝗵𝗮𝗻𝗴𝗲 𝗼𝗳 𝗖𝗼𝗻𝘁𝗿𝗼𝗹 𝗣𝗼𝗿𝘁𝗮𝗯𝗶𝗹𝗶𝘁𝘆” terms in their credit deals.

In a credit transaction, the change of control event of default is designed to fulfill a fairly simple and yet powerful proposition: the borrower lenders “elected” to lend to, will have that job for the term of the loan.

However, “𝗖𝗵𝗮𝗻𝗴𝗲 𝗼𝗳 𝗖𝗼𝗻𝘁𝗿𝗼𝗹 𝗣𝗼𝗿𝘁𝗮𝗯𝗶𝗹𝗶𝘁𝘆” terms in credit deals permit borrowers to avoid an event of default upon a change of control—essentially allowing the borrower to give the job of “being a borrower” to someone else—someone random, someone potentially not diligenced by the lenders, and someone who would have the rights and obligation of the borrower for rest of the term.

Change of Control Portability terms come in various types, but more broadly in the current credit cycle, the prevalence of these terms in credit deals is increasing. In Q3 ‘24, 13% of publicly filed high yield credit agreements included change of control portability terms, as opposed to just 10% in Q3 ‘23.

Message me if you’d like access to the excel with deal data on Change of Control portability.