A leading UBS analyst has issued a stark warning that the accelerating pace of artificial intelligence disruption could soon send shockwaves through credit markets, particularly impacting software firms. While the stock market has begun to price in AI's effects, the credit sector is expected to be the next to feel the pressure, potentially leading to significant defaults.
Key Takeaways
- AI disruption is expected to hit credit markets sooner than anticipated, with software firms being particularly vulnerable.
- UBS forecasts substantial defaults in leveraged loans and private credit markets within the next year.
- A rapid AI transition could trigger a credit crunch and a broad repricing of leveraged credit.
AI's Growing Threat to Credit
Matthew Mish, UBS's head of credit strategy, has updated his firm's forecasts, acknowledging that the rapid advancements in AI models from companies like Anthropic and OpenAI have accelerated the timeline for disruption. Mish noted that the market has been slow to react, underestimating the speed at which AI's impact would be felt. He stated that a recalibration of credit evaluation is necessary, as this is no longer a distant concern for 2027 or 2028.
The market's perception of AI has shifted from a general boon for technology to a more concentrated "winner-take-all" dynamic, where established players face significant threats from AI innovators. This shift has already impacted software firms, with ripple effects extending to sectors like finance, real estate, and trucking.
Projected Defaults and Market Impact
In a recent research note, Mish and his UBS colleagues outlined a baseline scenario predicting between $75 billion and $120 billion in new defaults across leveraged loans and private credit markets by the end of the year. This projection is based on estimated increases of up to 2.5% and 4% in defaults for leveraged loans and private credit, respectively, by late 2026. These markets are estimated to be worth $1.5 trillion and $2 trillion.
Mish also highlighted the possibility of a more severe "tail risk" scenario, where defaults could double, leading to a significant funding crisis for many companies. Such an event could result in a broad credit crunch, a widespread repricing of leveraged credit, and a substantial shock to the overall credit system.
Categorising AI's Impact on Companies
Mish categorises companies based on their position in the AI landscape:
- AI Model Creators: Startups like Anthropic and OpenAI developing foundational large language models.
- Investment-Grade Software Firms: Companies such as Salesforce and Adobe with strong balance sheets capable of integrating AI to maintain competitiveness.
- Private Equity-Owned Software and Data Services Firms: These companies, often carrying high debt levels, are considered the most vulnerable to AI disruption.
Mish indicated that companies in the third category are least likely to emerge as winners in a rapidly disruptive AI transformation.