In a tongue-in-cheek private credit glossary making the rounds, ABS, the usual abbreviation for asset-backed securities, has been rebranded as “anything but software.”
Once darlings of the market, software firms have turned into black sheep as artificial intelligence threatens to upend their businesses. While much activity has shifted toward financing the AI infrastructure buildout, demand is also growing for asset-heavy, old-economy businesses.
Take, for example, American Rock Salt, which mines and sells road salt and other sodium chloride products. Despite the firm’s junk ratings, lenders are currently duking it out over the company. American Rock Salt is working with Morgan Stanley to refinance more than $700 million of debt as its financial situation improves, according to people familiar with the matter.
The bank has been soliciting feedback on structure and pricing from private credit managers as well as existing lenders of its broadly syndicated loans, said the people, asking not to identified discussing a private matter. The potential debt financing could price at 5 percentage points over the benchmark rate for the first-lien loan and 8 percentage points for second-lien obligations.
Details are still being ironed out, and a deal may not materialize. A representative for Morgan Stanley declined to comment, while a representative for American Rock Salt didn’t respond to requests for comment.
Worth Its Salt
American Rock Salt’s assets include the largest operating salt mine in the US, selling to state and local government agencies in the northeast, according to its website. Moody’s Ratings assigned a Caa2 credit score to the firm in May — eight rungs into junk territory. While cautious due to the company’s high leverage and weak liquidity, the rater highlighted American Rock Salt’s high-quality mine asset and modest capital expenditures.
Direct lenders have focused on hard assets as a way to dodge volatility in technology. The “SaaSpocalypse” earlier this year that stemmed from jitters over AI contributed to a surge in redemption requests as investors sought to pull out more than $13 billion from over a dozen non-traded business development companies.
“Given recent volatility in the SaaS sector and noise around investor redemptions, private credit investors may be putting a premium on hard assets that can be monetized in a downsized scenario more quickly and cheaply than intangible assets,” said Michael Handler, a partner at law firm King & Spalding.
The company has been buoyed by harsh winters driving demand for de-icing salt, and investors like that the business is structured as a partnership, which incentivizes leaders to keep it out of bankruptcy, the people familiar said.
Its $485 million first-lien loan due in 2028 is quoted at about 97 cents on the dollar, up from 73 cents on Sept. 25, prior to the onset of massive winter storms across the US, according to data compiled by Bloomberg.
Software Sours
The software names that do come to market have been floundering, as appetite continues to wane. Planview Inc.’s effort to refinance its existing debt with private credit faltered recently, even after it dangled a hefty interest rate to sweeten the deal. Before that, Thoma Bravo’s Sophos saw its $2.5 billion deal snubbed by private lenders.
Instead, direct lenders are focused on financing anything but. Last week, Ares Management Corp. was eyeing a $2 billion deal to finance an acquisition for MedImpact Healthcare Systems, a pharmacy-benefits manager. In July, Blackstone Inc. led a $400 million private loan for the buyout of HVAC firm Integra Testing Services.
That said, software still comprises a significant portion of private credit funds, even as lenders try to reduce their exposure. At Blue Owl Capital Corp., software makes up 18% of its $15 billion portfolio, its largest single sector exposure. The industry also represented about 19% of Blackstone Secured Lending Fund, down from 21% in the prior quarter.
“We’re going to continue to be cautious around software,” Blue Owl Co-President Craig Packer said last week on an earnings call. “It’s an area that’s moving quickly, and we’re going to continue to be cautious about deployment.”
Still, the firm said its existing book of software loans remains one of its best-performing segments.
Ares earlier this year was preparing for tough conversations with sponsors of software firms about refinancing their debt, and hired an outside consultant to examine its total exposure to the sector.
As the “anything but software” mantra takes hold at some firms, others see a strategic edge in bucking the trend.
There may be “compelling opportunities in this vertical as some lenders with large software portfolios are avoiding this sector entirely,” Barings BDC Inc. President Matthew Freund told investors on an earnings call last week.
Deals
- Apollo Global Management Inc. is providing $2.6 billion of financing to the owners of the New York Yankees, the private capital giant’s largest investment to date in US sports
- US investment giants including Apollo, Blackstone, BlackRock Inc. and Brookfield Asset Management are partnering with Nvidia Corp. to source $500 billion in financing for AI infrastructure
- Ares Management is leading a $2.2 billion direct loan to help finance a healthcare services acquisition, in one of the biggest deals since the private credit market was roiled by record redemptions this year
- Flexible workspace provider The Executive Centre is seeking a $500 million loan to refinance existing debt and fund capital expenditure
- London-based buyout firm TDR Capital is considering a sale of British private credit manager Arrow Global
Fundraising
- Blue Owl Capital Inc. sold $750 million of high-grade debt, up from initial discussions of $500 million, after receiving a large amount of investor orders
- Canada’s Polar Asset Management Partners Inc. received more than $215 million in commitments for the first close of a fund that will invest in significant risk transfer deals
Job Moves
- Turkiye Is Bankasi AS CEO Hakan Aran will step down at the end of this month and be replaced by deputy chief Hasan Cahit Cinar
- Toronto-Dominion Bank’s US credit trading unit is ramping up its push in leveraged finance business with the hiring of Eric Tiedeken
Written by: Ellen DiMauro and Reshmi Basu — With assistance from Rene Ismail @Bloomberg
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