AI is boosting the stock market. But it’s a threat to private credit.
Defaults in the highly opaque corner of finance known as private credit are expected to increase after hitting record highs in April, and some money managers are warning that retail investors may not be insulated from the fallout. The combination of ascendant artificial intelligence models, rising inflation and higher interest rates is weighing on the corporate loans that private credit uses as collateral for its funds. That has led some investors to try and pull their money back, never mind the sector’s constrained liquidity. Credit analysts are warning that risks are going to intensify through the rest of this year as pressure mounts on the software sector, which supports a large share of the securitized loans favored by private credit. Software accounts for 19% of assets for private credit collateralized loan obligations, also called middle-market CLOs, according to S & P. “Our updated perspective points to a meaningful increase in private credit defaults, rising from roughly 4.4% to 9–10%, driven in part by the implications of the AI cycle,” strategist Matthew Mish at UBS wrote Thursday. “Risk is expected to evolve over the next year,” he added, “intensifying toward year-end and into early/mid-2027 as software businesses experience slowing growth, waning pricing power, margin compression, and contract cancellations,” Mish wrote. Stock performance by Salesforce on Thursday, which sagged despite an impressive beat on profits and revenues, is emblematic of the troubles facing software. Multiple Wall Street firms fretted about the company’s long-term growth prospects in the face of AI. “There is increasing risk that AI labs like OpenAI and Anthropic expand downstream into enterprise applications such as Salesforce Inc.,” Bank of America analyst Tal Llani wrote Thursday. Ratings agency Fitch registered a record-high 6% private credit annual default rate in April, with 10 default events occurring that month. In the 12 months ended in April, Fitch clocked 99 defaults of various kinds, including interest payment deferrals, maturity extensions under duress, and payments-in-kind instead of cash, as well as more conventional bankruptcies, liquidations and debt-equity swaps. Amend and extend The situation in private credit has, so far, been a sort of slow-moving train wreck as opposed to a cataclysmic derailing. Funds have used amend-and-extend maneuvers and capped withdrawals in hopes that loan collateral will regain its footing as macroeconomic conditions improve. But some are issuing warnings about a rapidly approaching precipice over which it will be impossible to lay any more track. “Beware the ides of June,” DoubleLine Capital CEO Jeffrey Gundlach posted on social media last month. “You’re going to get humongous withdrawal requests from these interval funds in June, and I think that’s going to be a catalyst for more angst,” Gundlach told CNBC at the end of April. Retail investors may not be shielded from the fallout, especially if it affects banks, which have loaned about $300 billion to private credit as of last year, according to ratings agency Moody’s . Unicus founder Laks Ganapathi also said many blue chip names are involved. “You have KKR with Capital Group, Goldman Sachs Asset Management, Blue Owl, Apollo, BlackRock, Blackstone with Wellington and Vanguard – they are all collaborating and completely infiltrating, for lack of a better word, into retail [retirement] accounts,” she said Thursday. Meanwhile, some giant state pension funds also have multiple private credit investments and are sticking with them despite the risks. Pension systems from Kentucky, Arizona, California, Virginia and other states all have significant exposure to private credit, according to information from the Boston College Center for Retirement Research, as reported by Reuters . Potential spillover effects from private credit markets into public credit markets are “underappreciated,” according to UBS’s Matthew Mish. “Investor bases overlap significantly, particularly among insurance companies, foreign investors, and to a lesser extent retail participants,” he wrote on Thursday. DoubleLine’s Gundlach pushed back on the linkages, noting the robust performance of securities markets in general over recent months. “[People] say, because they can’t get out of private credit, they’re going to sell public credit,” he told Bloomberg earlier this month – in other words, stocks, high yield bonds, bank loans and corporate bonds. “The only problem I have with that is it’s not happening at all. The stock market is not in trouble, it’s at new highs … You’d think if there was something to that concept, we’d see more evidence of it.”
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