AI‑led software selloff may pose risk for $1.5 trillion US credit market, says Morgan Stanley

Concerns that artificial intelligence could disrupt large parts of the software industry have started to spill into credit markets, Morgan Stanley warned, as software accounts for about 16%, or $235 billion, of the $1.5 trillion U.S. loan market.

WHY IT'S IMPORTANT

Financial markets, juiced for months with investor enthusiasm about the AI trade, were jolted last week as global software stocks sank on worries that fast-advancing AI tools could disrupt the industry.

CONTEXT

A majority of the software sector's exposure is tied to lower credit ratings - with 50% of the loans holding a "B- or lower" credit rating - loans which typically denote a higher risk of default, the brokerage said in a note dated Monday.

Morgan Stanley said 20% of software loans are "B" rated and 26% are "CCC" rated, while only 7% hold a higher "BB" rating.

Unlike the equity market, more than 80% of software loans are issued by private companies and nearly 78% are sponsor- backed, which indicates limited access to financials needed to assess exposure to AI-driven disruption.

BY THE NUMBERS

"Software also faces a more front-loaded maturity wall than the overall market," Morgan Stanley said as the sector has roughly 30% of outstanding loans due by 2028, versus 22% for the overall market.

Also, 46% of software debt is due within the next four years, compared with less than 35% of the wider loan market, Morgan Stanley said, which makes refinancing risks appear particularly acute if AI disruption-related concerns were to materialize quickly.

KEY QUOTES

However, the risk of large, systemic disruption across the software sector is limited in the near term, the brokerage said.

"We expect continued price volatility in loans, but a near-term spike in defaults is unlikely," it added.

-Reporting by Siddarth S in Bengaluru; Editing by Leroy Leo/Reuters