- Private-equity firms are racing to negotiate loan extensions on much of a $300 billion wall of debt coming due starting in 2028, The Wall Street Journal reported. About $140 billion of risky corporate loans mature in 2028 and another $160 billion in 2029, compared with an average of about $60 billion due in two years over 2023 to 2025, according to PitchBook, roughly 2.5 times the earlier two-year average of $120 billion (Lumida calculation).
- Software companies account for about one-third of the loans coming due in 2028 and 2029, largely because buyout funds binged on tech deals over the past decade, and many of those companies are at risk of being eclipsed by AI firms such as Anthropic. About a quarter of the loans have junk ratings of CCC-plus or below, about $75 billion (Lumida calculation).
- Bank of America said in a report Friday that near-term maturity walls have risen to the highest levels since 2013, and it forecasts the default rate for below-investment-grade corporate loans will double next year to 4%, with creditors recovering less on bad loans.
- Solera, a vehicle-maintenance software maker owned by Vista Equity Partners, has about $8 billion of loans due in 2028 and 2029; S&P downgraded them to CCC-plus last year, and they trade at 93 to 77 cents on the dollar, according to Solve. Its lenders include Apollo, Ares, Fidelity and Pimco.
What Happened?
The debt wall was built in 2021, when low pandemic-era rates fueled a record year for megadeals like the $11.8 billion takeover of McAfee, and much of the money came as seven-year loans, matching the time frame in which funds typically aim to flip companies. Most companies refinance large obligations 18 to 24 months in advance, but PE-owned companies have found that harder since the Fed started hiking in 2022, and this year’s surge in Treasury yields made it tougher still. Some firms are now using cash from new funds to win extensions: Clearlake gave healthcare software company symplr $175 million for preferred shares after lenders including Ares and Sixth Street balked at refinancing $2.2 billion of loans, and lenders pushed maturities to 2030 and 2031 and added about $100 million of new debt.
Why It Matters?
Buyout managers that fail to get extensions risk having creditors take over their companies and wipe out their equity. “There are going to be businesses that get the keys tossed back to the bank and don’t make it,” said Bain & Co.’s Hugh MacArthur. The risk extends to the private-credit firms and mutual funds that hold the loans, and to listed alternative managers, since defaults above expectations would weigh further on PE returns, which PitchBook data show have fallen below 10% from around 15% when rates were near zero. That hits pensions, insurers and wealthy investors who rely on those payouts.
What’s Next?
The pace of extension deals over the next year will show whether the wall can be pushed out or turns into defaults. “There’s nothing in my mind that says rates are going down for the foreseeable future,” said Carlyle’s head of global credit Mark Jenkins, so refinancing costs remain the key variable. Investors will watch Bank of America’s forecast of a 4% default rate next year, pricing on stressed software loans like Solera’s, and how many sponsors inject new equity as Clearlake did. “Private-equity firms are going to need to reposition their companies’ balance sheets,” said McKinsey’s Alexander Edlich.
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Source: WSJ
