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News Analysis
Is Medallia the proverbial canary in the coal mine?
by Lisa Lee & Lisa Fu
In 2021, the USD 6.4bn buyout of Medallia was hailed as a marquee deal for a private credit industry enjoying its golden age. It turned out to be a flop. Five years later, some of the sector’s titans, including Blackstone, Apollo, KKR and BlackRock’s HPS, are poised to take the keys to the troubled software firm from its private equity owners.
It’s the latest stumble for a market that’s been under siege because of its massive exposure to software service firms vulnerable to the rapid advance of artificial intelligence. The debacle raises questions of whether the expansion of the asset class was too fast and whether standards were too lax.
“It’s certainly a sign that more may come,” Tim Kang, a managing director in Houlihan Lokey’s financial and valuation advisory business, said of recent instances where lenders take the keys. “Is it a sign of many more to come?” That is unclear, he said.
Rise in restructurings
Default rates in private credit portfolios have begun to tick higher, albeit from a low base. Defaults in Morningstar DBRS’s actively rated portfolio have risen from close to zero in 2023 to almost 4%.
Michael Dimler, an analyst at Morningstar DBRS, said a steady stream of companies had got into trouble, but the reasons varied. “BDCs and more public-facing portfolio managers have now been forced to start reckoning with this. They realise that you can’t mark [a credit] at 98 if half your EBITDA has disappeared and the company is facing significant restructuring,” he said.
Fitch reported 32 defaulters in its privately monitored portfolio over the past year, raising the default rate to a record high of 10% from 9.2% at the end of 2025. At the same time, private credit downgrades are outpacing upgrades, led by borrowers in the software sector.
The Medallia deal bears all the hallmarks of private equity’s go-go years, with private credit acting as handmaiden.
Thoma Bravo, known for its prowess in software and technology buyouts, paid cash for the customer management software provider. Included in the USD 6.4bn price was USD 1.8bn in private credit debt. Thoma Bravo, which acknowledges it overpaid, will see its equity of about USD 5bn wiped out.
What raised eyebrows is that Medallia was not making money. In the absence of steady profit flow, private credit lenders instead extended an annual recurring revenue (ARR) loan — which assumes predictable revenue to service debt.
It’s not related to AI or any recent news
Dan Leiter
Head of global liquid credit strategy
Blackstone
ARR loans are designed for fast-growing start-ups that are burning cash but are expected to become profitable in short order. In the interim, the borrower’s unpaid interest is paid in kind (PIK) by adding it to the loan principal.
Sure enough, Medallia did become profitable. It is now reporting roughly USD 200m in annual EBITDA, said a source familiar with the company. The problem is that its debt load has increased to USD 2.8bn — partly because of PIK — and its annual interest bill is USD 300m.
With the company under pressure, lenders have been pushing Thoma Bravo to either provide new capital or hand control to Medallia’s creditors.
In an interview with Bloomberg in late April, Thoma Bravo founder Orlando Bravo admitted his firm had made mistakes with Medallia and wasn’t interested in injecting new money. “We could do it, kick the can down the road another five years, pretend like it never happened. But we have a big fiduciary duty to our investors,” said Bravo.
No documents have been signed yet, but the handover of Medallia to its lenders is expected to be completed by the end of May, according to Debtwire.
Some bankers dispute that Medallia’s woes foreshadow wider trouble for the software sector as cheaper AI tools are rolled out.
“This was a troubled credit well before anyone was talking about software. It’s not related to AI and it’s also not related to any of the private credit news recently,” said Dan Leiter, head of international and global liquid credit strategy at Blackstone, on the Credit Exchange with Lisa Lee podcast.
Blackstone, which holds about USD 1.5bn in loans to Medallia, marked them down to 60.3 in the first quarter of 2026, from 78 three months earlier.
Leiter believes execution of Medallia’s LBO was poor. “There are going to be some defaults in any portfolio and we’ll work that one out as best we can,” he said.
Broad decline in valuations
Medallia may prove to be an outlier, but Houlihan Lokey says its modelling shows a decline last quarter in the enterprise values of software companies that have borrowed from private credit firms. As a consequence, loan-to-value (LTV) ratios are rising.
Private credit firms usually feel comfortable lending at an LTV of no more than 50%. But on Houlihan Lokey’s figures, borrowers with an LTV greater than 50% reached 39% of the total in the first quarter of 2026, up from 24% in the previous quarter.
“The equity cushions for these borrowers are coming down. However, the tail of the ones that get really precarious, like in the 80%, 90% of LTVs, that’s still pretty small,” said Chris Cessna, who is also a Houlihan Lokey managing director.
