Tech’s cash crunch sees creditors turn ‘violent’ with one another

THE relentless rise of the Magnificent Seven makes it easy to forget that many tech firms are unprofitable and struggling with their debt burdens. Now, creditors in the space are turning against one another in a bid to get repaid.

Alvaria, GoTo Group and Rackspace Technology are among a spate of troubled tech companies set to agree to restructuring deals this year, providing select lenders with better terms on debt swaps than others, in a process sometimes deemed a form of “creditor-on-creditor violence”.

It is part of a wider trend of heavily indebted corporates looking to manage their liabilities by taking advantage of relatively loose agreements with debt investors – known as covenants – that can allow them to move assets out of the reach of creditors.

Typically, firms threaten to do so because higher borrowing costs combined with excessive leverage have left some with balance sheets that are impossible to refinance, said Jason Mudrick, founder of distressed credit investor Mudrick Capital.  

“These two phenomena, coupled with the covenant-lite nature of leveraged loans today, have been the primary drivers of the creditor-on-creditor violence we’re seeing,” he said.

Software and services companies are in the spotlight after issuing almost US$30 billion of debt that is classed as distressed, according to data compiled by Bloomberg, the most in any industry apart from real estate.

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The latest spat in the sector centres on CVC Capital Partners-backed ConvergeOne, after the cloud computing provider filed for Chapter 11 protection. 

Lenders, including Silver Point Capital and CVC itself, reached an agreement with the company that would cut its debt pile by more than 80 per cent and allow it to secure new financing. Money managers left out of the deal cried foul and hired counsel to explore their options. 

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

J Crew evolution

Creditor-on-creditor violence has evolved since 2016, when struggling retailer J Crew famously shifted its brand and other intellectual property into a so-called unrestricted subsidiary and borrowed US$300 million against it. Lenders left with the old loan saw its value plunge.

In one increasingly popular manoeuvre these days, known as non-pro rata uptiering, companies cut a deal with a small group of creditors who provide new money to the borrower, pushing others further back in the line to be repaid. In return, they often partake in a bond exchange in which they receive a better swap price than other creditors. 

The high number of liability management transactions recently shows that the deals can get widespread creditor support, as long as the spread between the two groups is reasonable, said Scott Greenberg, the global chairman at law firm Gibson Dunn & Crutcher’s business restructuring and reorganisation group. 

Still, some market participants question whether the exchanges actually succeed in allowing companies to avoid bankruptcy. The percentage of companies that have 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.

“Issuers with previous defaults are susceptible to more in times of harder macroeconomic and tighter financing conditions,” said Nicole Serino, director of credit research and insights at the ratings company, who was speaking generally. BLOOMBERG