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AI Fallout Hits Wall Street Lenders
7 Feb
Summary
- Software sector's AI-driven downturn impacts asset managers.
- Software loan exposure raises concerns for lenders.
- Private credit firms face growing default risks from software.
The software industry's significant downturn, driven by AI advancements, is now impacting asset managers and private equity firms. This sector-wide sell-off, which has seen software stocks decline substantially, has led to investor concerns about the loan exposure and leverage associated with these companies. Asset managers and private equity firms have experienced notable stock price decreases as a result.
Data reveals that software and services constitute a significant portion of U.S. leveraged loans and the U.S. high yield loan market. In the private credit space, software exposure is approximately 20%. This has heightened default risk concerns, especially as software borrowers, who represent the largest exposure for private lenders, are experiencing slowing revenue growth and carry substantial debt relative to their profits.
Lenders are scrutinizing their portfolios for potential disruptions. Some firms are reporting minimal exposure to potentially disrupted software companies, while others are actively assessing AI's impact on their investments. The increasing debt burden on software borrowers poses a considerable test for alternative asset managers, particularly when considering investment exits.
