European leveraged loans and high-yield bonds linked to technology issuers continued to sell off in the first week of February. While the sector remains a small part of Europe’s high-yield market, investors warn that the scale of software exposure — particularly in loans — still poses a risk.
Italian software credits such as Almaviva, TeamSystem and companies owned by ION sit within the technology segment, which accounts for just 3.7% of the Morningstar Eurozone High-Yield Bond Index. Software credits represent roughly €5.9 billion of high-yield paper, or 1.6% of the index.
Exposure to this segment is more pronounced in the European loan market, where Software & Services represents 8.95% of the Morningstar European Leveraged Loan Index (ELLI) by par amount outstanding.
“Private equity has been a big buyer of software, and the capital structure has been heavily skewed toward private debt and loans,” said a high-yield investor. “For high-yield investors running a fund tied to an index it’s not a big deal, but for CLOs or broadly syndicated loan funds there is definitely exposure.”
Bankers agree, pointing to the sector’s size as a broader concern for market confidence. “It’s probably the biggest risk we face at the moment,” said one. “The market has already decided that call centers are unfinanceable because of AI, but that is just two European borrowers. If this spreads to software, the implications for underwriting and pricing risk would be far more significant.”
Sector sentiment
Pulled loan repricings for Dedalus and Team.blue in January show how doubt around the sector can quickly affect investor sentiment. The sell-off in technology and software also comes at an awkward time for arrangers leading the record LBO financing for videogame giant Electronic Arts. It is reported that the roughly $3 billion term loan A portion of the $20 billion debt financing has already been placed with banks, and LCD understands that cross-border institutional loans and bonds supporting the buyout by PIF, Silver Lake and Affinity have been shown to early birds.
Think-Cell provides a case in point for how the sell-off in software equities has affected some European credits. The business software group’s loans fell by as much as six points at the end of January to around 90, despite no issuer-specific news. “Software sold off pretty indiscriminately,” said a manager. “It didn’t seem to matter how risky the business was or how embedded it was in enterprise software — where revenues are sticky and replacement risk is low.”
The Cinven-backed company has since scratched back some losses, trading around 92 in the secondary market.
Last year, the Berlin-based issuer sought to take advantage of what it viewed as unjustified weakness in its debt, offering to buy back €35 million of its E+425 facility and ultimately accepting roughly €15 million at an average price of 95.75, according to sources. The loan finished the year around 97.
Market favorite
TeamSystem — a market favorite among high-yield investors — has also come under pressure. Its euro 5% secured notes due 2031 have fallen roughly four points during the software sell-off, to trade at 96.375/97.125 in the opening week of February.
Spread Research said the euro high-yield technology sector posted a negative total return of 0.8% in January — though it noted that many issuers continue to report strong organic growth, despite concerns over AI. An investor source similarly said that issuers such as TeamSystem and Almaviva operate niche businesses that are difficult to substitute with AI models.
Higher-yielding credits have also weakened. Engineering’s 8.625% secured notes due 2030, for example, have fallen from around 107.125-bid at the end of January, to 103.500/104.375 in the first week of February.
ION Platform led the early February sell-off, while its euro 6.5% secured notes due 2030 and 6.875% secured notes due 2032 each lost more than a point to trade at 90/91 and 88/89, respectively.
The company’s €600 million and €500 million tranches priced in September as part of a cross-border financing that combined three ION businesses under a single structure. “ION is big, liquid and levered so it has repriced a long way,” said a high-yield investor. “But exposure to tech for the market as a whole is low.”
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