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Opinion CLOs
The next phase of AI credit analysis will distinguish solutions from temporary reprieves
by Dagmara Michalczuk
Dagmara Michalczuk
Co-chief investment officer
Tetragon Credit Partners
Software loans recovered in August, but a maturity wall looms ahead
August brought not only sunnier skies but also a welcome recovery in US software loan prices. After beginning to rebound in July, software loans continued to rise in August alongside a rally in public software equities, ending the month at an average price of USD 87.7, up USD 2.1 from the end of June. Importantly, gains varied across subsectors, reflecting a more granular repricing of risk where infrastructure loans generally traded at higher prices than application software.
The rebound suggests that the indiscriminate phase of the software sell-off may be behind us. It should not, however, be mistaken for renewed investor appetite for all software credits, or an easy refinancing environment.
The sector’s US maturity wall, estimated at USD 45bn by the end of 2028, remains on the horizon as another test of investor confidence in the sector.
Maturity extensions come at a cost
Recent maturity extensions offer a potential path forward. Several software borrowers have extended their debt, but generally at the cost of higher yields and stronger lender protections. In July, Proofpoint, a B/B3-rated cybersecurity company, extended the maturity of USD 4.3bn of first-lien debt by two years.
Despite strong recent performance and an S&P rating upgrade, the amended loan’s spread increased by 150bps to SOFR + 450bps, with an issue price of USD 98. Proofpoint also strengthened its covenants by adding a more comprehensive LME ‘omni-blocker’ and enhanced protections against collateral stripping.
Other issuers, including Paysafe and Gainwell Technologies, similarly offered higher spreads and stronger documentation to complete maturity amendments.
These transactions demonstrate that the maturity extension market remains selectively open to software and other AI-sensitive borrowers, but on terms that reflect lenders’ increased negotiating leverage.
For CLO managers, the secondary market recovery provides equity NAV relief and greater flexibility to rotate portfolios while realising smaller losses.
Wider spreads on software credits can also support CLO equity excess interest generation so long as the incremental income is greater than related principal losses. Stronger documentation may also improve prospective recoveries, so it is encouraging to see documentation quality become a more explicit part of the relative value matrix.
Buying time can weaken credit
Nonetheless, extensions create a trade-off across time. They reduce near-term default risk, but the accompanying increase in interest expense can weaken longer-term credit quality and limit the capital available to reposition businesses for rapidly evolving AI realities.
A maturity extension may buy a borrower time, but it cannot ensure that management uses that time effectively or that the company’s products or services remain relevant when the extended debt comes due.
The time dimension is therefore central to software credit selection. CLO managers must balance the near-term benefits of higher income and lower default risk against the possibility of longer-term principal impairment. Current excess spread can compensate investors for volatility, but it cannot rescue a business whose competitive position deteriorates.
Economist John Maynard Keynes famously observed that “in the long run we are all dead”. For credit investors, however, the long run often arrives on a date certain. CLO reinvestment periods end, maturities come due, and principal must ultimately be repaid.
The relevant question is not simply whether a software borrower can survive for another few years, but whether an extension provides sufficient time to reach a sustainable capital structure or merely postpones an eventual default.
The summer rally suggests that investors no longer view every software company as an inevitable casualty of AI.
The next phase will require a more difficult judgment — distinguishing borrowers for which time is a solution, from those for which it is only a temporary reprieve.
