Investors are growing more wary of lending to technology companies, fearing that the bout of volatility sparked by the global banking crisis could exacerbate stress in an industry already saturated with lower-rated debt.
(Bloomberg) — Investors are growing more wary of lending to technology companies, fearing that the bout of volatility sparked by the global banking crisis could exacerbate stress in an industry already saturated with lower-rated debt.
The collapse and hurried takeover of Silicon Valley Bank, a key lender to tech companies, alongside the failures of other regional US lenders and Switzerland’s Credit Suisse Group AG, may now force tech companies to pay more for their loans. Investors are asking for better safeguards, while some lenders are demanding that corporations pay down some of their debt, or are pushing private equity backers to inject more equity into companies, according to people with knowledge of the matter.
Jefferies Financial Group Inc., for example, held investor meetings to extend KKR & Co.-backed Optiv Security Inc.’s upcoming debt maturities, Bloomberg reported. Discussions have paused given recent volatility, according to the people, who asked not to be identified because the matter is private. Representatives for Jefferies and KKR declined to comment.
Some new loan sales, as well as transactions designed to extend the due dates on existing debt, have also been pushed to the sidelines. A bank group led by Goldman Sachs Group Inc. had been trying to sell a $750 million loan backing the buyout of technology services company BetaNXT Inc. for months, Bloomberg reported.
Clearlake Capital Group and Motive Partners, which bought the assets of BETA+ from the London Stock Exchange Group last July and rebranded it BetaNXT, declined to comment, while representatives for BETA+ and Goldman Sachs didn’t immediately respond to requests for comment.
For the technology companies that had turned to SVB for everything from funding their warchests to holding their executives’ personal mortgages, the bank’s demise is an especially hard-hitting blow.
“The loss of SVB as the lowest cost-of-capital provider is a big shock to the system,” said Ivan Zinn, founding partner and chief investment officer of Atalaya Capital Management. “Financing cost is going to increase for everyone, and capital availability will shrink because people are worried about their existing positions.”
Larger banks in particular have less appetite for leading sales now as they’re already chock-full of hung debt from high-profile deals like Twitter Inc. and Citrix Systems Inc.. Underwriters plan to begin offloading around $4 billion of junior debt tied to Citrix as soon as this week, after lenders were stuck holding it for months, Bloomberg reported Monday.
Tech companies that were already being pressed to boost liquidity or tackle near-term debt are likely to bear the brunt of the fallout. The Federal Reserve’s decision to hike interest rates by 25 basis points Wednesday, with more hikes likely on the way, increases interest burdens and further constrains credit supply for tech companies expecting slower earnings growth.
Concerns from the biggest buyers of leveraged loans — collateralized loan obligation managers — could prompt more investors to exit their stakes and drag down prices even more. Technology-related leveraged loans made up a sizable 25% chunk of all leveraged loan deals in 2022, up from nearly 19% the previous year, according to data compiled by Bloomberg. That figure is around 18% so far in 2023.
On top of that, a significant chunk of tech debt is rated at B-, making some CLO managers wary about the threat of downgrades to the CCC tier, the riskiest level that commonly trades in the market.
Meanwhile in Europe, the shotgun marriage of Credit Suisse to UBS Group AG has forced some private equity owners and their portfolio companies to evaluate exposure to the 166-year-old institution through revolver lines and letters of credit. They’re now seeking advice on how to protect their cash funds, said people with knowledge of the matter.
“You’ll see changing investor behavior when it comes to performing due diligence,” said Nick Tsafos, a partner at EisnerAmper who is advising venture capital firms. “Risk management is going to enter a new phase, where related party relationships will be scrutinized.”
As regional banks like SVB pull back from lending, private credit firms may jump in. They often charge more for financing, but closing loans with them can also be faster for borrowers.
“With the amount of uncertainty created from the SVB fallout, deals that rely on bank financing will face an extended timeline of three to six months or more to close, creating an opportunity for flexible private credit firms to step in for banks,” said Jeffrey Stevenson, managing partner of New York-based private investment firm VSS Capital Partners.
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