"AI Disrupts Everything" Severely Impacts Software Outlook! Morgan Stanley Sounds Direct Lending Alert: Private Credit Default Rates May Rise to 8%

Wall Street financial giant Morgan Stanley recently stated that as the rapid development of artificial intelligence technology continues to disrupt the global software industry’s profit growth prospects, default rates in the direct lending sector will quickly rise to 8%. Morgan noted that among major global industries, the credit fundamentals of the software industry face significant challenges with the highest leverage ratios and lowest coverage levels. The pessimistic narrative that “AI disrupts everything” could dominate market risk pricing, leading to a broad upward trend in private credit default rates.

Including Joyce Jiang, Morgan’s market analysts team said in a report on Monday that although AI disruption has not yet substantially impacted the fundamentals of private credit in a “concrete way,” the high leverage in the software industry and imminent maturity walls could push direct loan default rates to levels not seen since the COVID-19 pandemic. Direct loans are the core and most common sub-sector within private credit.

The analysts wrote: “The credit fundamentals of software industry loans are facing severe challenges, with the highest leverage and lowest coverage among major global industries.” They added that while default rates in public and private markets have eased, the effects of AI disruption spreading worldwide will likely cause default rates to rise further.

In recent months, global credit markets have experienced heavy sell-offs and asset redemptions as investors actively assess how AI will disrupt revenue streams for SaaS providers and broader software companies. Over the past decade, alternative asset managers like Blue Owl have heavily invested in software firms, attracted by their predictable profit curves and higher profit margins.

With Morgan raising its default rate forecast to 8%, and previously UBS predicting that AI disruptions would become more evident around 2026-2027, especially affecting lower-quality, highly refinancing-dependent credit assets, private credit with “high software exposure, high leverage, and refinancing pressures” could see significant increases in default rates soon. In other words, if the “AI disrupts everything” pessimistic narrative continues to dominate risk pricing, default rates are likely to trend upward—more as a structural rise in sectors like software disrupted by AI rather than a total market collapse.

The real impact of cutting-edge AI technology will not be on all software companies but on those whose product functions are easily absorbed by native model capabilities, with weak moats, heavy customization and implementation requirements, and customers capable of partially reconstructing functions with AI themselves. For these borrowers, the issue is not valuation decline per se but doubts about sustainable profitability growth, pricing power, and renewal ability. Once growth assumptions are downgraded, credit structures built on high EBITDA multiples and leverage become fragile.

Fitch Solutions also pointed out that the most vulnerable software companies are often those that focus heavily on implementation, customization, and are easily replaced by internal AI development. Therefore, private credit default rates may continue to rise, especially in direct software loans and other areas where AI directly compresses business models, particularly in scenarios with “AI disruption + low ratings + maturity walls.”

Additionally, market pricing may not simply mean “software all lose.” The true beneficiaries of AI may be concentrated in two major themes: first, AI deployment and governance infrastructure—platform providers that help enterprises operationalize AI, including cloud and model platforms, data governance, identity and access management, security, observability, workflow orchestration, etc.; second, the most solid global market segment—AI data center computing power and power supply chains.

“AI Disrupts Everything” Narrative Sweeps Global Stock Markets, Especially Devastating for Software Stocks

Since February, the pessimistic tone of “AI disrupts everything” has been driven by concerns that viral AI workflows like Claude and OpenClaw (formerly Clawdbot, Moltbot) could weaken the entire SaaS subscription revenue model of the software empire, leading to rare sell-offs. This wave of selling quickly spread to insurance, real estate, trucking, and other industries perceived as reliant on subscription or labor-intensive business models—markets believe these sectors will be thoroughly disrupted by AI.

Not only in the US, but globally, the software sector has been under continuous pressure since February, despite increased buybacks in US stocks, investors remain cautious, worried about whether the long-term fundamentals and business models will be fundamentally reshaped by AI.

Since last fall, investors have been selling software stocks, with the scale of selling intensifying after the “Anthropic storm” in February. Fears that AI’s trajectory will significantly disrupt this already high-valuation, asset-light sector have caused the S&P 500 software index to fall about 30% since late October.

The “Anthropic storm” that heavily impacted software stocks continues to ferment in global markets, with the sell-off spreading to wealth management, real estate consulting, and other traditional industries seen as vulnerable to AI disruption. The market’s pessimistic outlook that “AI disrupts everything” acts like a domino effect, impacting sectors from software, SaaS, private equity, to insurance, traditional investment banks, wealth management, real estate, property management, and logistics—all experiencing sequential declines. Over the past three to four weeks, AI has seemingly swept through traditional industries one by one, prompting investors to accelerate selling of potential “losers.”

As a series of innovative AI agents focused on proxy workflows are launched, they threaten to disrupt traditional industries and suppress pricing power across the broader economy. Since this year, concerns that “the AI super wave may compress corporate profits, disrupt employment, and cause deflation” have rapidly spilled over into software, private credit, real estate services, and insurance sectors.

The core reason for this round of software stock plunges and sector-wide declines is the pessimistic view that “AI disrupts everything.” Since February, this narrative has swept global financial markets, driven by the launch of a series of AI tools and proxy AI agent collaboration platforms by Anthropic, triggering a broad sell-off in SaaS subscription stocks and the wider software sector. The panic among global software investors, known as the “Anthropic storm,” began earlier in February when Anthropic released a major legal plugin for its rapidly popular Claude Cowork AI agent. This super tool for contract review, enabling low-threshold AI automation, caused billions of dollars in market value to evaporate from companies like Thomson Reuters and RELX (LexisNexis parent).

The selling pressure driven by the “Anthropic AI storm” persisted from late February through March. Recently, Anthropic launched Claude Code Security, an AI-powered cybersecurity vulnerability scanner. This caused cybersecurity firms like CrowdStrike, Cloudflare, and Okta to plunge 8-10% in a single trading day. After Anthropic claimed that its Claude Code could help enterprises automate processes on IBM systems with minimal barriers, IBM experienced its worst single-day stock decline in over 25 years.

Private Credit Risks Resemble Pre-2008?

Morgan Stanley stated that within the overall portfolio of Business Development Companies (BDCs), the software sector is the largest, with an exposure of about 26%. Its analysts said that securitized private credit loans, including private credit collateralized loan obligations (CLOs), have about 19% exposure to the software industry, with many high-risk loans maturing soon.

These strategists cited PitchBook data indicating that software loans in direct lending face a high “front-loading” risk, with 11% maturing by 2027 and another 20% in 2028.

Anxieties around this sector have significantly increased redemption requests for private credit funds, with managers debating how best to respond to investors seeking to withdraw funds.

Last week, after redemption requests far exceeded typical quarterly thresholds, Morgan Stanley and Cliffwater LLC imposed limits on withdrawals and asset redemptions for their multi-billion-dollar private debt funds.

It’s worth noting that while some market observers compare the current private credit crisis to the subprime mortgage crisis before the 2008 financial crisis, Morgan analysts generally believe that although risks are emerging in the broader private credit space, these are not systemic risks, and the threat of spillover effects to the wider market remains limited.

As of Q3 last year, assets held by Business Development Companies allowing retail investors to access private credit totaled $530 billion. This has raised concerns that the inherent illiquidity of private credit could harm less experienced investors and weaken one of the main growth drivers of these markets in recent years.

Morgan’s analysts pointed out: “The sharp slowdown in retail investor demand for private credit could shift the buyer base more toward institutional investors and suppress future growth of the private credit market.”