Morgan Stanley warns: Private credit default rates expected to rise to 8%! Is AI disruption the biggest catalyst?

How Will AI Specifically Impact the Credit Fundamentals of the Software Industry?

Reporter: Li Lei Editor: Xiao Ruidong

According to reporters from the Daily Economic News, the wave of redemptions in the U.S. private credit market continues to unfold. Recently, Morgan Stanley issued a warning: as artificial intelligence technology continues to develop and disrupt the software industry, the private credit market is preparing for a new wave of pressure, with default rates expected to rise to around 8%.

Led by analyst Joyce Jiang, the team stated that although the impact of artificial intelligence on private credit has yet to create a substantial shock, potential risks are accumulating rapidly, especially for loans related to the software industry. High leverage and weakening cash flow coverage could push default rates to their highest levels in recent years.

It is worth mentioning that just a few days ago, both Morgan Stanley and Cliffwater LLC set redemption limits for their debt funds, which manage billions of dollars, due to redemption requests exceeding the usual quarterly limits.

According to the Financial Times, in the first quarter of this year, several large private credit funds collectively faced over $10 billion in redemption requests, involving institutions such as Blackstone, BlackRock, Cliffwater, Morgan Stanley, and Monroe Capital.

AI Reshapes the Software Industry Ecosystem, Private Credit Faces Default Pressure Test

Recently, Morgan Stanley clearly indicated in a report that as the industry transformation driven by artificial intelligence reshapes the software industry, the private credit market is preparing for a new wave of pressure. The direct loan default rate is expected to rise to around 8%, a level close to the peak defaults during the COVID-19 pandemic.

According to the report, the credit fundamentals of software industry loans are the weakest across all sectors, showing dual pressures of high leverage and low debt service coverage. The Joyce Jiang team noted in the report that software loans have the highest leverage levels and the lowest interest coverage ratios among major industries, with cash flow coverage continuously weakening and debt repayment capacity significantly under pressure.

At the time of this warning, the global credit market is struggling to cope with the impact of artificial intelligence on business models, especially in the software industry. For a long time, the software industry has been favored by private credit investors due to its stable income and high profit margins.

Over the past decade, alternative asset management firms have significantly increased their risk exposure to software companies. Morgan Stanley data shows that this sector currently accounts for about 26% of non-public business development companies’ (BDC) investment portfolios. In private credit collateralized loan obligations (CLOs), the software industry’s exposure is also substantial, at about 19%, with a large number of loans set to mature soon.

According to global financial tracking agency PitchBook, the debt maturity profile of direct loans in the software industry shows a “front-loaded” characteristic: 11% of loans are set to mature in 2027, and the proportion maturing in 2028 rises further to 20%. If market liquidity tightens and lenders’ risk appetite decreases, the refinancing costs for software companies will rise significantly, and the difficulty in extending debt maturities will directly increase default risks.

Amid these risk warnings, market liquidity pressures have already begun to manifest. Just last week, Morgan Stanley and Cliffwater LLC both set redemption limits for their multibillion-dollar private debt funds, becoming yet another example of tightening liquidity in the industry. Both institutions indicated that the core reason for triggering the limits was that the scale of investor redemption requests far exceeded the usual quarterly caps, making it difficult for the funds to meet all payment demands without impacting asset prices.

The $10 Billion Redemption Wave Sweeps Asset Management Giants, Market Analyzes Risk Boundaries

The redemption limits set by Morgan Stanley and Cliffwater are not isolated cases.

According to the Financial Times, in the first quarter of 2026, leading institutions like Blackstone, BlackRock, and Morgan Stanley collectively received $10.1 billion in redemption requests from their private credit funds, but only fulfilled about 70% of those requests, with the remainder being forced to be deferred.

Among these, BlackRock’s $26 billion HPS corporate loan fund faced 9.3% in redemption requests but only executed a 5% quarterly redemption limit; Blackstone’s flagship private credit fund, with $82 billion in assets, saw redemption requests reach 7.9%, a new high.

Redemption pressures have transmitted to the capital markets, directly leading to a collective decline in the stock prices of related assets. Since March (as of March 16), Blue Owl Capital’s stock has fallen 16.97%, with a year-to-date drop exceeding 40%, and Ares Management also saw a decline of over 10% in March. On March 6 alone, BlackRock’s stock plummeted 7.17%, while Blue Owl Capital, KKR, and Ares Management dropped 5.09%, 4.46%, and 6.01%, respectively.

It is noteworthy that on March 11, KKR publicly stated that direct loans account for 5% of its assets under management, and the company’s recent poor performance is mainly due to legacy investments and non-first lien investments. “Core operating metrics have not shown any substantial slowdown,” said the company’s CFO, Robert Lewin. Recent market performance indicates that KKR’s stock shows signs of stabilization and recovery.

In response to market panic, various institutions have also assessed the boundaries of risk. Morgan Stanley strategists emphasized that the current risks in private credit are confined to the industry level and do not pose a systemic risk, with limited spillover effects. The report pointed out that the liquidity restriction mechanisms in private credit effectively block risk transmission, and the banking sector’s risk exposure in this field is defensive, preventing a repeat of the 2008 subprime mortgage crisis.

Huatai Securities also noted that private credit is currently in a phase of industry clearing, with short-term pressures continuing. However, under the benchmark scenario of a soft landing for the U.S. economy, systemic spillover risks are generally controllable, resembling a “storm in a teacup” (i.e., localized industry risks).

Some market participants also remind that the disruption caused by AI to the software industry is characterized by long-term and uncertainty, and the reconstruction of revenue models in software companies will continue to affect credit quality. Additionally, the increase in retail investor participation may lead to liquidity vulnerabilities, further exacerbating market volatility, potentially marking the end of the high-growth phase of the private credit market over the past decade.

As of now, redemption restrictions remain in place. In the coming two weeks, as institutions like Ares Management, Apollo Global, Blue Owl, Oaktree, and Goldman Sachs complete their statistics, redemption scales are expected to rise, and the liquidity test in the private credit market is far from over.

Daily Economic News