- Banks are preparing to take a haircut. Lenders led by JPMorgan Chase could offer one of the year’s biggest discounts to sell some of the $5 billion in debt for software firm Qualtrics International that they were stuck holding a few months ago, Bloomberg reported, with investor meetings scheduled this week for nearly $2 billion of high-yield bonds.
- The terms show how far software credit has fallen out of favor. Initial indications are that the debt could be marketed at a coupon of at least 8% and a discounted price of about 85 cents on the dollar, which would be one of the biggest new-issue discounts in the US high-yield market this year, according to people with knowledge of the matter.
- The deal has been stuck since March. Qualtrics, owned by Silver Lake, agreed more than a year ago to buy Press Ganey Forsta in a deal valued at $6.75 billion, and 11 banks committed about $5.3 billion in financing, but they paused efforts to sell it down in March amid a software selloff and funded the purchase themselves, shouldering what was then expected to be more than $500 million in paper losses.
- Growth is slowing. Qualtrics told lenders that third-quarter revenue slipped to $711 million from $718 million in the second quarter and grew 2% from a year earlier, slower than the 6% and 7% gains of the prior two quarters, although the company generated more than $1.1 billion in cash over the past four quarters, including $230 million in the third quarter.
What Happened?
Banks waited for Qualtrics’ third-quarter results to revive the sale, and those numbers showed the company is still working to integrate the two businesses to drive revenue growth, according to people familiar with the matter. A bond sale could come as soon as next week and price before the Thanksgiving holiday. The banks could later offload more of the debt to leveraged loan investors, and the 11-member group is discussing an agreement to hold the remainder for at least six months unless all lenders agree to a sale. Representatives for JPMorgan and Silver Lake declined to comment, and Qualtrics did not respond to a request for comment.
Why It Matters?
The Qualtrics sale is a test of how much investors now demand to lend to software companies seen as vulnerable to AI disruption. A number of software borrowers have had to pay high borrowing costs and offer stronger protections to secure lenders in recent months, and Qualtrics’ existing loan, which pays just 2.25 percentage points over the benchmark, was quoted between 81 and 83 cents on the dollar on Monday. For the banks, accepting a deep discount crystallizes losses but frees up balance sheet that has been tied up since the spring. A successful sale would help clear one of the larger hung deals on Wall Street; a weak one would signal that the repricing of software credit has further to run.
What’s Next?
Watch whether the bonds price before Thanksgiving and whether strong demand lets the banks tighten the discount or coupon from initial indications. Any sale to leveraged loan investors later, and the terms of the bank group’s lock-up on the remaining debt, will show how quickly the exposure can be cleared. Qualtrics’ integration of Press Ganey Forsta and a return to faster revenue growth would be the key to improving its credit profile. Other software borrowers, and lenders holding their debt, will treat the final pricing as a benchmark.
Affected Tickers and Coins: JPM, HYG
Source: Bloomberg
