The U.S. credit market is now more linked to technology companies than ever before.
This may be benign when it comes to companies like Apple and Microsoft, which are at this point viewed as at least as creditworthy as developed-market governments. But they're at the top of a long list. Dig a little deeper and you'll find a host of increasingly speculative borrowings.
Tech companies account for a record proportion of U.S. investment-grade and high-yield bond sales, which is remarkable considering just how much debt has been issued overall.
They also account for an unprecedented share of new leveraged-loan issuance, at almost 20 percent of total sales, according to data compiled by Bloomberg. This is a tremendous increase from even a year earlier and stems from a surge in private equity firms borrowing money to purchase public companies.
As Gadfly has written before, technology private equity buyouts have boomed in the last few years, and the buyout barons are wading into corners of the tech world where they have never ventured before. So far this year, technology companies have made up nearly one-third of the value of all U.S. PE buyouts, the industry's largest share of PE deals since at least 2004, according to Bloomberg data.
As is often the case when private equity buyouts are hot, some PE firms are pushing the debt market envelope to get deals done. Thoma Bravo couldn't tap traditional banks for its $3 billion purchase of software firm Qlik Technologies this summer, so the PE firm turned to unusual lending sources.
That doesn't mean Thoma Bravo won't be able to pay back the $1.1 billion it borrowed. But it's notable that Thoma Bravo and other PE firms have been buying some tech companies that -- like Qlik -- have scant cash flow. To pay back the money borrowed in the buyouts, then, the PE firms need to drastically improve profits at tech companies that in some cases seem to be in permanent decline.
On one hand, this could be expected at this point in the credit cycle. Tech companies are borrowing money at bargain-basement rates relative to history, thanks to unprecedented stimulus efforts by central bankers globally. And why shouldn't PE companies look to benefit from this, by leveraging up some balance sheets in a play to generate returns at a time of depressed yields globally?
On the other hand, credit cycles do turn, and companies that benefit the most on the way up often suffer the most on the way down.
The last time we saw an industry rise to such dominance in credit, it didn't end well. Energy companies accounted for an increasing amount of bond sales in the years leading up to 2014, when oil prices collapsed and spurred a wave of bankruptcies that's still rippling throughout the industry.
Buyers of tech debt don't seem all that worried about history repeating itself in the sector. Returns have been great this year, with the riskiest companies doing the best.
But it's important to keep an eye on the growing influence of tech companies over U.S. debt markets. While many of the borrowers will likely stick around and repay investors, some inevitably will not. And this will have a bigger effect on anyone who owns a piece of the $8 trillion U.S. corporate-debt market, which is more investors than ever before.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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