AI-Driven Software Slump Creates Openings for Private Credit Investors, Says Matthew Mintzer of Piper Sandler

By Gaurav Sharma

The recent selloff in the software sector, triggered by mounting concerns that AI would replace those companies, presents a major opportunity for private credit investors, says Matthew Mintzer, global co-head of restructuring at Piper Sandler.

“Everyone wants to talk about it,” said Mintzer. “I don’t think anyone gets any credit for saying software is a risk right now – it is front-page news, and now people want to think about where the opportunities are.”

The prices of bonds for several software names have slid in recent weeks as investors are increasingly becoming wary of artificial intelligence replacing their products in the future. Some legal software names came under pressure this week after Anthropic released tools and plug-ins within Claude Cowork that can automate some legal services and functions, including reviewing documents, flagging risks and tracking compliance.

Mintzer warned that the need for cash could compel lenders to sell their positions, which could cause stress in other sectors as well. “You sell what you can when you need to raise liquidity,” he said. “If the next thing they all own is in pockets of healthcare, you’re going to see pressure there too.”

Unlike broadly syndicated loans, private credit deals in the middle market are clubby, and the lenders have ties to sponsors. That structure has fundamentally altered restructuring dynamics, Mintzer said.

“Private credit lenders generally view themselves as long-term partners with the sponsor,” he said. “There is usually a deep institutional relationship, and that dynamic impacts every negotiation.”

These relationships, combined with small “club” lender groups, often allow distressed companies to move faster. “You don’t have to get consensus from 30 or 40 lenders,” Mintzer said. “That makes the timeline much shorter.”

Since private debt does not often trade and is not rated, the scenario gives the company and lenders more flexibility in the restructuring negotiations.

“That enables us to creatively structure and modify the waterfall for how proceeds will be allocated in a future monetization event. You can’t do that when you have a broadly syndicated loan, because we may be able to just rewhack and redefine the waterfall without actually having the loan equitized or inserting a new piece of paper.”

He also cautioned lenders against sidelining sponsors. “Not reincentivizing the sponsor is a mistake,” Mintzer said. “Their operational involvement is critical in the mid-market.”

Looking ahead, Mintzer sees an opportunity for new capital providers willing to step in and provide liquidity where sponsors and lenders hesitate in capital structures funded by private credit lenders

Rinchem

Jefferies is expected to provide $105 million in new money to Rinchem in the form of a first-out loan as part of Rinchem’s proposed non-pro-rata liability management exercise. The proposed deal presents a significant economic disparity between the ad hoc lender group and other lenders, with the ad hoc lender group benefiting from a holdback on the new money and an ability to uptier a portion of its new second-out loans into first-out loans. The company’s credit agreement offers flexibility for non-pro-rata treatment, which had prompted some CLO lenders to exit before the deal’s launch. Rinchem is working with Paul Weiss and Houlihan Lokey, and an ad hoc group of majority lenders is represented by Paul Hastings and Solomon Partners. Octus’ coverage of Rinchem is HERE.

Pre-Paid Legal Services, Consilio and Epiq

The legal software sector is experiencing pressure following Anthropic’s release of tools within Claude Cowork that automate various legal services, potentially disrupting this part of the software-as-a-service industry. Companies such as Consilio, Epiq and Pre-Paid Legal Services have seen declines in their term loans, reflecting market concerns. Consilio is focused on electronic discovery and legal services, Epiq deals with legal proceedings and bankruptcy claims, and Pre-Paid Legal Services offers subscription-based online legal services. Moody’s Ratings and S&P Global Ratings have maintained their ratings for these companies despite the challenges posed by emerging AI technologies. Octus’ Secondary Trading coverage is HERE.

BRC Group Holdings

On a sum-of-the-parts basis, Octus believes that BRC Group Holdings, fka B. Riley Financial Inc., has enough value to cover its funded debt of approximately $1.4 billion, with its value predominantly attributable to its investment banking and brokerage carve-out B. Riley Securities, its cash-generative telecommunications business and recently appreciated investments. We value B. Riley Securities at an enterprise value of $485 million to $550 million at a discounted multiple to its peers, which we believe is warranted because of risks associated with recent business underperformance, coupled with potential reputational harm tied to Franchise Group and Brian Kahn, along with previous delays in its SEC filings. Octus’ coverage of BRC Group Holdings can be found HERE.

Tronox and Chemours

As investors shift their focus from the struggling software sector they are looking for value in the beaten down chemicals sector, causing a rally in companies such as Tronox and Chemours. Tronox’s and Chemours’ bonds have seen significant gains in recent trading but still face headwinds. Both companies are facing their challenges, and Tronox was recently downgraded by S&P Global and Chemours received a negative outlook from Moody’s due to weak financial performance. Octus Secondary Trading coverage can be found HERE.

EchoStar, SpaceX and xAI

SpaceX has announced its acquisition of xAI in a stock transaction valued at $1.25 trillion, with SpaceX valued at $1 trillion on xAI at $250 billion. EchoStar will receive SpaceX Class A common stock as a function of its spectrum transactions with SpaceX. The license purchase agreement between EchoStar and SpaceX includes provisions for adjustments to mitigate dilution from related-party transactions, although the specific details have not been disclosed. We estimate that EchoStar will receive between a 2.211% and 2.763% stake in SpaceX depending upon the adjustments made for dilution. Octus’ coverage of EchoStar can be found HERE.

Xerox

Certain large lenders to Xerox have become restricted in order to discuss a comprehensive balance sheet solution with the company. The Gibson Dunn-Moelis consortium comprises creditors with crossover holdings in first lien, second lien and unsecured tranches, although it is more weighted toward the first lien. Xerox is working with Kirkland & Ellis and Lazard as legal and financial advisors, respectively, and has considered a $500 million loan backed by intellectual property. The company faces challenges such as decreased print demand, higher costs from tariffs and increased leverage from its acquisition of Lexmark, leading to a need for potential capital raising and deleveraging efforts. Octus’ coverage of Xerox is HERE.

Jeld-Wen

Certain term loan lenders to Jeld-Wen are collaborating with Gibson Dunn due to concerns about the company’s performance. Jeld-Wen, a publicly traded building materials manufacturer, is experiencing declining demand in both its North American and European segments, leading to a significant drop in adjusted EBITDA. Jeld-Wen has initiated a strategic review of its Europe business to drive long-term value amid ongoing challenges in the construction sector. Octus’ coverage of Jeld-Wen is HERE.

Multi-Color Corp.

In a bench ruling on Monday, Judge Michael B. Kaplan granted interim approval of the Multi-Color debtors’ proposed $675.5 million DIP financing, overruling objections from a cross-holder ad hoc group and excluded first lien lenders. However, the judge approved only $125 million of a requested $150 million rollup of prepetition first lien debt and $3.75 million of a requested $7.5 million backstop premium. The cross-holder ad hoc group and excluded first lien lenders have appealed the ruling and asked for a direct appeal to the U.S. Court of Appeals for the Third Circuit. We also published an analysis of creditor recoveries under the prepackaged plan. Octus’ Multi-Color coverage is HERE.

First Brands Group LLC

On Feb. 4, U.S. District Judge Analisa Torres of the Southern District of New York scheduled a July 13 trial in criminal proceedings against former First Brands Group CEO Patrick James and his brother, former senior executive Edward James. The James brothers, who were arrested last week, face multiple fraud and money laundering charges in connection with the collapse of First Brands Group.

Over the weekend, the U.S. District Court for the Southern District of Texas remanded Evolution Credit Partners’ appeal of the bankruptcy court’s order authorizing the debtors to use up to $60 million in cash collateral. The district court concludes the record is “too infirm” to support a definitive ruling and directs the bankruptcy court to conduct further proceedings to determine the validity of Evolution’s security interest and whether the lender’s asserted $60.5 million first-priority lien is adequately protected by new inflows of cash into the debtors’ factored receivables account. Octus’ First Brands Group coverage is HERE.

Saks Global Enterprises

On Feb. 2, Judge Alfredo R. Perez entered an interim order approving the Saks Global debtors’ procedures for closing 34 Saks OFF 5TH stores and all five Neiman Marcus Last Call stores. The retailer also announced settlements with Visa and Mastercard to resolve long-standing antitrust claims, although the settlement amount and net recoveries for the estates were not publicly disclosed. The settlements would end more than a decade of litigation of settlements over allegedly “anticompetitive rules and prices” for access to payment card networks. Octus’ Saks coverage is HERE.

Excluded Selecta Creditors Flesh Out U.S. Antitrust Claims

Excluded Selecta first lien noteholders filed a proposed second amended complaint in their U.S. court challenge to the Swiss vending machine operator’s 2025 liability management exercise. The amended complaint provides additional details on the excluded noteholders’ novel antitrust claims that the favored noteholders’ cooperation agreement violated U.S. federal antitrust laws by forming a “collusive” scheme to control pricing in the secondary debt market. The amended complaint lays out two relevant antitrust markets for judicial analysis: the secondary market for Selecta debt and the sale of initial debt in the leveraged finance market. Octus’ coverage of Selecta is available HERE and Liability Management coverage HERE.

BlackRock TCP Capital Securities Fraud Litigation

An individual investor in BlackRock TCP Capital Corp. sued the business development company and three executives for securities fraud in the Central District of California, alleging the defendants failed to properly value the BDC’s investments and overstated its net asset value. The suit could be a bellwether for investor challenges to private credit/BDC valuation and management issues. Octus’ coverage of BDC News and Analysis is available HERE.