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When Everything Is a Growth Stock And All Money Is Venture Funds

When everything’s a growth stock and expectations for growth are sky-high.
Photographer: Ron Antonelli/

What do you get a credit market that has everything?

How about billions of dollars of loans at ultra-low interest rates to companies with no income?

Having spent years chasing shrinking returns in the booming institutional loan market, yield-hungry lenders are taking a leaf out of the venture capitalist playbook and extending cash to companies that aren’t yet profitable but which might be expected to become so in the future.

Last month, Medallia Inc. capped a growing trend towards ‘recurring revenue’ loans after the software company tapped a host of private lenders including Blackstone Group Inc., Apollo Global Management Inc. and KKR & Co. for $1.8 billion — the biggest such deal on record.

Where once these lenders might have calculated the prudence of their credit exposure based on earnings before interest, taxes, depreciation and amortization, or Ebitda, recurring revenue loans mean that private equity firms can easily borrow billions to fund buyouts of unprofitable firms. The deals are based on annualized recurring revenue, or expected revenue from the companies’ service contracts or subscriptions due.


In that way, the deals mirror what’s going on in equity markets, where lofty stock valuations are often justified by wildly optimistic earnings forecasts and buyout firms are acting a lot like venture capital firms making big bets on the future.

“With recurring revenue, the creditor’s value proposition is the hope that the borrower will prosper,” wrote the legendary contrarian investor Jim Grant earlier this month. “Borrowers don’t always prosper, or prosper on schedule.”

To understand how recurring revenue loans have come to constitute what Wells Fargo & Co. analyst Finian O'Shea dubs a “new frontier,” it’s helpful to look back at the slow erosion of borders between equity and credit markets in recent years. For that, we turn to the poster child for this particular dynamic: the Canadian pharmaceutical giant once known as Valeant Pharmaceuticals International Inc.