Why Lenders Are Starting to Ask About Portfolio Technology Risk During Debt Financing
8/20/20263 min read
Credit providers financing leveraged acquisitions and add-on deals have historically focused their diligence almost entirely on financial performance, cash flow stability, and collateral value. A trend gaining momentum over the past year: lenders are increasingly asking specific questions about technology infrastructure and cybersecurity posture as part of underwriting, treating operational technology risk as a genuine credit consideration rather than something entirely outside their scope.
Why Lenders Are Expanding Their Focus This Way
The shift reflects a straightforward realization among credit teams: a portfolio company's ability to service debt depends on its ability to operate without disruption, and a serious ransomware incident, a prolonged system outage, or a significant data breach can materially impair a borrower's cash flow and operational stability in ways that traditional financial covenants don't directly capture or protect against. Lenders who have watched a borrower's operations get disrupted by a cyber incident, sometimes severely enough to affect debt service, have understandably started building questions about this risk into their standard underwriting process for future deals.
This mirrors a broader pattern already visible in insurance underwriting, discussed elsewhere in this series, where cyber and technology risk has moved from an afterthought to a specific, quantified underwriting factor. Debt financing is following the same trajectory, simply somewhat later, as lenders build out the same kind of specific diligence capability that cyber insurers and increasingly sophisticated buyers have already developed.
What This Looks Like in Practice
Lenders are increasingly requesting evidence of security controls, incident history, backup and disaster recovery capability, and technology vendor concentration risk as part of the credit diligence package, sometimes as a standard checklist item and sometimes as a targeted request when the underlying business is particularly technology-dependent. This is still less rigorous and less universal than the equivalent diligence a sophisticated buyer's team would run, but the direction of the trend is consistent: lenders asking more, and asking more specifically, than they did even two years ago.
For borrowers, this means a technology and security review that was previously relevant primarily for M&A purposes, buyer diligence, exit preparation, insurance underwriting, is now also relevant to financing conversations that have nothing directly to do with a sale. A platform seeking acquisition financing for its next add-on, or refinancing existing debt, increasingly needs to be prepared to answer the same category of technology questions a buyer would ask, even though the audience asking is a lender rather than an acquirer.
The Pricing Implication Worth Watching
As this trend matures, it's reasonable to expect technology and security posture to eventually influence financing terms directly, similar to how it already influences cyber insurance premiums, with better-documented, better-secured borrowers potentially accessing more favorable pricing or terms than comparable borrowers who can't demonstrate the same level of operational resilience. This isn't yet universal market practice, but the underlying logic, that documented operational resilience reduces a lender's risk and should be reflected in pricing, is the same logic that has already reshaped cyber insurance underwriting, and there's little reason to expect debt financing to remain permanently exempt from a similar evolution.
Preparing for a Financing Conversation That Now Includes This Category
Funds and portfolio companies preparing for an upcoming financing or refinancing conversation benefit from treating technology and security documentation as part of the standard financing preparation package, alongside the financial statements and projections that have always been central to that process. This is, once again, largely the same documentation, a current security baseline, a vendor risk inventory, evidence of backup and recovery testing, that supports buyer diligence, insurance underwriting, and now, increasingly, lender underwriting as well, which makes maintaining it as a standing operational discipline valuable across an increasingly wide range of situations rather than useful for only one specific purpose.
Which Borrowers Are Feeling This First
This trend is showing up most visibly for borrowers in industries where technology operations are unusually central to the business, healthcare services, financial and insurance services, and any platform running significant e-commerce or digital transaction volume, since lenders correctly perceive these borrowers as carrying more concentrated technology risk than a business where technology plays a more peripheral operational role. Borrowers in these categories should expect to see technology-specific questions in their next financing conversation even if their most recent deal, a year or two ago, didn't include them.
A Reasonable Expectation for How Far This Goes
It's unlikely that technology risk will ever carry the same weight in debt underwriting that it carries in equity diligence or cyber insurance pricing, since a lender's primary concern remains debt service capacity rather than enterprise value, and technology risk is one contributing factor among many rather than the central underwriting question. But the direction of travel is clear enough that borrowers who treat this as a passing curiosity rather than a genuine, permanent addition to the underwriting conversation are likely to be caught less prepared than borrowers who build the documentation now, while the requirement is still relatively light-touch and forgiving of a good-faith effort rather than an exhaustive, fully mature program.
Sigma Technology Consulting, Inc.
25 Years of Experience, Vetting & Procuring Technology Vendors
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