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(Bloomberg) — The relentless rise of the Magnificent Seven makes it easy to forget that many tech firms are unprofitable and struggling with their debt burdens. Now, creditors in the space are turning against one another in a bid to get repaid.

Alvaria Inc., GoTo Group Inc. and Rackspace Technology Inc. are among a spate of troubled tech companies to agree to restructuring deals this year that provide select lenders with better terms on debt swaps than others, a process sometimes deemed a form of ‘creditor-on-creditor violence.’

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It’s part of a wider trend of heavily-indebted corporates looking to manage their liabilities by taking advantage of relatively loose agreements with debt investors — known as covenants — that can allow them to move assets out of the reach of creditors. Typically, firms threaten to do so because higher borrowing costs combined with excessive leverage have left some with balance sheets that are impossible to refinance, said Jason Mudrick, founder of distressed credit investor Mudrick Capital.  

“These two phenomena, coupled with the covenant-lite nature of leveraged loans today, have been the primary drivers of the creditor-on-creditor violence we’re seeing,” he said.

Read More: Hedge Funds Find It’s Hit First or Get Hurt in Distressed Fights

Software and services companies are in the spotlight after issuing almost $30 billion of debt that’s classed as distressed, according to data compiled by Bloomberg, the most in any industry apart from real estate. The latest spat in the sector centers on CVC Capital Partners-backed ConvergeOne after the cloud computing provider filed for Chapter 11 protection. 

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Lenders, including Silver Point Capital and CVC itself, reached an agreement with the company that would cut its debt pile by more than 80% and allow it to secure new financing. Money managers left out of the deal cried foul and hired counsel to explore their options. 

Representatives for Silver Point, CVC and ConvergeOne didn’t reply to requests for comment.

J. Crew Evolution

Creditor-on-creditor violence has evolved since 2016, when struggling retailer J. Crew famously shifted its brand and other intellectual property into a so-called unrestricted subsidiary and borrowed $300 million against it. Lenders left with the old loan saw its value plunge.

One increasingly popular maneuver these days, known as non-pro rata uptiering, sees companies cut a deal with a small group of creditors who provide new money to the borrower, pushing others further back in the line to be repaid. In return, they often partake in a bond exchange in which they receive a better swap price than other creditors. 

The high number of liability management transactions recently shows that the deals can get widespread creditor support, as long as the spread between the two groups is reasonable, said Scott Greenberg, the global chairman at law firm Gibson Dunn & Crutcher’s business restructuring and reorganization group. 

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Click here to listen to a podcast on the growing threat to junk credit from high rates

Still, some market participants question whether the exchanges actually succeed in allowing companies to avoid bankruptcy. The percentage of companies that have defaulted on their debt more than once reached its second highest level since 2008 last year, according to a report this week from S&P Global Ratings.

“Issuers with previous defaults are susceptible to more in times of harder macroeconomic and tighter financing conditions,” said Nicole Serino, director of credit research and insights at the ratings company, who was speaking generally.

Week in Review

• Wall Street’s biggest banks, lured by narrow bond spreads and strong investor demand, are likely to generate an unusually large amount of borrowing in April after they report first-quarter earnings.
• Banks have been quick to appease the holders of their riskiest pools of debt, helping elevate additional tier 1 bonds to one of the hottest trades in the global credit market right now.
• If history is any guide, investment-grade US corporate bonds can stay at current nosebleed valuations for months more.
• After five straight years of losses, billionaire Hiroshi Mikitani’s Rakuten Group Inc. is trying to bounce back from a move into mobile that cost it billions of dollars. Doing so is proving expensive.
• S&P Global Ratings downgraded China Vanke Co. to junk, underscoring mounting pressure on the state-backed developer as it faces a cash crunch and increased scrutiny from investors.
• Credit traders at Barclays Plc and HSBC Holdings Plc are among those making a market for clients to bet against the debt of Thames Water amid an escalating crisis at the UK’s largest water utility.
• Todd Boehly’s Eldridge Industries is among final bidders in talks to acquire European private credit firm Hayfin Capital Management.
• Telecommunications companies are piling into fiber securitizations, raising financing expected to top $5 billion this year, according to Goldman Sachs Group Inc.
• British money manager Schroders Plc is one of the biggest buyers of junior bank debt. And now in an unusual twist, it’s planning to sell the debt too.
• Dish Network Corp. has received financing offers from private credit firms.
• Silver Lake Management has lined up as much as $8.5 billion of debt financing for its buyout of Endeavor Group Holdings Inc.
• A Vistra Corp. subsidiary sold a combined $1.5 billion of bonds in both the high-yield and investment-grade bond markets Tuesday to refinance debt.
• Diamondback Energy Inc. borrowed $5.5 billion in the US investment-grade market to partly help fund its $26 billion takeover of Endeavor Energy Resources LP.

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On the Move

• Barings laid out a plan to rebuild its direct-lending team after one of the largest asset management raids in years.
• Wells Fargo & Co. hired New York-based Alexandra Barth, co-head of leveraged finance at Deutsche Bank AG.
• Morgan Stanley recruited Charlie Towers, most recently head of leveraged loans sales and trading at RBC Capital Markets.
• Citgroup Inc. has picked Uday Malhotra to be the firm’s head of EMEA leveraged finance and loans amid a long-running reorganization to streamline operations.
• Bank of America Corp. hired Matt Fink from Citigroup Inc. to run loan sales in the Americas.
• Adam Howard plans to retire as Bank of America Corp.’s country head in Canada after 13 years with the firm.
• Shane Azzara is taking over as head of asset-based and transitional finance at Citigroup Inc., succeeding Shapleigh Smith who is retiring next month.
• Oliver Sedgwick, the former head of EMEA investment-grade capital markets at Goldman Sachs Group Inc., has started a new role as a portfolio manager at Asva Investment Partners LLP.
• Jackie Ineke has joined Swiss boutique Spring Investments as chief investment officer.
• Banco Santander SA hired a trio of dealmakers from Wall Street rivals as it continues to build out its US investment bank.

—With assistance from Jill R. Shah, Claire Boston and Dan Wilchins.

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