Private Credit Snubs $2.5 Billion Deal by Thoma Bravo’s Sophos

jrm(x6u044[6st409thst}ct_media_dl_1.png via Bloomberg

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(Bloomberg) — Just last year, private credit firms were falling over themselves to lend to software borrowers like Sophos. Now, AI anxiety has snarled up the market so much that Thoma Bravo’s $2.5 billion refinancing for the cybersecurity firm is facing hesitant lenders. 

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Despite the company dangling a steep increase in yield, several private credit firms are passing on the deal, according to people familiar with the matter. That’s prompted Thoma Bravo to consider an alternative plan, tapping Goldman Sachs Group Inc. to run a parallel process aimed at extending maturities with current lenders before a looming debt deadline next year, the people said, asking not to be identified discussing private information. 

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Once the industry’s darling, software’s concentration in private credit portfolios had triggered market-wide concern as lenders contend with the fact that billions in loans may be over leveraged and vulnerable to AI disruption. Sophos, which offers services to protect business networks from cyber threats, is among a raft of firms — many owned by private equity — whose debt was hit earlier this year amid those fears. 

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Sophos has a $2.1 billion loan that matures in March 2027. That’s posing mounting refinancing risks, according to S&P Global Ratings, which lowered its outlook on an entity of the company to negative last week. The ratings agency said it could downgrade Sophos’ credit grade if it’s “unable to refinance its upcoming maturities in the next two months.”

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Representatives for Thoma Bravo and Goldman Sachs declined to comment. 

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Steep Premium

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The financial ramifications of the sentiment shift are stark. Sophos’s current debt pays 3.5 percentage points above the benchmark rate, while the potential private credit refinancing would have paid firms nearly 6 percentage points based on early discussions, according to the people. The gap marks reversal to last year, when private credit firms cleared deals at razor-thin pricing. 

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Existing lenders being asked to amend and extend are demanding heavy concessions. They want Thoma Bravo to inject more money into deal, partially pay off some existing debt and increase the pricing, the people said. In exchange, lenders are willing to extend the loan maturity by roughly 2.5 years, according to the people.

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Thoma Bravo has more than $2.3 billion of equity invested in Sophos, the people said.  

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This comes as the private equity giant faces having its equity wiped out in another software company, Medallia. A group of private credit lenders are working to inject at least $100 million of new capital into that firm, as part of a restructuring which would give lenders control over the business, Bloomberg reported earlier this month. 

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The deal will erase around $5 billion of equity Thoma Bravo and its co-investors poured into the company since they took it private in 2021. 

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Cash Flow

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Sophos serves more than 550,000 customers and generated more than $1 billion in revenue and billings for the three quarters through the end of last year, according to S&P. Most of its revenue stems from annual recurring subscription revenue, the dependable cash flow that made software companies preferred private equity targets.