What is the predicted default rate for direct lending due to AI?

Morgan Stanley predicts that direct lending default rates will climb to 8% as artificial intelligence continues to disrupt the software industry.

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AI Disrupts Software Loans: Defaults to Surge

Q: Why are software loans facing increased default risks?

Software loans are challenged by the highest leverage and lowest coverage ratios across major sectors, making them vulnerable to disruption.

Q: When is the maturity wall for software loans expected?

The maturity wall for software loans in direct lending is front-loaded, with 11% due in 2027 and another 20% in 2028.

17 Mar

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Summary

Direct lending default rates are predicted to climb to 8%.
Software sector loans face high leverage and low coverage.
Maturity walls for software loans are front-loaded in 2027-2028.

AI Disrupts Software Loans: Defaults to Surge

Advances in artificial intelligence are poised to significantly disrupt the software industry, leading Morgan Stanley to forecast an increase in direct lending default rates to 8%.

While AI's impact on private credit fundamentals is still emerging, analysts note that existing high leverage and upcoming debt maturities within the software sector may drive default rates to pandemic-era peaks. These software loans currently exhibit the highest leverage and lowest coverage ratios across major sectors.

The looming maturity wall for software loans in direct lending is front-loaded, with 11% due in 2027 and an additional 20% in 2028. This concentration of upcoming debt obligations exacerbates concerns.