Morgan Stanley expects default rates in direct lending markets to climb to around 8%, driven in part by mounting pressure on software companies from artificial intelligence disruption, according to a report by Bloomberg.
The report cites bank analysts as writing in a recent note that while AI has not yet had a material impact on private credit fundamentals, a combination of high leverage and upcoming debt maturities in the software sector is likely to push defaults toward levels last seen during the pandemic.
The bank highlighted that software borrowers exhibit some of the weakest credit metrics across sectors, with elevated leverage and relatively low interest coverage ratios.
Software also represents a significant portion of private credit portfolios. Morgan Stanley estimates the sector accounts for roughly 26% of business development company holdings and about 19% of assets in private credit collateralised loan obligations.
A wave of upcoming maturities is expected to add further strain. Around 11% of software loans in direct lending are due in 2027, rising to approximately 20% in 2028, creating a near-term refinancing challenge.
Investor concerns around the sector have already contributed to increased redemption requests in private credit funds, prompting some managers to impose withdrawal limits in recent weeks.
Despite these pressures, Morgan Stanley said risks in private credit are unlikely to become systemic, though a slowdown in retail investor demand could shift the balance of capital toward institutional investors and moderate the asset class’s growth trajectory.
