Wall Street finds a new way to finance unprofitable tech companies
No gains? No problem. Investors are funneling money to unprofitable software companies through a new type of debt deal.
Non-bank lenders like Golub Capital, AllianceBernstein Holdings LP and Owl Rock Capital Partners LP have issued asset-backed bonds to help fund about $ 2 billion in loans to these companies since November, according to data from Kroll Bond Rating Agency. Inc. and S&P Global Market Intelligence. Most of the loans go to fast growing but still unprofitable software companies.
The eruption of recent deals is the latest indicator that large investors have have resumed their hunt for high yield debt to compensate for low interest rates in a more secure government and corporate bonds. It also highlights the growing reach of private debt funds, which have replaced banks in many transactions and weathered Covid-19 despite fears of suffering from a surge in defaults.
Loans backed by complex bonds – called asset-backed securitizations or ABS – can be modest, like the $ 25 million Golub provided to software delivery specialist CloudBees Inc. Other deals run in the hundreds of millions of dollars, as the $ 300 million Rock Owl loaned to support the leveraged buyout of software security firm Checkmarx by private equity firm Hellman & Friedman LLC. Golub has been lending since 2013 and has had no defaults, even during the pandemic-induced economic downturn last year, according to a credit rating report.
Companies often take out loans to fuel growth without resorting to additional stock sales that dilute existing shareholders. If borrowers are having a hard time, they can cut costs to generate cash and cover their debts, which protects buyers of ABS bonds, those involved in the transactions said.