Morgan Stanley’s latest credit‑risk note flags that the AI‑driven plunge in software stocks is spilling into the U.S. loan market, which holds roughly $235 billion of the $1.5 trillion corporate credit pool. The firm warns that rising defaults could tighten spreads, and you may see tighter covenants before any broad‑scale fallout in the near term.
AI‑Driven Software Sell‑off and Credit‑Risk Exposure
The software‑sector loan book represents about 16 % of the total corporate credit pool. Roughly half of those loans sit at a B‑ or lower rating, with 20 % rated B and another 26 % at CCC. Only about 7 % fall into the relatively safer BB category, meaning a sizable chunk already carries a heightened probability of default.
Loan Rating Distribution Highlights Vulnerability
- B‑rated loans: 20 % of the sector’s debt.
- CCC‑rated loans: 26 % of the sector’s debt.
- BB‑rated loans: just 7 % of the sector’s debt.
- Higher‑risk concentration: Over 80 % of financing goes to private firms, limiting transparency.
Refinancing Timeline Signals Pressure
About 30 % of software‑sector debt is due by 2028, compared with 22 % across the broader market. In the next four years, 46 % of the sector’s debt will need to be refinanced, versus under 35 % for the overall credit market. This mismatch between looming maturities and potentially weaker earnings creates a flashpoint for volatility.
What Investors Should Monitor
- Rating concentration – a high share of B‑ and CCC‑rated loans signals vulnerability.
- Sponsor‑driven financing – any pullback by private‑equity sponsors could tighten liquidity.
- Refinancing schedule – watch for widening spreads as 2028 approaches.
- Spread movements – jittery spreads may appear before any systemic default wave.
Potential Market Impact
The AI boom is reshaping software economics by automating coding, testing, and product design, which could erode traditional licensing and subscription revenues. When equity investors pull back, that sentiment quickly travels to the debt side, raising the cost of capital for tech‑enabled businesses. You’ll want to keep an eye on how quickly AI adoption translates into revenue compression, because that speed will dictate whether borrowers can refinance on favorable terms or face tighter credit conditions.
