Solera, a global provider of data‑driven vehicle lifecycle and dealership software, could serve as a bellwether for testing investors’ faith in software companies amid concerns that advances in AI are undermining the sector.

As Debtwire previously discussed, Solera’s EBITDA is likely insufficient to service its funded debt stack, which includes ~USD 5.75bn of debt maturing between March and June 2028.

Amid these concerns, a group of the company’s term loan lenders have reportedly retained White & Case as counsel and signed a cooperation agreement. Apollo, Carlyle, Blackstone, UBS and KKR are among the top holders of Solera’s term loans, according to CLO-i data. In this article, Debtwire’s legal analysis team discusses the options for right-sizing Solera’s balance sheet, and what the stakeholders’ actions could mean for software companies in need of refinancing at a time when some investors may be reluctant to put in more money in light of fears over AI.

Solera’s software business

Acquired by Vista Equity Partners in 2016, Solera provides global modular technology platforms and data analytics. The company operates through four lines of business: (i) vehicle claims; (ii) vehicle repairs; (iii) vehicle solutions; and (iv) fleet solutions. According to its website, the claims division consists of a proprietary database of over 4.5bn images that covers over 88% of vehicles and purportedly produces more collision repair estimates “in a day than would have historically been produced in a week!” Through this business line, Solera uses machine learning algorithms and digital tools to accelerate vehicle claims decisions, estimate damages, and enhance repair management. The claims division also works to speed the repair process by “getting the right parts to the right shop at the right time.”

Through Solera’s vehicle repairs business line, the company’s software is designed to assist technicians with accurately diagnosing and quickly repairing vehicles. It also provides, among other things, cloud-based auto repair shop management software solutions. Through this business line, Solera (i) assists auto repair shops with online advertising and social media, (ii) offers training to repair technicians, (iii) provides e-commerce channels that connect parts supply and demand, and (iv) assists repair shops with responsible parts recycling.

Through its vehicle solutions line, Solera provides a cloud platform to car dealerships to assist with, among other things, sales, service, finance, and marketing. On 20 April, Solera announced “the Solera AI Engine, a cloud-native intelligence layer purpose-built to accelerate AI-powered innovation across the automotive ecosystem. Unlike conventional approaches that layer AI features onto legacy systems, the Solera AI Engine is an infrastructure-first capability embedded directly into the Solera Cloud Platform, connecting proprietary data, orchestrating cross-product workflows, and enabling the company to move new solutions from concept to production on dramatically shortened timelines.”

Embracing the concept that AI can enhance the effectiveness of Solera’s software, rather than act as a replacement, the announcement quotes Alberto Cairo, Chief Financial Officer and Managing Director at Solera as follows: “The automotive industry doesn’t need more AI features bolted onto disconnected tools. It needs intelligent infrastructure that makes the entire ecosystem work better together. The Solera AI Engine is that infrastructure. It connects the data, automates the workflows, and gives us the speed to build what our customers need — when they need it.”

Lastly, Solera’s fleet division provides an intelligence and safety platform that is based on data from drivers, vehicles, and customers and is designed to manage fleet performance. More specifically, its software aims to “improve driver safety, and mitigate risk by giving back-office teams and customers real-time visibility with end-to-end fleet intelligence.” This includes routing and dispatch solutions, regulatory compliance solutions, license monitoring, and custom trackers and sensors, among other things.

Capital structure options

While Solera’s underlying business has shown a degree of operational resilience, as further discussed in Debtwire’s credit report, the company is unable to service its funded debt. To address its capital structure, Solera and its stakeholders likely would consider several options, including potential asset sales, a liability management transaction (LME), or a Chapter 11 case.

In terms of asset sale prospects, Solera’s fleet division would be the most likely sale candidate of the four business lines because the other three lines – vehicle claims, solutions, and repairs divisions – are operationally integrated. However, the fleet solutions division appears to be the least profitable and, as the Debtwire team discussed in its credit report, any sale of this non-core business line would need to yield a a sale multiple of over 9.0x EV/EBITDA to adequately delever the company. However, given its decline, this would significantly exceed a realistic valuation of the fleet division. Consequently, an asset sale-driven deleveraging would not be a likely solution.

Thus, the company and its term lenders could be considering an out-of-court restructuring through an LME. However, an LME comes with its own set of downsides in Solera’s case. For one, its investors may be less willing to exchange their debt or put in additional capital at a time when many are questioning whether new AI tools can outperform products and services provided by traditional software companies. In other words, if AI tools can provide a comparative and competitive service and platform as that provided by Solera, what is the risk that customers will stop paying for something they could get elsewhere either for free or at a heavily discounted cost?

An argument in response that has been offered up by a number of traditional software companies is that software companies are uniquely positioned to integrate AI into their products to enhance their software. An example is Solera’s 20 April announcement of its new AI Engine, discussed above. Another consideration is that AI is still a new and developing tool that can sometimes fail to function as intended.[1]

While a consensual LME that adequately addresses Solera’s capital structure would be an ideal solution for the company, particularly if coupled with an equity infusion by Vista Equity Partners, the AI-driven fears discussed above may lessen the chances of a consensual LME. If fears of AI competition spook Solera’s lenders, and possibly Vista Equity Partners to the extent that they could not agree to extend maturities, exchange debt, and/or provide additional capital, the LME option may be just a temporary band-aid or not be possible at all. If that were the case and Solera could not arrange for an LME, or the LME had limited effect, the company, together with a group of its lenders – such as the term lender group represented by White & Case – could enter into a restructuring support agreement in hopes of commencing a pre-arranged or pre-packaged Chapter 11 case to implement the terms of a restructuring agreement that is acceptable to a significant block of creditors.

As shown in the table below, pre-arranged cases (i.e., cases where a debtor enters Chapter 11 with an agreement with certain creditors as to the terms of an acceptable plan) and pre-packaged cases (i.e., cases where a debtor enters Chapter 11 with a Chapter 11 plan that has already received the requisite votes from creditors) remain a viable option used by companies to reduce their stay in Chapter 11 and the costs of a lengthy and contested case. Although none of the cases in the following table involve software companies, pre-arranged and pre-packaged cases are not limited to any given sector and as shown in the following table, can shorten a company’s stay in bankruptcy.

Software sector confidence

While each software company is distinct, with differing capital structures, stress points, and revenue profiles, how the White & Case-led lender group and Vista Equity Partners address Solera’s financing needs will be closely watched; not only for Solera itself, but as a sign of investor confidence – or skepticism – in comparable software companies going forward.

Prior to joining Debtwire, Sara was a law clerk to two judges in the United States Bankruptcy Court, S.D.N.Y. and practiced in the Financial Restructuring Group at Clifford Chance, where she represented financial institutions (as secured and unsecured creditors, defendants in adversary proceedings, and participants in DIP financings) in high-profile restructurings. She also represented foreign representatives in Chapter 15 cross-border cases.

This report should not be relied upon to make investment decisions. Furthermore, this report is not intended and should not be construed as legal advice. ION Analytics does not provide any legal advice, and clients should consult with their own legal counsel for matters requiring legal advice. All information is sourced from either the public domain, ION Analytics data or intelligence, and ION Analytics cannot and does not verify or guarantee the adequacy, accuracy or completeness of any source document. No representation is made that it is current, complete or accurate. The information herein is not intended to be used as a basis for investing and does not constitute an offer to buy or sell any securities or investment strategy. The information herein is for informational purposes only and ION Analytics accepts no liability whatsoever for any direct or consequential loss arising from any use of the information contained herein.

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[1] A very recent example of that is what happened on 18 April in the Chapter 15 case of Prince Global Holdings. In that case, the joint provisional liquidators (JPLs) of Prince Global Holdings commenced a Chapter 15 case seeking recognition of British Virgin Islands provisional liquidation proceedings in the US. Sullivan & Cromwell acted as US counsel to the JPLs and, in addition to seeking recognition, filed a motion seeking provisional relief to be granted while recognition was pending. As Debtwire reported, Sullivan & Cromwell, in a letter to the US Bankruptcy Court for the Southern District of New York, which is overseeing the case, acknowledged that its provisional relief motion included errors due to AI “hallucinations.” According to Sullivan & Cromwell’s letter, hallucinations include instances in which an AI tool fabricated citations, misquoted authorities, or generated fake sources. This is just one example of AI not always living up to its expectations.