Source: Zhitong Finance

The continuous rise of the “Big Seven” technology stocks makes it easy for investors to forget that many technology companies are not profitable and are still struggling with debt burdens. Now, creditors in this area are fighting against each other in order to get repaid.

A range of troubled technology companies, including Alvaria Inc., GoTo Group Inc. and Rackspace Technology Inc. agreed to restructuring deals this year, which provided selected creditors with better debt swap terms than other creditors, a process sometimes viewed as a form of “creditor to creditor violence.”

This is part of a broader trend where heavily indebted companies want to manage their debts using relatively loose agreements (so-called contracts) with debtor investors that allow them to move assets out of reach of creditors. Jason Mudrick, founder of Mudrick Capital, a bad credit investment agency, said that under normal circumstances, companies threaten to do this because of rising borrowing costs and excessive leverage, which makes it impossible for some companies to refinance their balance sheets.

“These two phenomena, combined with the low threshold nature of current leveraged loans, are the main drivers of creditor violence against creditors we have seen,” he said.

According to the data, software and service companies issued nearly $30 billion in bad bonds, the most in any industry except real estate. The latest dispute in the cloud computing industry centers on ConvergeOne supported by CVC Capital Partners after the cloud computing provider filed for Chapter 11 bankruptcy protection.

Lenders, including Silver Point Capital (Silver Point Capital) and CVC itself, reached an agreement with the company that would reduce the company's debt by more than 80% and enable it to obtain new financing. The fund managers who were excluded from the deal shouted out and hired legal advisors to study their options.

Past cases

Creditor to creditor violence has been evolving since 2016, when troubled retailer J. Crew transferred its brand and other intellectual property rights to a so-called unrestricted subsidiary and used this as collateral to borrow $300 million. Lenders who left with their old loans saw their old loans plummet in value.

Today, an increasingly popular technique is called “non-prorata upering” (non-prorata upering), where a company makes an agreement with a small group of creditors that provide new capital to the borrower and push other creditors further behind the repayment line. In return, they often participate in bond exchanges, receiving better swap prices than other creditors.

Scott Greenberg, global chairman of the business restructuring and restructuring group at Gibson Dunn & Crutcher (Gibson Dunn & Crutcher), said that the number of recent debt management transactions shows that as long as the price difference between the two groups is reasonable, these transactions can receive broad creditor support.

However, some market participants questioned whether the exchange actually succeeded in preventing the company from going bankrupt. According to a report released by S&P Global Ratings this week, the proportion of companies that defaulted more than once last year reached the second highest level since 2008.

“In a time when the macroeconomy is more difficult and the financing environment is more tense, issuers with a record of default are more likely to be affected,” Nicole Serino, head of credit research and insight at the rating company, said in a general statement.

edit/lambor