Morgan Stanley expects private credit default rates to rise to 8%, as the fundamentals of loans in the software industry face challenges.

How AI and Artificial Intelligence Will Disrupt the Software Industry and Drive Up Default Rates

Source: Global Market Report

Morgan Stanley states that as AI technology continues to revolutionize the software industry, default rates on direct loans are expected to rise to 8%.

In a report on Monday, analysts including Joyce Jiang noted that although the disruptive impact of AI has not yet had a “substantial” effect on the fundamentals of private credit, the high leverage and upcoming maturities in the software sector could push default rates to levels not seen since the pandemic.

The strategists wrote, “The credit fundamentals of software loans are facing challenges, with the highest leverage and the lowest coverage among major industries.” They added that while default rates in public and private loan markets have decreased, the ongoing disruptive transformation driven by AI will only cause default rates to climb further.

In recent months, global credit markets have come under pressure as investors assess how AI will disrupt revenue streams for software companies. Over the past decade, alternative asset managers have heavily invested in software firms, attracted by their predictable earnings and higher profit margins.

Morgan Stanley notes that software is the largest industry in the business development portfolio, accounting for about 26% of exposure. The strategists also indicated that private credit securitized loans (PCCLO) backing software have a 19% exposure, many of which are nearing maturity.

Citing data from PitchBook, the strategists mentioned that software loan maturities are “concentrated in the early years,” with 11% maturing in 2027 and another 20% in 2028.