NEW YORK: Loan investors are pushing back for the first time in years, in a shift that will probably translate to higher borrowing costs for everyone from private equity firms to deeply indebted artificial intelligence (AI) companies.
At least four borrowers, including CoreWeave Inc, an AI cloud provider, and Proofpoint Inc, a cybersecurity business, had to sweeten terms to entice investors this week.
It’s a sign that money managers are becoming overwhelmed by the deluge of debt hitting debt markets as tech firms invest hundreds of billions of dollars in AI infrastructure.
Their pushback is understandable.
In the US junk bond market, companies sold nearly US$200bil of bonds this year, up about 9% from this time last year, while high-grade sales have increased by a third to US$1.3 trillion. Credit spreads have been creeping higher.
And dissenters at the Federal Reserve are becoming more vocal about the need to raise rates, with investors worrying that monetary tightening will put more pressure on heavily indebted companies even as it boosts payouts to loan buyers in the near term.
Amid this difficulty, investors are looking for more safeguards.
Thoma Bravo’s Proofpoint had to offer major concessions to complete a proposed US$5bil loan refinancing.
It changed about two dozen provisions in its offering, including giving up the right to take collateral away from investors.
Blackstone Inc-backed Ancestry.com Inc also boosted protections for buyers to sell US$2bil of leveraged loans and junk bonds.
“Creditors have greater rights at wider spreads, and that’s a beautiful thing,” said Bruce Richards, chief executive officer of Marathon Asset Management.
Guardrails like amortisation and covenant controls are something that “you haven’t seen in a very long time”.
For years, companies have had the upper hand when borrowing in the almost US$1.5 trillion leveraged loan market.
With investors hungry for floating rate paper, private equity firms, which often use loans to help fund buyouts, have heaped ever larger piles of debt onto those companies, sometimes to pay themselves.
But now the trend may be reversing.
Paysafe Ltd didn’t even wait for investors to push back when it wanted to extend the maturity of some loans this week.
The online payments platform preemptively offered lenders greater protections.
And CoreWeave significantly boosted yields to 5.5 percentage points above benchmark rates on a US$2.6bil loan, after early price discussions of 4.25 to 4.5 percentage points. The extra yield amounts to about another US$30mil a year in interest.
Leveraged loan prices have fallen this year, to an average of 95.3 US cents on the dollar on Thursday from 97 US cents in January. — Bloomberg
