Credit markets are bracing for a substantial influx of buyout debt, with an estimated $138 billion expected to be issued. A significant portion of this is attributed to the technology sector, particularly software companies whose debt, largely from 2021-2023 buyouts totaling around $257 billion in primary leveraged loan issuance, is approaching maturity in 2028 and 2029. This refinancing challenge is compounded by a re-evaluation of software company valuations due to AI's impact, which has lowered the cost of building software and intensified competition, making previous high-leverage financing assumptions less valid.
The re-pricing of software portfolios by lenders means that loans underwritten against 2021 valuations now carry a much higher loan-to-value ratio, even for performing businesses, due to compressed equity cushions. While past market downturns saw lenders and borrowers use amendments and wider spreads to buy time, the current situation is different. The fundamental enterprise value of software companies is in question, prompting lenders to demand genuine risk reduction, such as debt paydown funded by new capital, before extending credit. Structured capital instruments like preferred equity and convertible structures are being suggested as ways for sponsors to reset loan-to-value levels.
Simultaneously, major tech companies, or "hyperscalers" like Amazon and Broadcom, are actively tapping debt markets to finance their substantial investments in artificial intelligence. Amazon is launching a debut sterling bond sale, while Broadcom is in talks to raise over $60 billion, potentially up to $100 billion, for an AI chip financing deal involving companies like Anthropic. This move highlights the intense capital requirements for AI buildout, with tech giants signaling elevated spending through 2026. This significant demand for AI-related debt issuance is contributing to the overall surge in credit market activity.
