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Gadfly: Credit Market Is Now More Linked To Technology Companies 'Than Ever Before'

Gadfly: Credit Market Is Now More Linked To Technology Companies 'Than Ever Before'

To some investors, Apple Inc. (NASDAQ: AAPL)'s growing debt level serves as a case against investing in the company. However, it is reasonably safe to assume that Apple's debt levels won't cause any sort of financial crisis. The same can reasonably be said for some of Apple's largest technology peers, including Microsoft Corporation (NASDAQ: MSFT).

But can the same be said for all technology companies, regardless of size? According to Bloomberg Gadfly's Lisa Abramowicz, technology companies now account for a record proportion of new U.S. debt sales this year, which is "remarkable considering just how much debt has been issued overall."

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Specifically, technology companies account for almost 20 percent of new leveraged-loan issuance, roughly double when compared to last year's levels. However, the surge is attributed to private equity firms borrowing money to acquire public companies.

What's Going On?

So far this year, technology companies accounted for nearly one-third of the overall value of all private equity buyouts, the largest share since at least 2004. More often than note, the private equity firms are tapping the debt market for billion dollar deals instead of traditional banks.

Granted, interest rates are sitting at "bargain-basement" levels relative to history, and it is only natural for private equity firms to take full advantage.

For instance, Thoma Bravo couldn't obtain financing from traditional banks to acquire Qlik Technology so it had to borrow $1.1 billion elsewhere. The problem is Qlik has a "scant" cash flow and Thoma Bravo needs to turn its acquired business around to be able to pay back the money it borrowed.

There may also be a larger underlying program. As noted by Abramowicz, companies that "benefit the most on the way up often suffer the most on the way down."

In the meantime, buyers of tech debt aren't worried — at least, not yet. Returns have been "great this year, with the riskiest companies doing the best."

Bottom line, Abramowicz concluded that while most borrowers of debt should have little problem in paying back the funds owed other firms will not — and "this will have a bigger effect on anyone who owns a piece of the $8 trillion U.S. corporate-debt market, which is more investors than ever before."

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