AI Boom Is Triggering a Loan Meltdown for Software Companies: Credit Weekly
(Bloomberg) — Amid the euphoria in credit markets, one type of debt is facing growing fear.
Software companies, laden with debt after leveraged buyout firms saw their revenues as relatively predictable, saw loan prices fall this week. Investors are increasingly concerned that advances in artificial intelligence, including the growing coding capabilities of Anthropic’s Claude, will make many software products and services obsolete.
Cloudera Inc.’s credit fell 7 cents on the dollar this week; Loans tied to companies from Dayforce Inc. to Rocket Software Inc. also fell. Other borrowers, such as European software company Team.Blue and software-focused private equity firm Thoma Bravo’s Conga, have struggled to execute new debt offerings at a time when loan sales have generally been busy.
“A storm has hit the credit market,” said Scott Macklin, head of U.S. leveraged finance at asset manager Obra Capital Inc. “The busiest calendar of months, driven largely by repricing but still overwhelming, has collided with growing existential questions around software business models as AI reshapes the largest industry among loans. [bids wanted in competition] and you are experiencing complete ‘credit-old age’.
Software is one of the largest components of the leveraged loan market, accounting for 12% of loans in the Bloomberg US Leveraged Loan Index. Software debt on collateralized loan obligations, which are bonds backed by portfolios of leveraged loans, had the worst total return of any sector so far this year, according to data compiled by Nomura.
The selloff in software lending is in stark contrast to the rest of the leveraged loan market; Overall sales rose this week after U.S. President Donald Trump dropped tariff threats around Greenland, encouraging companies to step forward amid a lull in tensions. In Europe, the rush pushed leveraged loan sales to a new weekly record.
“Right now the market seems to be selecting for some of the largest, most liquid structures and those that are more vulnerable to disruption,” said Sinjin Bowron, portfolio manager and head of liquid credit strategies at Beach Point Capital Management LP. “These are exactly the areas where deep rigor and understanding of the competitive moat is most important.”
Bonds of software companies also took a hit this week, as prices for bonds of cloud computing company Rackspace Technology Global Inc. as well as CDK Global, which provides software for auto dealers, fell this week. The friction comes ahead of next month’s borrowing spree, which is expected to boost artificial intelligence projects and could push U.S. corporate bond sales to record levels.
Representatives for Dayforce, Cloudera, Rocket and CDK did not immediately respond to requests for comment. Rackspace declined to comment.
“There’s a certain element of throwing the baby out with the bath water,” said Pratik Gupta, who leads CLO and RMBS research at Bank of America Corp. “Software sales have shifted to names that probably won’t be affected by AI.”
One of the main fears is that AI will allow more companies and people to create their own custom software, reducing the demand for off-the-shelf software products and services. This month, Anthropic introduced Claude Cowork, a product that is similar to a chatbot but can complete tasks on your behalf, such as building apps and creating spreadsheets. Recent media accounts have described how Claude made coding easier for people without formal training.
A Morgan Stanley report on Friday recommended shorting AI-exposed loans and opting for junk bonds over leveraged loans; because these loans are more exposed to potential disruptions in technology and software.
It’s unclear how many companies currently taking a hit in the market are actually at risk of being undermined by AI. The sell-off is also independent of underlying fundamentals, according to Beach Point Capital’s Bowron. He points out that many companies in the industry are reporting generally good results and are still gaining customers. “These are software packages that are incredibly ingrained in company processes,” he added. “It could potentially take years to remove and replace some of these.”
For the tech sector in general, many deals made about five years ago were priced to reflect high-growth assumptions that in many cases did not materialize, said Ari Lefkovits, managing partner at Delos Capital, who advises companies on restructuring and other corporate finance transactions. In the years since then, these companies have had to pay higher coupons due to increased interest rates.
“Things are intact,” Lefkovits said. “It’s just that the balance sheets are under a lot of stress.”
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