High yield and leveraged loan issuance in North America and Western and Southern Europe for the technology industry reached an 18-month high in Q1 2020. The sector raised US$52.2 billion, an increase of almost 75% over Q4 2019 figures and double Q1 2019 issuance.
While other sectors have been hit heavily by COVID-19 lockdowns, technology companies continued to serve customers and protect their earnings. The shift to remote working in many parts of the world, online education and entertainment and telemedicine, among other things, have confirmed technology’s role as an essential lockdown survival tool.
The fact that many technology companies were already sitting on large cash balances before the onset of the crisis has certainly helped them remain resilient. At the end of 2019, tech giants Alphabet, Apple, Facebook and Microsoft together reported cash reserves exceeding US$300 billion.
Open markets
The strength of technology companies has allowed them to continue accessing debt markets, benefitting from investor demand in the face of low interest rates as well as a general reluctance to lend into other more volatile sectors.
Companies that have successfully tapped the market in recent months include content streaming platform Netflix, Finnish telecom equipment maker Nokia and Asian tech giant Tencent.
Demand for Netflix’s US$1billion offering of US dollar-denominated and euro high yield bonds in April was so strong that the company was able to negotiate a yield on its US$500 million bonds at 3.6% and price a €470 million (US$518.8 million) eurobond at 3%. These are much lower yields than historic high yield bonds and comparable to the pricing on some investment grade bonds.
Nokia’s launch of bonds worth €1 billion (US$1.10 billion) in May, split across five-year and eight-year tranches, was also well received. There was demand of €6 billion for the launch, which allowed Nokia to reduce pricing by 60 basis points.
Tencent, meanwhile, was able to raise US$6 billion that same month, in what was the largest dollar bond issue in Asia this year, attracting demand of more than US$27 billion.
Deals back in the cards
Although most capital raised during the lockdown has been for refinancing and corporate purposes, financing for M&A is also back on the radar. KKR-backed BMC Software, for example, secured a US$1.35 billion high yield bond to fund its acquisition of Compuware.
Big tech has also been on the acquisition trail. Facebook acquired web-based animation group Giphy for a rumored US$400 million soon after making a US$5.7 billion investment for a 10% stake in Jio Platforms, the India-based digital and social networking group owned by telecoms entrepreneur Mukesh Ambani.
Microsoft, meanwhile, backed cloud-based communications software group Metaswitch Networks in May and Apple acquired virtual reality company NextVR in a deal said to be worth US$100 million.
M&A in the sector still has some way to go to reach pre-COVID levels, but its deal market has been more robust than most during the pandemic and it is expected to lead the way when deal activity eventually resumes. Buy-and-build deals are expected to be especially attractive for lenders, who are eager to deploy capital into leveraged loans and high yield bonds in resilient sectors.
Potential headwinds
As resilient as the technology sector has been, however, some companies have struggled and certain pockets of the industry could see restructuring.
Lenders will be closely watching financial results for the latest quarter to better assess the pandemic’s impact. Technology geared specifically for industries hit the hardest by lockdowns, from ticketing platforms to providers of software for hotels, airlines, taxis and restaurants, are all likely to see a fall in earnings. For example, Airbnb experienced double-digit falls in bookings, which could delay its IPO.
Even sectors less affected by the crisis, such as financial services, are reviewing IT budgets and may reduce investment in new technology. Gartner forecasts that financial services spending on IT and cybersecurity could drop by up to 5.6% in 2020, prompting some providers to offer payment deferrals and discounts to retain clients.
Reasons for optimism
These pockets of difficulty aside, the technology industry is well-positioned to emerge from the coronavirus crisis stronger than ever. Lockdowns have accelerated shifts in work and consumer behavior to technology’s advantage. Companies in the space have been able to maintain, or in some cases even grow, earnings. Through it all, there has been sustained lender appetite for technology bond and loan financings, and demand for tech credits could increase even further as deal activity resumes.
