Feb. 23 (GeokHub) Software companies are slowing or postponing debt fundraising as borrowing costs climb and lenders tighten scrutiny, reflecting growing concern that artificial intelligence could disrupt traditional business models across the sector.
Bankers and credit strategists say both U.S. and international software firms have stepped back from loan and bond markets in recent weeks. Investors are increasingly pricing in higher default risks, particularly for companies with weaker balance sheets and elevated refinancing needs.
“We expect AI disruption risk to become more visible through 2026 and into early 2027,” said Matthew Mish, head of credit strategy at UBS. He noted that leveraged loans — especially in the United States — are beginning to reflect higher projected default rates compared to earlier market expectations.
Leveraged Loans Under Pressure
Technology borrowers account for the largest share of the leveraged loan market, with software companies representing the majority within that segment. According to data cited by analysts at Fitch Ratings, tech loans total roughly $260 billion, or 17% of outstanding leveraged loans.
By contrast, technology companies represent a much smaller portion of the high-yield bond market, valued at around $60 billion. Analysts suggest the leveraged loan market is more exposed to AI-driven uncertainty because of its concentration in lower-rated software credits.
Investment banks report that lenders are now demanding higher yields and stricter covenant protections, including maintenance requirements that obligate companies to maintain certain debt-to-earnings ratios. These changes reflect a more cautious approach from investors who fear that rapid advances in automation could weaken software firms’ competitive positions.
Analysts at Morgan Stanley estimate that about half of software-sector leveraged loans carry ratings of B- or lower — a classification generally associated with elevated default risk.
Meanwhile, Moody’s Ratings has warned that lower-rated companies facing upcoming maturities in 2026 may encounter greater refinancing challenges if market conditions do not stabilize.
Market Volatility Spreads
Equity markets have also reflected AI-driven uncertainty. The S&P 500 Software & Services index has declined sharply this year as investors reassess valuations for companies whose products could be replaced or significantly altered by generative AI systems.
Even firms with stronger credit profiles are choosing to delay issuance until trading levels improve. Industry participants say there are currently no new leveraged loan deals underway for software companies as lenders and borrowers wait for greater clarity.
One closely watched transaction will involve enterprise software provider Qualtrics, whose lenders are preparing to raise financing tied to its planned acquisition of Press Ganey Forsta. Market reception to that deal could serve as a barometer for broader investor appetite in the sector.
AI’s Two-Year Test
Credit strategists believe the full impact of AI disruption will likely unfold over the next two years. While many investors expect markets to price in a portion of future defaults, some analysts caution that risks may still be underestimated.
Private credit exposure to software and services companies remains significant, adding another layer of vulnerability if AI adoption accelerates faster than anticipated.
Portfolio managers warn that confidence in the sector now depends less on historical growth and more on adaptability. Companies able to integrate AI into their own offerings may prove resilient, while those reliant on legacy subscription models could face increasing competitive pressure.
