The hidden value of tech bonds

As traditional banks are sceptical about lending to high-growth businesses with short track records, high-yield bond investors understand – and profit from – the value of the business model behind tech companies.
The Oslo Stock Exchange now has more than 10% of its value ​​in technology and telecommunications, and tech companies represented the majority of last year’s IPOs. However, bond investors, too, are recognising the sector’s potential.
“The interest from investors has been enormous,” says Eivind Kjær Thorsen, ABG Sundal Collier partner in investment banking. “Investors now have the opportunity to diversify towards a credit class that has a lot of attractive characteristics in terms of downside protection.”
“Many software and tech companies certainly check a lot of the boxes from a credit perspective, and as a consequence, their bonds receive interest from a broad range of investors,” says Andreas Johannessen, ABG Sundal Collier credit research analyst covering the tech credit space at ABGSC.
“We held a software and e-commerce investor conference call just before the holidays with record-high attendance,” he notes as an example of the current market sentiment.
In 2013 and 2014, tech and software companies accounted for around 1% of total issues in the Norwegian high-yield market, while last year this had soared to around 10%. This makes software and technology the third most active sector in the high yield market after real estate and shipping.
“An interesting finding is that the increased investor interest and demand when it comes to these companies have led to decreasing credit spreads but also tolerance for higher transaction leverage. But even as transaction leverage has increased, these companies are typically valued at high multiples in the equity market and the loan to value is still at moderate levels,” says Johannessen, and adds “A testimony of the strong investor interest can be found in the secondary market, where most of these bonds are trading at a significant premium to par”.
Tech companies typically deliver software in the cloud on a subscription basis, and have few assets on the balance sheet apart from proprietary technology and goodwill from historical acquisitions. The companies are also often characterised by high growth, and the historically reported figures are therefore less relevant. This means that traditional banks are often sceptical about lending to these ventures.
“We see that the Nordic high-yield bond investors, in contrast to the banks, understand the value that lies in this business model and can rely on pro forma/run-rate financials, and that these types of companies have a high capacity for servicing debt,” says Kjær Thorsen.
ABG Sundal Collier is the leading manager for bond issues by software and technology companies in the Nordic market, and in 2020 we acted advisor to Link Mobility Group, Mercell Holding and SuperOffice.