The private credit boom that fueled a generation of software companies is facing an unexpected threat: their own product. As artificial intelligence automates core tasks, from coding to data analysis, it is undermining the business models of the very firms that borrowed heavily against them. Analysts at Morgan Stanley now forecast that this disruption could push default rates on software-sector private loans toward 10% by next year.
Private credit funds, which directly lend to companies outside traditional banks, have poured trillions into tech, drawn by software's predictable subscription revenues. The loans often backed intellectual property and future cash flows. But the rise of generative AI is making entire categories of software—from specialized development tools to certain enterprise platforms—look suddenly replaceable. A company built on a legacy data analytics platform, for instance, may struggle as clients opt for newer, AI-native alternatives.
This creates a dangerous mismatch. Many software companies took on significant debt during an era of low interest rates and high growth expectations. If AI siphons off their revenue faster than they can adapt, meeting loan covenants and interest payments becomes difficult. Lenders are already responding, tightening terms and scrutinizing borrowers' AI transition plans.
The potential reckoning highlights a deeper vulnerability in tech financing. The private credit market, valued for its flexibility and high yields, lacks the transparency of public bonds. A wave of software defaults could test the resilience of the funds—and the pension funds and endowments that invest in them—while potentially drawing sharper regulatory scrutiny.
Not all is bleak. Some lenders are pivoting to finance AI-integration efforts, and agile software firms are adapting. But Morgan Stanley's warning is clear: the industry's assumption of perpetual software growth is colliding with a technology that rewrites the rules. The correction, long delayed by easy money, may finally arrive in 2026.
Source: Webpronews