- Software firms delay debt issuance amid AI disruption concerns.
- UBS projects higher defaults in lower-rated tech loans.
- Leveraged loan market shows greater caution than bonds.
- S&P software index down about 20% this year.
Software firms are retreating the debt markets since borrowing rates are rising, and lenders are enforcing stricter discipline, as more planners of fake intelligence fear that it can upset fundamental business concepts throughout the industry, executives and analysts of industries.
Other software companies in the US and Europe have halted or delayed future investments over the past few weeks, with investors revising long-term returns expectations and marking to market to a greater value with increased risk of default.
The reluctance is driven by the fact that AI tools quickly redefine the enterprise software markets, endangering the existing sources of revenue, and compelling corporations to invest significant amounts to keep up.
Leveraged loans markets have started to display a sense of increased caution especially on lower-rated issuers. In the case of leveraged loans of U.S. technology firms, UBS claims that the loans are already reflecting slightly higher default prospects than in previous months of this year.
In 2026, AI disruption risk is more likely to be more pronounced, especially in the lower-quality credit segments that have high refinancing requirements, and in the U.S. than in Europe, according to Matthew Mish, UBS head of credit strategy.
Defaults and Market Divergence
The probability of defaults in UBS projects is projected to increase by 3 percent to 5 percent in a situation of quicker AI-based disruption in contrast to the wider market forecasts of an increment of 1-2 percent. The latter two bankers that participated in recent transactions point out the shift that can be most visible with leveraged loans, and not with the high-yield bonds.
The disruption will materialize in 2 years time, Mish added. We finally believe that the market will discount most of, not everything that we are predicting of the defaults.
Around 17 per cent of the U. S. leveraged loans market worth $260 billion is borrowed by technology borrowers, and of these borrowers, roughly 60 per cent of the companies are engaged in software, says Brendan Hoelmer, head of U. S. default research, Fitch Ratings.
In comparison, technology businesses make up only 6 percent of the $60 billion high yield bond market and approximately 70 percent of the high yield sector relates to software borrowers, Hoelmer says. Analysts opine that leveraged loans tend to be more susceptible to perceived operational risk because most of the issuers already have high debts.
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Approximately 50 percent of the software-sector loans not yet fully deemed are rated as B- or worse, which is an indication of high risk of default, estimated to be about 50 percent by Morgan Stanley. The BNP Paribas analysts estimated the software and service exposure to the privates to be at approximately 20%.
The credit caution has been reflected by the equity markets. The S&P software index is down approximately 20 percent this year with investors moving out of firms perceived to be at risk of automation or compression of a margin that could be performed by AI.
The Financing Fratricide Grows
Although there is increasing anxiety, the maturities in the near future are comparatively low. Fitch statistics indicate that outstanding leverage loan balances on the software-sector are just 0.5 percent maturity this year, and less than 6 percent is in 2027. There is 0.7% of debt payable this year and approximately 8% in the year 2027 with the high rate being on the high-yield side.
Nevertheless, any companies that have tried to enter the debt markets in the United States have faced an underwriting and investor doubt. The two bankers reported that banks that are arranging new loans are being pushed back on pricing and structure.
One of the bankers indicated that they are likely to require greater yields in new issues and greater discounts in renewed refinances. There can also be tighter covenants in future deals, or maintenance tests that the borrower maintains leverage ratios at certain designed levels.
The first banker said that the software companies currently do not have leveraged loan deals because the issuers are still awaiting trading levels to stabilize in already existing debt after earlier downfalls in the first quarter of the year.
According to a source close to the subjects, a planned acquisition financing amounting to $5.3 billion to purchase Press Ganey Forsta by Qualtrics will be closely monitored by the market. The acquisition can be a pointer of investor demand in the industry. Qualtrics has refused to comment, and Press Ganey has not attempted to immediately respond to a request to comment posed by the Reuters.
A number of deals have already been lagged. Team Blue, a European digital services company, pushed further an extension of EUR1.353 billion term loan (expiring in September 2029) and a repricing of one seven-hundred-dollar term loan, one banker said.
The strain has also been experienced in the private capital markets. Stocks of alternative asset manager Blue Owl dropped following its decision to sell $1.4 billions of assets to give back capital to shareholders, highlighting overall skepticism over valuations related to businesses sensitive to AI.
According to a January report posted by Moody, lower-rated firms with maturities coming in the year 2026 are prone to larger refinancing and default risk in 2026, in case the operating environments go down the drain.
"I do not consider software and business services to be hot sectors to issue in the next one year," said Jeremy Burton a portfolio manager of leveraged finance group at PineBridge investments. The technology has been transforming so fast that you are really supposed to be confident.
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With the pace of AI creation, lenders are seen putting increased emphasis on establishing which companies are in a place to take advantage of automation, and which may soon face the risk of replacement that is starting to redefine the borrowing terms of the software industry.
Recommended FAQs:
Why are software companies pulling back from debt markets?
Rising borrowing costs and stricter lending standards are making debt financing less attractive. Investors are also reassessing risks as AI threatens traditional software business models and revenue streams.
How is AI disruption affecting leveraged loans?
Analysts say leveraged loans, especially for lower-rated issuers, are pricing in higher default risk. UBS estimates AI-driven disruption could push default rates up by 3% to 5% in stressed scenarios.
Are software firms at higher risk of default?
About half of software-sector leveraged loans are rated B- or lower, indicating elevated default risk. Companies with high debt loads may struggle if AI compresses margins or forces costly reinvestment.
How have equity markets reacted to AI concerns?
The S&P software index has fallen roughly 20% this year as investors shift away from firms seen as vulnerable to automation. Market sentiment reflects caution about long-term profitability.
Will refinancing pressures worsen for software companies?
Near-term maturities remain relatively low, but refinancing in 2026–2027 could become more challenging if market conditions deteriorate. Lenders are already demanding higher yields and tighter covenants for new deals.
