Private credit alarm on software loans

One of Wall Street’s hottest businesses is suddenly worried about a very specific borrower: software companies that were financed on growth promises instead of hard cash flow. Marathon Asset Management chief executive Bruce Richards said software defaults in direct lending could reach 15% in the next few years. (bloomberg.com; finance.yahoo.com) Direct lending is just private credit with fewer middlemen. A fund lends straight to a company, often one owned by private equity, and holds the loan instead of trading it like a public bond. (money.usnews.com) Software became a favorite target because subscription revenue looked steady. If customers pay every month, lenders can pretend that future revenue is almost as solid as a factory or a warehouse. (pitchbook.com; msci.com) That logic produced a niche loan called an annual recurring revenue loan. At the peak, software borrowers could get these loans at 525 to 550 basis points over the benchmark rate with loan-to-value ratios of 30% to 35%, according to PitchBook LCD. (pitchbook.com) Now the bet is breaking because the revenue stream itself looks less durable. PitchBook said annual recurring revenue loans have become increasingly rare, and recent software deals are pricing at about Secured Overnight Financing Rate plus 550 to 575 basis points instead of the 450 to 475 basis point range seen before the selloff. (finance.yahoo.com) The trigger is not just higher interest rates. Lenders are also worrying that newer artificial intelligence tools could replace or cheapen parts of the software products those borrowers sell, which makes tomorrow’s subscription revenue look less certain than it did six months ago. (cnbc.com; bloomberg.com) Banks that finance the lenders have started reacting too. JPMorgan Chase marked down software loans used as collateral by private credit firms and reduced how much those firms could borrow against them, which is a warning shot because it squeezes leverage on top of already risky loans. (cnbc.com) The refinancing calendar makes the problem harder to dodge. Bloomberg reported that more than $330 billion of high-yield, leveraged-loan, and business-development-company-linked software and technology debt comes due through 2028. (bloomberg.com) That means a lot of companies will soon have to ask for fresh money in a market that no longer believes the old story. Some private credit funds are already turning away software borrowers outright, and some software company sale processes backed by private equity have stalled. (bloomberg.com) The weak spot is leverage. MSCI said software borrowers in private credit are more highly leveraged and more dependent on future growth expectations than borrowers in other industries, so even a small hit to growth can make interest payments much harder to cover. (msci.com) Investors are feeling the pressure before many loans have formally defaulted. Bloomberg reported more than $4.6 billion of investor capital was trapped behind withdrawal limits across private credit funds in late March, and Blue Owl said unusually high redemption requests were tied to concerns about artificial-intelligence disruption to software companies. (bloomberg.com; msn.com) So this is what the market is repricing in real time: a software company with thin cash generation used to be financed like a reliable subscription machine, and now it is being treated more like a borrower that may need rescue capital. When that shift happens across a whole sector, lenders charge more, lend less, and private equity owners get less room for error. (pitchbook.com; bloomberg.com)