Private Credit News Weekly Issue #87: Software Gets Crushed, Managers Split on Defense, and Thoma Bravo Blocks Creditor Unity
$46.9 billion in tech debt trades distressed as lenders divide between retreat and doubling down
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Slowly, then suddenly.
Software debt held stable through most of 2025, trading near par while managers pitched recurring revenue, sticky customers, and low default risk. Slowly.
Then $17.7 billion of US tech company loans dropped to distressed trading levels over four weeks, swelling the total tech distressed pile to $46.9 billion. The biggest monthly drop since October 2008 for software equities. Suddenly.
Private credit titans rushed to defend their positions. Blue Owl’s Marc Lipschultz insisted “no red flags, no yellow flags, largely green flags” on $25 billion in software exposure. Ares’ Mike Arougheti told Bloomberg TV “the narrative is wrong” around AI disruption. KKR’s Scott Nuttall said “our level of anxiety is pretty low” after years preparing for this moment.
But Apollo already cut software exposure from 20% to around 10% in 2025. Trinity Capital’s Kyle Brown said software companies that don’t evolve are “getting left in the dust.” And Oaktree’s Armen Panossian warned that while near-term disruption is unlikely, medium-term recoveries “could be quite problematic.”
The market isn’t waiting to find out. Blue Owl shares hit multi-year lows. Ares dropped 11% in a single day. Software represents roughly 20% of BDC portfolios per Barclays. UBS projects private credit default rates could hit 12-13% under aggressive AI disruption scenarios.
Meanwhile, capital migrates toward new opportunities. Private credit closed four defense deals in Europe including Carlyle financing €290 million for Mecachrome, which makes components for France’s Rafale fighter jets. H.I.G. Capital reports distressed calls went from monthly to daily. Fortress sees $4.5 trillion in commercial real estate refinancing over three years as regional banks retreat.
And Thoma Bravo just deployed a new weapon: a $1.2 billion loan requiring lenders to self-report any attempts at cooperation agreements within three business days or forfeit voting rights. The clause signals pre-emptive efforts to frustrate creditor unity before restructurings even begin.
Key Market Themes
1. Software Debt Rout Exposes the $46.9 Billion Distressed Pile
More than $17.7 billion of US tech company loans dropped to distressed trading levels during four weeks ending late January, the most since October 2022 according to Bloomberg Intelligence. That swells the total tech distressed debt pile to about $46.9 billion, dominated by software-as-a-service firms well-backed by private lenders and seen as particularly vulnerable to AI disruption.
The selloff accelerated after Anthropic released new AI coding tools, triggering the sharpest monthly decline for software equities since October 2008. The S&P North American software index fell 15% in January. Loans to Kaseya dropped 3.5 points to around 96.75-97.75. Finastra first-lien loans marked around 93-94, down from high 90s two weeks prior.
Software represents roughly 20% of BDC portfolios per Barclays, totaling about $100 billion in Q3 2025 per PitchBook. Almost half of BDC software exposure matures in four years or later, accounting for around $45 billion of loans. Sixth Street and Blue Owl BDCs have the highest exposure to longer-maturity software loans according to Barclays.
Why It Matters
The speed of the repricing demonstrates how quickly sentiment can shift in concentrated exposures. Software debt held near par through October 2025, then lost $17.7 billion to distressed levels in four weeks. When 20% of BDC portfolios sit in a sector experiencing its worst month since 2008, managers face increased scrutiny around portfolio composition and duration matching. Asset-light business models offer less collateral for recovery, making credit selection and ongoing monitoring increasingly important as the sector navigates AI-driven disruption.
2. Private Credit Titans Split Between Defense and Repositioning
Blue Owl’s Marc Lipschultz told investors the firm’s software lending portfolio is in “pristine” condition with loan-to-value in the low 30% range. “We don’t have red flags. We don’t have yellow flags. We actually have largely green flags,” he said on an earnings call. Blue Owl has about 8% of its more than $307 billion assets under management in software loan exposure.
Ares’ Mike Arougheti said on Bloomberg TV that “the narrative is wrong” around AI disruption. The firm disclosed software represents 9% of private credit AUM including real estate and infrastructure debt. Non-performing loans in the software portfolio were “close to zero” with “no change” to growth outlook. KKR’s Scott Nuttall said the firm has been preparing for AI disruption for years, selling companies deemed vulnerable.
Apollo cut direct lending funds’ software exposure almost by half in 2025, from about 20% at the start of the year to around 10% by year-end. Oaktree’s Armen Panossian said the firm has developed incremental criteria for new software investments, requiring “coherent and credible” AI roadmaps. While “too early to actually see performance degradation,” Panossian noted medium-term concerns around recovery values if AI meaningfully disrupts business models.
Why It Matters
The divergence in positioning reveals different strategic approaches to identical risks. Apollo repositioning exposure proactively while Blue Owl and Ares defend current portfolios reflects varying assessments of disruption timing and magnitude. Lipschultz emphasizing 30% loan-to-value provides equity cushion protecting senior lenders. Ares highlighting “close to zero” non-performing loans demonstrates current portfolio performance. The managers who correctly assess which software businesses successfully integrate AI versus those disrupted will drive material performance dispersion over the next 24 months as the sector matures.
3. Thoma Bravo Deploys Anti-Cooperation Clause in $1.2 Billion Loan
Thoma Bravo added a provision to a $1.2 billion loan backing its Vitech acquisition requiring lenders to alert the firm within three business days of any attempts to coordinate with other creditors in cooperation agreements. Lenders who fail to notify forfeit voting rights on matters like amending credit terms or covenant waivers.
The $1.3 billion financing package includes a term loan and $100 million revolver priced at 450 bps over benchmark with option to reduce to 425 bps based on leverage progress. The deal is covenant-lite with payment-in-kind option and non-amortizing structure. Other lenders included Oak Hill Advisors, Antares Capital, Morgan Stanley Private Credit, Golub Capital, Francisco Partners, and Octagon Credit Investors.
Cooperation agreements have become a defense increasingly used by creditors to prevent being sidelined in aggressive debt restructurings. Thoma Bravo’s requirement that lenders self-report attempts at collective bargaining signals evolving dynamics in sponsor-lender negotiations, particularly around potential restructuring scenarios.
Why It Matters
The provision represents an innovation in loan documentation that shifts information dynamics between sponsors and lenders. Requiring disclosure of coordination attempts within three business days provides sponsors earlier visibility into potential creditor coalitions. The 450 bps pricing with covenant-lite structure and PIK option reflects competitive market conditions where multiple lenders compete for large-scale opportunities. Whether similar provisions proliferate across new deals depends on market reception and lender willingness to accept modified documentation in exchange for deployment opportunities. The clause tests how lenders balance relationship capital against structural protections.
4. Defense Sector Emerges as ESG Barriers Collapse in Europe
Private credit closed at least four defense-related deals in Europe over recent months as ESG barriers collapsed and European leaders ramped up military budgets. Carlyle financed Bridgepoint’s acquisition of Norwegian communications equipment maker Comrod, following a €290 million debt package for Mecachrome, which provides components for France’s Rafale fighter jets. Adams Street Partners led $300-400 million for UK survival gear maker Beaufort.
BDC exposure to defense reached approximately $7.2 billion as of September 30, up about $1.5 billion from end of 2024 per PitchBook LCD. Pimco president Christian Stracke said on a Credit Edge podcast “there’s a very healthy and pragmatic realization that this is something that is needed in Europe that’s been under-invested for too long.”
Norway’s sovereign wealth fund is reviewing its ethical investing mandate barring companies producing nuclear arms. The European Commission clarified the EU’s sustainable finance framework to include defense. UK’s Ministry of Defence is drawing up options to help finance its defense investment plan using private funds.
Why It Matters
The defense pivot provides managers with deployment opportunities in a sector experiencing structural growth as European nations increase military spending. Private credit moving into defense, drones, and aerospace offers portfolio diversification beyond software concentration. US Vice President JD Vance’s Munich Security Conference speech reinforced European defense independence requirements. The $7.2 billion current BDC exposure up $1.5 billion since year-end 2024 positions early movers for multi-year theme if European defense spending reaches 2% of GDP targets. Defense represents recurring revenue from government contracts with lower AI disruption risk than enterprise software.
5. Distressed Calls Surge as Fortress Targets $4.5 Trillion CRE Wave
H.I.G. Capital reports distressed opportunity calls went from “maybe a month” two years ago to “maybe a day, certainly three or four a week” currently per Jackson Craig, co-head of H.I.G. Bayside. Demand comes from private credit deals where growth hasn’t materialized due to underperformance or increasing loan maturity schedules. The firm provides stretch senior or junior capital to help tough refinancings over the line.
Fortress Investment Group says rival lenders are running shy of a $4.5 trillion market for property loan refinancing over next three years, putting its commercial real estate credit business on track to achieve $5 billion in new deals by end-2026. US regional banks that traditionally dominated loans between $50-125 million now have minimal presence. Deals that once attracted 15-20 bidders now catch 4-5 according to Spencer Garfield, global co-head.
Fortress achieved rapid growth with $1.7 billion in new originations in 2024 followed by $3.4 billion in 2025. The firm regularly sees opportunities offering un-levered returns of 7-8% today that might have only offered 3-3.5% before rate hikes.
Why It Matters
The acceleration in distressed inquiries from monthly to daily quantifies stress building as maturities approach and growth disappoints. H.I.G. noting deals “not necessarily in deep distress” but needing capital to complete refinancings describes the maturity wall dynamic as sponsors and lenders work through 2021-2022 vintages. Fortress targeting $5 billion in CRE deals by end-2026 as regional banks retreat demonstrates capital migrating toward sectors with physical collateral and actual recovery value. The $4.5 trillion refinancing wave over three years provides deployment alternative at 7-8% un-levered returns while software faces near-term uncertainty.
6. Bank Leverage to Private Credit Funds Hits $300 Billion
Banks’ exposure to private debt vehicles reached almost $300 billion as of October per Moody’s. Banks provide financing to private credit funds and cash to ease capital calls from fund investors. The European Central Bank and International Monetary Fund are questioning the relationship between banks and private credit funds as regulators assess leverage and risk transmission channels.
The Bank of England is carrying out the first stress test of private markets companies. The Financial Stability Board is concerned about ratings shopping in private markets where companies seek grades from multiple providers and opt for most favorable. The SEC has been probing Egan-Jones Ratings, which rated more than 3,000 private credit investments in 2024 with about 20 analysts.
US life insurers had as much as $2 trillion of exposure to illiquid forms of credit last year per Moody’s. Many assets are structured so holders are first in line for payments on bundles of debts, allowing high credit ratings. UBS Chairman Colm Kelleher said “in 2007 subprime was all about rating agency arbitrage. What you see now is a massive growth in small rating agencies ticking the box for compliance.”
Why It Matters
The $300 billion bank exposure to private debt vehicles demonstrates interconnections between traditional and alternative credit markets. Banks providing warehouse lines, revolvers, and facilities to private credit funds creates leverage and liquidity linkages that regulators are beginning to assess more closely. Insurance companies holding $2 trillion in illiquid credit shows the sector’s importance to institutional balance sheets. Regulatory focus on ratings quality and bank-fund relationships suggests potential for enhanced oversight as private credit scales. The scrutiny parallels pre-crisis concerns around opacity and leverage, though current structures differ materially from 2007 mortgage market dynamics.
Deals of Note
Vitech - Thoma Bravo obtained $1.3B from Oak Hill Advisors, Antares Capital, Morgan Stanley Private Credit, Golub Capital, Francisco Partners, Octagon to back Majesco acquisition and refinance existing debt, $1.2B term loan at S+450 with PIK option, $100M revolver
Comrod - Carlyle financed Bridgepoint’s acquisition of Norwegian communications equipment maker producing military masts
Mecachrome - Carlyle arranged €290M debt package for French aerospace components supplier to Rafale fighter jets
Beaufort - Adams Street Partners led $300-400M for UK survival gear and aerospace equipment provider
ADDEV - Carlyle provided €165M for French high-performance materials company
AC Milan - Comvest Credit Partners arranged roughly $700M to refinance Elliott Management vendor loan for RedBird Capital Partners
Evermark - Ares led $1.6B debt financing for Yellow Wood Partners’ merger of Suave Brands and Elida Beauty (Q-tips, ChapStick, Pond’s, Noxzema)
The Reality Check
Apollo cutting software exposure from 20% to 10% while Blue Owl maintains $25 billion with low 30% loan-to-value reflects different strategic positioning on identical risks. Time will determine which approach proves optimal. The LTV cushion provides protection assuming equity values stabilize. Software valuations compressing further would test these buffers, similar to dynamics seen in commercial real estate over the past two years.
Thoma Bravo’s cooperation disclosure requirement in the $1.2 billion Vitech loan shifts bargaining dynamics for future restructurings. Requiring lenders to report coordination attempts within three days or forfeit voting rights represents sponsor adaptation to increased creditor coordination. The 450 bps pricing with covenant-lite structure and PIK option reflects competitive market conditions where lenders balance returns against deployment pressure.
Capital is rotating toward new opportunities as software faces near-term uncertainty. Defense deals totaling over €650 million, Fortress targeting $4.5 trillion in CRE refinancing at 7-8% un-levered returns, and H.I.G. reporting distressed calls surging from monthly to daily demonstrate deployment alternatives emerging. Managers with software concentration face portfolio management questions as the sector navigates AI disruption. Those who accurately assess which businesses adapt successfully will drive performance dispersion over the next 24 months.
