Corporate democracy, sort of
Except the borrower can appoint their successor and ignore the electorate (you).
Every time I vote, Iโm amazed at how it can be both so simple and yet so powerful:
Submit a ballot for a person you want to have the job,
If that person wins, they will have that job for a specified period of time, and
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:
Whether ๐ฉ๐๐๐ฎ wanted to keep the job, or
Whether they wanted to give it to ๐จ๐ค๐ข๐๐ค๐ฃ๐ ๐๐ก๐จ๐โnot 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 โ๐๐ต๐ฎ๐ป๐ด๐ฒ ๐ผ๐ณ ๐๐ผ๐ป๐๐ฟ๐ผ๐น ๐ฃ๐ผ๐ฟ๐๐ฎ๐ฏ๐ถ๐น๐ถ๐๐โ 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 โelectedโ to lend to, will have that job for the term of the loan.
However, โ๐๐ต๐ฎ๐ป๐ด๐ฒ ๐ผ๐ณ ๐๐ผ๐ป๐๐ฟ๐ผ๐น ๐ฃ๐ผ๐ฟ๐๐ฎ๐ฏ๐ถ๐น๐ถ๐๐โ terms in credit deals permit borrowers to avoid an event of default upon a change of controlโessentially allowing the borrower to give the job of โbeing a borrowerโ to someone elseโsomeone 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 โ24, 13% of publicly filed high yield credit agreements included change of control portability terms, as opposed to just 10% in Q3 โ23.
Message me if youโd like access to the excel with deal data on Change of Control portability.
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