Tech’s Financial Crisis Causes Creditors to Become “violent” Among Themselves

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(Bloomberg) — The Magnificent Seven’s inexorable rise makes it easy to forget that many tech companies are unprofitable and struggling with debt. Now creditors in this area are turning against each other for repayment.

Alvaria Inc., GoTo Group Inc. and Rackspace Technology Inc. are among a number of troubled technology companies this year agreeing to restructuring deals that offer select lenders better debt conversion terms than others, a process sometimes referred to as a Type of “creditor” is considered – violence against creditors.’

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This is part of a broader trend of highly indebted companies looking to manage their liabilities by taking advantage of relatively loose agreements with debt investors – called covenants – that can allow them to move assets beyond the reach of creditors. Typically, companies threaten to do so because higher borrowing costs combined with excessive leverage have left some balance sheets unable to be refinanced, said Jason Mudrick, founder of distressed debt investor Mudrick Capital.

“These two phenomena, coupled with the covenant-lite nature of today’s leveraged loans, have been the primary causes of the intercreditor violence we are seeing,” he said.

Read more: Hedge funds get hit first or get hurt in heated arguments

Software and services companies are in the spotlight after issuing nearly $30 billion in distressed debt, the most of any industry except real estate, according to data compiled by Bloomberg. The latest industry controversy centers on CVC Capital Partners-backed ConvergeOne after the cloud computing provider filed for Chapter 11 protection.

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Lenders, including Silver Point Capital and CVC itself, have reached an agreement with the company that would reduce its debt pile by more than 80% and allow it to secure new financing. Asset managers left out of the deal complained and hired a lawyer to explore their options.

Representatives for Silver Point, CVC and ConvergeOne did not respond to requests for comment.

J. Crew Development

Creditor-creditor violence has escalated since 2016, when troubled retailer J. Crew famously transferred its brand and other intellectual property to a so-called unrestricted subsidiary and borrowed $300 million from it. Lenders who left the old loan behind suffered a decline in value.

An increasingly popular maneuver these days, known as non-pro rata uptiering, involves companies striking a deal with a small group of creditors who provide new money to the borrower and push others further down the repayment chain. In return, they often participate in a bond swap where they receive a better swap price than other creditors.

The high number of liability management transactions recently shows that the deals can attract broad creditor support as long as the spread between the two groups is appropriate, said Scott Greenberg, global chairman of the corporate restructuring and reorganization group at law firm Gibson Dunn & Crutcher.

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Click here to listen to a podcast about the growing threat of high interest rates to junk loans

Nevertheless, some market participants wonder whether the stock exchanges actually succeed in protecting companies from bankruptcy. The percentage of companies that defaulted on their debt more than once reached its second highest level since 2008 last year, according to a report from S&P Global Ratings this week.

“Issuers with prior defaults are more vulnerable to risk during times of tougher macroeconomic and tighter financing conditions,” said Nicole Serino, director of credit research and insights at the ratings firm, who offered general remarks.

Weekly review

• The largest Wall Street banks, lured by tight bond spreads and strong investor demand, are likely to borrow unusually large amounts in April following the release of first-quarter results.
• Banks have been quick to appease holders of their riskiest debt pools, helping make additional Tier 1 bonds one of the hottest deals in the global credit market right now.
• If history is any guide, U.S. investment-grade corporate bonds could remain at current low valuations for months to come.
• After five straight years of losses, billionaire Hiroshi Mikitani’s Rakuten Group Inc. is trying to recover from a shift to mobile devices that cost it billions of dollars. This turns out to be expensive.
• S&P Global Ratings downgraded China Vanke Co. to junk, underscoring increasing pressure on the state-backed developer as it faces a cash crunch and increased scrutiny from investors.
• Credit traders at Barclays Plc and HSBC Holdings Plc are among those creating a market for customers to bet against Thames Water’s debt amid the escalating crisis at Britain’s biggest water utility.
• Todd Boehly’s Eldridge Industries is among the final bidders in talks to acquire European private lender Hayfin Capital Management.
• Goldman Sachs Group Inc. said telecom companies are increasing their investment in fiber-optic securitization, expected to raise more than $5 billion this year.
• British asset manager Schroders Plc is one of the largest buyers of subordinated bank debt. And now, in an unusual twist, there are plans to sell the debt too.
• Dish Network Corp. has received financing offers from private lending companies.
• Silver Lake Management has provided up to $8.5 billion in debt financing to acquire Endeavor Group Holdings Inc.
• A subsidiary of Vistra Corp. sold a total of $1.5 billion in bonds on Tuesday in the high-yield and investment-grade bond markets to refinance debt.
• Diamondback Energy Inc. borrowed $5.5 billion in the U.S. investment-grade market to partially finance its $26 billion acquisition of Endeavor Energy Resources LP.

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On the way

• Barings laid out a plan to rebuild its direct lending team after one of the biggest asset management raids in years.
• Wells Fargo & Co. hired New York-based Alexandra Barth, co-head of leveraged finance at Deutsche Bank AG.
• Morgan Stanley recruited Charlie Towers, most recently head of leveraged loan sales and trading at RBC Capital Markets.
• Citgroup Inc. has named Uday Malhotra as head of the company’s EMEA leveraged finance and credit division, as part of a lengthy restructuring to streamline operations.
• Bank of America Corp. hired Matt Fink of Citigroup Inc. to lead loan sales in the Americas.
• Adam Howard plans to become country head of Bank of America Corp. after 13 years at the bank. to retire in Canada.
• Shane Azzara will lead asset-based and transition finance at Citigroup Inc., succeeding Shapleigh Smith, who is retiring next month.
• Oliver Sedgwick, former head of EMEA investment grade capital markets at Goldman Sachs Group Inc., has started a new role as portfolio manager at Asva Investment Partners LLP.
• Jackie Ineke has joined Swiss boutique Spring Investments as Chief Investment Officer.
• Banco Santander SA has hired three dealmakers from Wall Street rivals as it continues to expand its U.S. investment bank.

– With assistance from Jill R. Shah, Claire Boston and Dan Wilchins.

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