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AI Disrupts Software Loans: Defaults to Surge
17 Mar
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.
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.
Despite these sector-specific risks, broader concerns about systemic threats to private credit are considered limited. However, the potential moderation of retail demand for private credit could shift the buyer base composition towards institutional investors, potentially tempering future growth in the market.
