Private credit markets are facing new uncertainty as artificial intelligence-driven tools begin to put pressure on software companies, a major borrower group for private lenders.

The software industry is under pressure again after artificial intelligence company Anthropic launched a new artificial intelligence tool last week, triggering a sell-off in shares of software data providers.

The AI ​​tools developed by Anthropic are designed to perform complex professional tasks that many software companies currently charge for, raising new concerns that AI could undercut traditional software business models.

Shares of asset managers with large private credit franchises tumbled this week as investors worried that artificial intelligence could upend borrowers’ business models, put pressure on cash flows and ultimately raise default risks.

Ares Management fell more than 12% last week, while Blue Owl Capital A drop of more than 8%. KKR dropped by nearly 10%. TPG The loss is about 7%. Apollo Global and BlackRock fell by more than 1% and 5% respectively. For comparison, the S&P 500 Index fell about 0.1%, while tech-heavy stocks Nasdaq down 1.8%.

Market observers said the moves stoked growing unease in private credit markets, which must now contend with the fallout from artificial intelligence-driven disruption in a software industry that faces acquisitions financed by opaque, illiquid loans.

“Enterprise software companies have been a favored sector for private lenders since 2020,” PitchBook wrote in a report last week, adding that many of the largest ever single-loan (two or more loans combined into one) loans – the most popular structure in the private credit market – went to software and technology companies.

Software accounts for a large share of loans held by U.S. business development companies, accounting for about 17% of BDC investments by deal count, second only to business services, according to PitchBook data.

If AI is adopted faster than borrowers can adapt, this risk could prove costly. UBS Group AG warned that in the event of severe damage, the default rate of U.S. private credit could climb to 13%, much higher than the expected pressure on leveraged loans and high-yield bonds. UBS expects that the default rates of leveraged loans and high-yield bonds may reach about 8% and 4% respectively.

“Private credit loans are made to many software companies,” said Jeffrey C. Hooker, senior lecturer in finance at the Johns Hopkins Carey School of Business. “If they start going south, there will be problems in the portfolio.”

However, Hook said private credit tightness predates the latest AI concerns, pointing to issues with liquidity and loan deferrals. “Many private credit funds are having problems liquidating loans,” he said, adding that the recent developments simply added another layer of pressure to an industry already under pressure.

The new series of warnings comes after Recent concerns about $3 trillion industry Excessive leverage, opaque valuations and the risk that isolated issues could turn into systemic problems JPMorgan’s Jamie Dimon warned of “cockroaches” in private credit late last year, warning that stress on one borrower could be a harbinger of more hidden problems.

“AI disruption may pose a credit risk to private lenders for some software and services industry borrowers, but not for others, depending on which businesses are behind the AI ​​curve and which are above it,” said Kenny Tang, director of U.S. credit research at PitchBook LCD.

Tang added that software and services companies hold the largest share of in-kind payments (PIK) A loan is an arrangement whereby a borrower can defer cash interest payments. While PIK structures are often used to give fast-growing companies time to grow revenue and cash flow, they can be at risk if the borrower’s financial condition deteriorates. In this case, deferred interest can quickly turn into a credit issue, he said.

Mark Zandi, chief economist at Moody’s Analytics, noted that while it is difficult to fully assess the industry’s risks due to the industry’s opacity, the rapid growth of AI-related borrowing, rising leverage and lack of transparency are all considerable “yellow flags.”

“There are definitely going to be serious credit problems, and while the private credit sector may be well-positioned to absorb any losses at the moment, that may not be the case in a year’s time if current credit growth continues.”