Markets: Software Loans at Risk of Default Amid Private Credit Turmoil

Markets: Software Loans at Risk of Default

In a startling revelation, Bruce Richards, CEO of Marathon Asset Management, a $24 billion asset management firm, foresees that bad software loans could ignite a massive wave of defaults within the private credit sector. According to Richards, many software loans are on the brink of distress as capital becomes scarce.

Impacts on Private Credit Investors

• Richards anticipates that the default rate on direct lending to software companies could soar to 15%, potentially remaining at double-digit levels for several years.
• The rising default rate, already at a record 9.2% among US private credit borrowers last year, signals unprecedented distress in private credit's history.
• Recovery rates for lenders could plummet to as low as $0 to $0.30 on the dollar for bad loans.

Widening Spreads and Investor Anxiety

Spreads on new software loans may widen by approximately 700 basis points, indicating increased risk for investors. With asset managers facing redemption requests, investor anxiety in the private credit sector is palpable. Concerns over AI disruption have further soured the outlook for software loans, especially given that many companies are heavily leveraged.

Future of Private Credit Capital

Richards warns that capital for new software loans is rapidly drying up, predicting that refinancing options will not return to previous levels. This precarious position threatens the integrity of the private credit landscape.