(Bloomberg) — 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 AI companies.
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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 artificial intelligence infrastructure.
Their pushback is understandable. In the US junk bond market, companies sold nearly $200 billion of bonds this year, up about 9% from this time last year, while high-grade sales have increased by a third to $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 $5 billion 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 $2 billion 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 amortization 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 $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 $2.6 billion loan, after early price discussions of 4.25 to 4.5 percentage points. The extra yield amounts to about another $30 million a year in interest.
Leveraged loan prices have fallen this year, to an average of 95.3 cents on the dollar on Thursday from 97 cents in January. Meanwhile risk premiums for junk bonds surged this week to their highest level since April, reflecting investors’ worries.
Winifred Cisar, global head of strategy at CreditSights Inc., said recent developments represent a “shift in the market” that highlights the growing pressure on software firms needing to refinance leveraged loans. Investors are increasingly skeptical about lending to businesses threatened by advances in AI technology.
“There’s mutual interest in putting together documentation that allows the deal to go through the market, and then also provides lenders with a little bit more protection in sectors that feel a lot less certain than they once did,” Cisar said.
But many questions remain, including which software companies, if any, will be hurt by AI, and whether tech companies are investing too much in AI infrastructure.
“Right now, you’re paying a pricing premium because it’s too early to determine the winners and losers,” said Mark Hamilton, head of capital markets at Aquiline Capital Partners.
Still, this shift in favor of lenders is not expected to be limited to software and AI-related deals. Roughly $240 billion of leveraged loans are coming due through 2028, according to data compiled by Bloomberg, and this week has shown that lenders can fight for higher yields and greater protections — and evidently come out as winners.
Week In Review
BlackRock sold a $12.5 billion bond for a data center in Texas at a hefty yield of 7.53%, one of the highest levels for a blue-chip data-center debt offering since the AI borrowing binge started last year.
Banks led by Morgan Stanley are in talks to line up $15 billion of debt for an Anthropic data-center project in Texas, backstopped by Alphabet’s Google.
Data center firm Equinix sold $3 billion of US investment-grade bonds, raising cash in a recently weakened market for debt related to the AI boom.
TPG is in exclusive talks to acquire Macquarie Group-backed Netrality Data Centers. The company could be valued at $2 billion to $3 billion in the potential deal, which could be reached as soon as this fall.
SoftBank Group’s $40 billion bridge loan for its investment in US tech giant OpenAI has attracted a new group of 21 lenders in a broader syndication phase.
Morton Salt and fast-food chain Whataburger are joining a wave of junk-rated companies refinancing risky debt in the leveraged loan market. Whataburger launched a $2.72 billion term loan while Morton Salt kicked off a $3 billion deal. They follow at least 10 firms that were marketing US-dollar loans last week to refinance maturing debt.
AT&T raised €4.7 billion equivalent ($5.3 billion) of bonds, shattering a traditionally subdued period for Europe’s primary market with a large corporate deal.
Former Red Lobster owner Thai Union Group said the money-losing $20 all you-can-eat shrimp promotion that has become a focus of litigation arising from the restaurant chain’s bankruptcy wasn’t its idea, arguing the company’s managers introduced it to counter falling traffic and rising costs.
Hong Kong developer Parkview Group missed an interest payment on a $940 million loan backed by a landmark Beijing asset, less than a year after it secured the refinancing deal.
Xerox sold tariff refund claims at a discount to raise cash and reduce its debt load last quarter, as it looks to address its hefty maturities over the next three years.
The Federal Communications Commission is narrowing an aspect of Dish Network’s proposed restructuring deal that the regulator said would have improperly repaid corporate bondholders from a $2.4 billion fund earmarked for contractors in the buildout of its 5G network.
On the Move
Bank of Nova Scotia hired veteran banker Matthew Tuck as managing director and head of leveraged-finance syndicate in New York, as the Canadian bank aims for a bigger share of non-investment-grade deals. Tuck had spent more than 25 years at Credit Suisse.
HSBC Holdings is tapping David Schultz and Mitch VanZandt as co-heads of US corporate debt capital markets. Schultz is a managing director on the team now. VanZandt was formerly at Morgan Stanley.
HSBC is also hiring Ahmed Taha and Yannick Lakoue-Derant as co-heads of debt capital markets for the Middle East, North Africa and Turkey. Taha, who will be based in Dubai, formerly worked at Standard Chartered. Lakoue-Derant, set to be based in Riyadh, was most recently at Societe Generale.
Earlier, the firm hired Mark Byrne, previously at TD Securities, for its debt capital markets team in Europe, specializing in sovereign, supranational and agency bond sales. He will start his job at the bank later this year.
–With assistance from Aaron Weinman, Gowri Gurumurthy, Paula Seligson, Reshmi Basu, Dan Wilchins and Nabila Ahmed.
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