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

• 50% of software sector loans carry 'B- or lower' credit ratings, indicating higher default risk, with 26% rated 'CCC' and only 7% holding higher 'BB' ratings
• Software companies face a 'front-loaded maturity wall' with 46% of debt due within four years versus 35% for the broader market, creating acute refinancing risks if AI concerns materialize quickly
• Over 80% of software loans are issued by private companies and 78% are sponsor-backed, limiting access to financial data needed to assess AI disruption exposure

Summary: AI-Driven Software Selloff Threatens U.S. Credit Market

Morgan Stanley has warned that growing concerns over AI disruption in the software industry are spreading to credit markets, potentially impacting $235 billion in loans—representing 16% of the $1.5 trillion U.S. loan market.

Key Risk Factors

The software sector's credit exposure is concentrated in lower-quality debt, with 50% of loans rated "B- or lower," indicating elevated default risk. The ratings breakdown shows 26% are "CCC" rated, 20% are "B" rated, and only 7% hold stronger "BB" ratings.

A critical concern is the sector's accelerated debt maturity schedule: approximately 30% of software loans mature by 2028, compared to 22% for the broader market. Overall, 46% of software debt comes due within four years versus less than 35% of the wider loan market, creating acute refinancing risks if AI disruption materializes quickly.

Market Complications

Over 80% of software loans are issued by private companies, with nearly 78% being sponsor-backed, limiting transparency and making it difficult to assess AI-related exposure through financial analysis.

Near-Term Outlook

Despite these vulnerabilities, Morgan Stanley believes large-scale systemic disruption is unlikely in the near term. The firm expects "continued price volatility in loans, but a near-term spike in defaults is unlikely."

Context

Last week's global market selloff was triggered by concerns that rapidly advancing AI tools could significantly disrupt the software industry, marking a shift in sentiment after months of AI-driven market enthusiasm. The spillover into credit markets represents a new dimension to these concerns, particularly given the sector's debt quality and maturity profile.