While a wave of euphoria sweeps through global credit markets, a specific segment is experiencing a sharp and growing fear. Software companies, heavily loaded with debt following leveraged buyouts that targeted their predictable revenue streams, are witnessing significant declines in their loan prices this week. This downturn stems from mounting investor concerns that rapid advancements in artificial intelligence, particularly the enhanced coding capabilities of tools like Anthropic's Claude, could render numerous existing software products and services obsolete.
A "Loan-Ageddon" Hits Software Debt
The selloff has been pronounced. A loan tied to Cloudera Inc. fell by a notable 7 cents on the dollar this week. Similar declines were observed for loans associated with firms ranging from Dayforce Inc. to Rocket Software Inc. The pressure extends to new debt offerings, with European software firm Team.Blue and Thoma Bravo's Conga struggling to complete financings despite a generally heavy calendar for loan sales.
"A storm has hit the loan market," stated 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 [bids wanted in competition] and you have a full blown 'loan-ageddon'."
Software's Dominant Yet Vulnerable Position
Software constitutes one of the largest components of the leveraged loan market, accounting for approximately 12% of the credits in the Bloomberg US Leveraged Loan Index. Data compiled by Nomura reveals that software debt within collateralized loan obligations (CLOs)—bonds backed by portfolios of leveraged loans—has recorded the worst total returns so far this year compared to all other sectors.
This software-specific distress presents a stark contrast to the broader leveraged loan market. Overall sales surged this week, partly emboldened by US President Donald Trump dropping tariff threats related to Greenland, which eased geopolitical tensions and encouraged corporate borrowing. In Europe, this rush propelled leveraged loan sales to a fresh weekly record.
AI's Existential Threat to Software Models
The core investor anxiety revolves around AI's potential to democratize software development. The fear is that AI will enable more companies and individuals to build custom software solutions, drastically reducing demand for traditional off-the-shelf software products and services. A key example is Anthropic's recent introduction of Claude Cowork, a product that functions like a chatbot but can autonomously complete tasks such as building applications and creating spreadsheets. Media reports highlight how Claude simplifies coding for individuals without formal technical training.
"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," observed 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."
Bond Market Impact and Selective Selling
The selloff has not been confined to loans. Bonds issued by software companies have also been hit. Prices dropped this week for notes from cloud computing firm Rackspace Technology Global Inc. and CDK Global, a provider of software for automotive dealerships. This friction arrives just ahead of an anticipated borrowing spree next month to fund AI projects, which could potentially push US corporate bond sales to a record high.
However, analysts caution that the selloff may be indiscriminate. "There is a certain element of throwing the baby out with the bathwater," noted 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."
This sentiment is echoed by Beach Point Capital's Bowron, who points out that the selloff appears disconnected from underlying fundamentals. Many software firms continue to report solid financial 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."
Structural Stress and Investor Strategy Shifts
The current turmoil also reflects deeper structural issues within the technology sector. Ari Lefkovits, managing partner at Delos Capital, explained that many deals completed around five years ago were priced based on high-growth assumptions that often failed to materialize. Subsequently, these companies faced higher interest payments as rates rose, straining their balance sheets. "The businesses aren't broken," Lefkovits said. "It's just the balance sheets are stressed too much."
In response to these dynamics, a Morgan Stanley report released on Friday recommended a strategic shift: shorting credits exposed to AI disruption and favoring high-yield junk bonds over leveraged loans. This recommendation is based on leveraged loans' greater exposure to potential upheaval in the technology and software sectors.
Ultimately, the market is grappling with a fundamental question: how many of the companies currently facing selling pressure are genuinely at risk of being undermined by AI? The answer remains unclear, but the fear itself is now a powerful force reshaping credit allocations and valuations within the vital software segment of the global debt market.
