TEXAS: Amid broad euphoria in credit markets, one type of debt is facing growing fear.
Software companies, larded up with debt after leveraged buyout firms viewed their revenue as relatively predictable, have seen their loan prices drop this week.
Investors are becoming increasingly worried that advances in artificial intelligence (AI), including the growing coding capabilities of Anthropic’s Claude, will leave many software products and services obsolete.
A Cloudera Inc loan fell by seven US cents on the dollar this week, with loans tied to firms from Dayforce Inc to Rocket Software Inc also declining.
Other borrowers such as European software firm Team.
Blue and software-focused private equity firm Thoma Bravo’s Conga have struggled to get new debt offerings done at a time when loan sales have broadly been heavy.
“A storm has hit the loan market,” said Scott Macklin, head of US leveraged finance at asset manager Obra Capital Inc.
“The heaviest calendar in months, largely repricing-driven but still overwhelming, has collided with mounting existential questions around software business models as AI reshapes the sector, which is the single largest in loans.
Layer on an unusually heavy flow of BWICs or bids wanted in competition and you have a full blown “loan-ageddon”.
Software is one of the biggest components of the leveraged loan market, accounting for 12% of the credits in the Bloomberg US Leveraged Loan Index.
Software debt in collateralised loan obligations, which are bonds backed by portfolios of leveraged loans, has notched the worst total returns so far this year versus all sectors, according to data compiled by Nomura.
The software loan sell-off is a stark contrast to the rest of the leveraged loan market, where overall sales surged this week after US President Donald Trump dropped his tariff threats around Greenland, emboldening companies to come forward amid the lull in tensions.
In Europe, the rush pushed leveraged loan sales there to a fresh weekly record.
“Right now, it seems like the market is kind of picking on the largest, most liquid structures and some of the more obvious ones that are vulnerable to disruption,” said Sinjin Bowron, portfolio manager and head of liquid credit strategies at Beach Point Capital Management LP.
“Those are precisely the areas where deep diligence and an understanding of their competitive moat matter most.”
Bonds of software companies were also hit, with prices on notes from cloud computing firm Rackspace Technology Global Inc as well as CDK Global, which provides software for car dealerships, dropping this week.
The friction comes ahead of an anticipated borrowing binge backing AI projects next month, which could push US corporate bond sales to a record.
Representatives for Dayforce, Cloudera, Rocket and CDK didn’t immediately reply to requests for comment.
Rackspace declined to comment.
“There is a certain element of throwing the baby out with the bathwater,” said Pratik Gupta, who leads CLO and RMBS research at Bank of America Corp.
“The software sell-off got pushed into names which likely are not going to be affected by AI.”
A key fear is that AI will allow more companies and people to build their own custom software, reducing demand for off-the-shelf software products and services.
Anthropic this month introduced a product, Claude Cowork, that looks like a chatbot but can complete tasks on your behalf like building apps and making spreadsheets.
Recent media accounts have described how Claude makes coding easy for people with no formal training.
A Morgan Stanley report on Friday recommended shorting AI-exposed credits, and favouring junk bonds over leveraged loans because of the latter’s greater exposure to potential disruption in the technology and software space.
It’s not clear how many companies that are being hit in the market now are actually at risk of being undermined by AI.
The selloff is also irrespective of underlying fundamentals, according to Beach Point Capital’s Bowron.
He points out that many firms in the space generally report good results and are still gaining customers.
“These are incredibly deeply entrenched software suites in company processes,” he added. “It would take potentially years to rip out and replace some of these.”
For the technology sector generally, a lot of deals done about five years ago were priced to reflect high-growth assumptions that in many cases haven’t panned out, said Ari Lefkovits, managing partner at Delos Capital who has advised companies on restructurings and other corporate finance transactions.
In the years since, those companies also had to pay higher coupons as interest rates rose.
“The businesses aren’t broken,” Lefkovits said. “It’s just the balance sheets are stressed too much.” — Bloomberg
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