Morgan Stanley indicated that as advancements in artificial intelligence continue to disrupt the software industry, default rates on direct loans are expected to climb to 8%. Analysts, including Joyce Jiang, noted in a Monday report that while the disruptive impact of AI has not yet had a "material" effect on private credit fundamentals, the high leverage in the software sector and upcoming debt maturities could push default rates close to their highest levels since the pandemic. Strategists wrote, "Software loans face credit fundamental challenges, exhibiting the highest leverage and the lowest coverage ratios among major industries." They added that although default rates have declined in both public and private loan markets, they are likely to increase further as AI-driven disruption unfolds. In recent months, global credit markets have been under pressure as investors assess how AI could affect software companies' revenue streams. Over the past decade, alternative asset managers have heavily invested in software firms, attracted by their predictable earnings and higher profit margins. Morgan Stanley stated that software represents the largest sector in business development company portfolios, with an exposure of approximately 26%. Strategists also highlighted that private credit collateralized loan obligations, which securitize middle-market loans, have a 19% exposure to software, with many of these loans nearing maturity. According to PitchBook data cited by the strategists, software loan maturities are "front-loaded," with 11% of such loans due in 2027 and another 20% maturing in 2028.
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