Investors Offload Software Loans Amid AI Disruption Concerns

Recent developments in the software industry have prompted investors to offload software loans at discounted rates, signaling distress within the sector. Managers of collateralized loan obligations (CLOs) are actively seeking to reduce their exposure to software companies, anticipating potential rating downgrades and defaults. This trend follows a significant downturn in the software market, primarily triggered by the release of advanced AI tools by Anthropic, which raised concerns about widespread disruption across technology and professional services.

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The software sector constitutes approximately 15% of the collateral in outstanding syndicated CLO deals in the U.S., with software alone accounting for about 12% of CLO holdings. Analysts from JPMorgan estimate that between $40 billion and $150 billion of U.S. CLO holdings are linked to sectors at high risk from AI advancements. Jim Egan, co-head of securitized products research at Morgan Stanley, noted that the current selling pressure from CLO managers exceeds buying interest, particularly in light of the heightened risk associated with "CCC" rated companies.

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In late February and early March, a range of software loans, including those from companies like Intuit, Dayforce, and Citrix, were sold at prices between 89 and 98 cents on the dollar, a stark contrast to their previous premium valuations. Despite this, Intuit's investment-grade bond remains stable, reflecting its upgraded credit rating. However, the overall sentiment in the market has turned bearish, with many analysts cautioning that the buyer base for these loans is thin, limiting participation from major private credit firms.

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CLO managers are currently assessing AI risks on a case-by-case basis, which has slowed their willingness to engage in new software loan acquisitions. Joyce Jiang, head of U.S. CLO Research at Morgan Stanley, indicated that the majority of CLO managers are still developing frameworks to evaluate these risks. Gavin Zhu from Barclays emphasized that without a clear catalyst, it is challenging for CLO managers to pivot back into software investments.

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The turmoil in the software sector has broader implications for the private credit market, with major U.S. banks tightening lending practices and some funds limiting withdrawals. As of June 2025, U.S. banks had nearly $300 billion in loans to private-credit providers, with concerns over valuations and transparency leading to increased scrutiny. Notably, firms like Morgan Stanley and Blackstone have faced significant withdrawal requests, prompting them to adjust their redemption policies.

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While many CLO managers are reducing their software loan exposure, some analysts suggest that the selling activity is selective and focused on better-performing loans. This discrepancy highlights the varied strategies within the CLO community regarding software investments.

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• “Software is a sector where there is more selling coming from CLO managers than there is buying right now,” — Jim Egan, Co-head of Securitized Products Research, Morgan Stanley

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• “At the same time, many view the current environment as a buying opportunity, especially for companies they believe are least vulnerable to AI disruption.” — Al Remeza, Associate Managing Director, Moody’s Ratings

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• “The majority of the CLO community is really taking its time to think about how to come up with a framework to assess AI risk, more on the single-name level, to really scrub their book to identify which are the names that are more prone to AI risk,” — Joyce Jiang, Head of U.S. CLO Research, Morgan Stanley

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• “For CLO managers, the appetite for stressed loans in orphan sectors, like software and services, is weaker,” — Rishad Ahluwalia, Head of CLO Research, JPMorgan

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The ongoing adjustments in the software loan market reflect a cautious approach by investors as they navigate the complexities introduced by AI technologies.

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