JPMorgan Chase and fellow underwriters are preparing a massive fire sale. To finally move $5 billion in stuck debt for the software company Qualtrics, they are expected to offer one of the biggest price cuts Wall Street has seen all year. According to insiders, the bankers will be huddling with investors this week to move a massive $2 billion high-yield bond package.
Some time back, the Qualtrics loan deal fell apart because investors got nervous about how AI would impact software companies. At the time, the original underwriters had to pay for the deal themselves, losing possibly over $500 million.
Qualtrics loan deal could be finalized as soon as next week
The root of this hung debt goes back over a year, when Qualtrics inked a $6.75 billion deal for Press Ganey Forsta. An 11-bank syndicate committed $5.3 billion in bridge financing and has been quietly holding preliminary talks with institutional investors to unload it. However, negotiations hit a wall in March when a massive selloff dragged down software stocks. But since then, the banks have been considering a new sale.
Sources had previously disclosed that the banks planned to sell the debt at an 8% interest rate, with a steep discount of approximately 15%. At that price, investors may see greater value in buying existing debt rather than participating in a new issuance, which could increase the company’s borrowing costs.
The proposed discount is evidence of the increasing difficulty banks are having selling leveraged debt backed by software companies.
Discounting bonds below their original price allows underwriters to attract investors who might otherwise shy away from greater exposure to the sector, but it also means banks could absorb losses on financing they originally agreed to provide. For Qualtrics, this deal would clear the financing backlog, but expensive borrowing terms may also put pressure on its balance sheet.
Last month, sources reported that JPMorgan hoped that Qualtrics’ third-quarter earnings would help boost demand for the deal, despite the firm’s decline in Q2. Qualtrics had seen revenue edge down slightly to $718 million in the second quarter from $720 million in the previous quarter, while adjusted EBITDA came in at $332 million.
Qualtrics’ latest financial results could also impact investor appetite for the debt sale. Revenue was reportedly $711 million in the third quarter (vs $718 million in the second quarter).
That means pressure on revenue growth will continue as investors evaluate whether Qualtrics can maintain its position in an increasingly competitive software market. Reports put cash generation over the past four quarters at more than $1.1 billion, but again that should be independently verified before publication.
At the moment, sources believe the Qualtrics debt sale could happen as early as next week.
Many software companies are funding each other with debt
Lately, a bunch of software companies have been getting crushed by high interest rates. Lenders are terrified of how AI might ruin their businesses, so companies have to pay way more and agree to strict rules just to get anyone to lend them money. Firms like Proofpoint and Gainwell Technologies had to drastically improve their terms to secure multi-billion-dollar refinancings.
According to Chris Poggi from Ropes & Gray, the turn of events is mostly because debt investors are pretty much maxed out right now, and they’re trying to figure out if they’ve handed out all the money they’re willing to spend for the rest of the year.
Major AI companies are pouring capital into smaller firms, which then immediately route that money back to the tech giants to pay for computing power and software. Considering that, more investors are growing anxious that the tech market could suddenly crash. Because all these big AI investments are so tightly interconnected, a failure in one spot could quickly turn into a massive disaster for everyone involved.
Not to mention, these tech giants are already funding each other with debt, meaning a market slowdown could trigger a massive domino effect. A sudden drop in demand or an economic downturn would ripple through the entire interconnected software sector, causing widespread failures.
More recently, Google’s parent company saw well over half a trillion dollars wiped off its total valuation. Ben Barringer, global head of technology research at Quilter Cheviot, commented on the possible cause, saying, “The problem for Google is it faces an innovator’s dilemma and doesn’t know whether to protect its core business or look to join the disruption. As such, Google has lost its edge with Gemini and is behind peers on agentic AI.”
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