Beaten Down Loans from Proofpoint, Sophos Climb as AI Fears Ease

A series of leveraged loans recently sold by software companies are climbing as investor fears about the industry ease and lenders that couldn’t originally buy the debt snatch it up.

Loans for software businesses Proofpoint Inc. and Gainwell Technologies were quoted close to 101 cents on the dollar on Thursday, according to people holding the debt. That’s a quick leap above par value for loans totaling more than $7 billion that were both originally sold at 98 cents on the dollar.

Another roughly $2 billion slug of loans in dollars and euros for cybersecurity firm Sophos Holdings LLC was quoted above par in secondary trading, after the company offered that debt at 97 cents on the dollar last month.

As skepticism over AI disrupting software businesses mounted earlier this year, companies had to offer sweeter terms to lure investors and get the sales done. Almost all existing investors rolled into the newly-amended loan deals, while those who missed out at the time have bought into the loans through the secondary market.

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“When you add in the additional protection that lenders get from tighter documentation, this looks pretty attractive compared to the overall opportunity set,” said Sinjin Bowron, a portfolio manager at Beach Point Capital Management.

Advancements in AI tools hit particularly hard companies built around the “software as a service,” or Saas model, in what became known as “SaaSpocalypse.” Portfolio managers dumped their software holdings, which cratered the value of these companies’ loans and left some in distressed territory. These concerns are now easing.

“The SaaSpocalypse has essentially blown over for now,” said Grant Nachman, founder and chief investment officer at Shorecliff Asset Management. “And with rates higher, demand for floating-rate loans has surged.”

The Federal Reserve’s decision to lift interest rates is another tailwind for leveraged loans, whose floating-rate structure is lucrative when rates rise. US leveraged loan funds attracted $1.93 billion in inflows on Thursday, the largest injection since Feb. 5 last year, according to data from LSEG Lipper.

Software and technology loans have rebounded since their February nadir, however, the debt still lags the broader US leveraged loan index, according to data compiled by Bloomberg. The iShares Expanded Tech-Software Sector ETF, known by its ticker IGV, is also up more than 45% since its low for the year in April.

Despite the uptick in the sector’s fortunes, credit investors are still applying a higher level of scrutiny to transactions for software and technology companies.

Healthcare software business Symplr Software agreed to an approximate $175 million equity injection from its owners last month to revamp its debt pile, while Syniverse Technologies is overhauling its loans through a liability management exercise.

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“I don’t think SaaSpocalypse is gone, I think it is on pause,” Beachpoint’s Bowron said. “Maybe the SaaSpocalypse was overdone at the beginning.”