Macro

Tech Debt Crisis: $30B Distressed, Creditor Clashes Intensify

Tech sector's distressed debt surge leads to aggressive creditor tactics and ethical concerns in restructuring deals.

By Jack Wilson

4/13, 15:25 EDT
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Key Takeaway

  • Tech firms like Alvaria Inc., GoTo Group Inc., and Rackspace Technology Inc. face a debt crisis, leading to 'creditor-on-creditor violence' through restructuring deals.
  • The tech industry issued almost $30 billion in distressed debt, with software and services companies most affected.
  • Tactics like non-pro rata uptiering push some creditors back in repayment priority, raising questions about the effectiveness of avoiding bankruptcy.

Distressed Debt Dynamics

The financial landscape is witnessing a surge in "non-pro rata uptiering" transactions, particularly among distressed tech companies like Rackspace Technology Inc. and Apex Tool Group. This strategy, which offers select creditors more favorable terms in debt swaps, has sparked concerns over fairness and the exacerbation of financial disparities among creditors. The trend is driven by the combination of high borrowing costs, excessive leverage, and the covenant-lite nature of leveraged loans today, as noted by Jason Mudrick, founder of Mudrick Capital. The tech sector, having issued almost $30 billion of distressed debt, is at the forefront of this wave, with companies seeking to manage their liabilities amidst challenging financial conditions.

Unequal Exchanges and Creditor Clashes

Recent transactions have highlighted the controversial nature of these debt restructuring deals. For example, Bain Capital’s Apex Tool Group and Apollo Global Management Inc.’s Rackspace have proposed deals that offer negotiating creditors better swap rates than others, leading to significant disparities in treatment. This has led to creditor-on-creditor violence, where those not part of the negotiating circle face the risk of losing their collateral and covenants, pushing them further down the repayment hierarchy. The aggressive tactics employed by distressed funds underscore the desperation in a market with limited troubled bonds and loans, as Scott Macklin of Obra Capital points out.

Legal and Ethical Questions

While these maneuvers are legally permissible in many cases, they raise ethical questions about the treatment of creditors and the integrity of distressed debt markets. The language permitting such deals, often inserted into bond documents during the leveraged buyout boom, has led to a landscape where creditor clashes and litigation become more common. A notable example is the bankruptcy of appliance maker Robertshaw, where a pre-filing deal with select investors significantly altered the repayment priority, leaving some lenders at a considerable disadvantage.

Street Views

  • Jason Mudrick, Mudrick Capital (Neutral on the tech sector's debt situation):

    "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."

  • Scott Greenberg, Gibson Dunn & Crutcher (Neutral on liability management transactions):

    "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."

  • Nicole Serino, S&P Global Ratings (Neutral on companies with previous defaults):

    "Issuers with previous defaults are susceptible to more in times of harder macroeconomic and tighter financing conditions."