AI disruption could hit credit markets next, UBS analyst says

The recent turbulence in the stock market has shed light on the potential risks faced by software firms and other industries in the wake of the artificial intelligence (AI) boom. While the market has been quick to react to this threat, credit markets may be the next battleground where the impact of AI disruption becomes apparent, according to UBS analyst Matthew Mish.

Mish predicts that tens of billions of dollars in corporate loans are at risk of default in the coming year, particularly for companies owned by private equity that operate in software and data services. The rapid advancements in AI technology, as evidenced by models from Anthropic and OpenAI, have accelerated the timeline for potential disruption, catching many investors off guard.

As investor concerns around AI intensify, the market sentiment has shifted from viewing AI as a rising tide that lifts all technology companies to a winner-takes-all dynamic, where newcomers like Anthropic and OpenAI pose a significant threat to established players. This shift has already led to sell-offs in various sectors, including finance, real estate, and trucking.

In a research note, Mish and his UBS colleagues outline a baseline scenario in which leveraged loans and private credit markets could see $75 billion to $120 billion in fresh defaults by the end of the year. These estimates are based on projections of up to 2.5% and 4% increases in defaults for leveraged loans and private credit, respectively, by late 2026.

However, Mish also warns of a more severe AI transition scenario, where defaults could double the baseline estimates, leading to a credit crunch and widespread repricing of leveraged credit. While this “tail-risk” scenario is not yet a certainty, the increasing pace of AI adoption by large corporations and the ongoing improvements in AI models are contributing to the rising risks in the credit market.

When it comes to the companies most vulnerable to AI disruption, Mish categorizes them into three groups. The first group includes startups like Anthropic and OpenAI, which are leading the development of large language models and could soon become major players in the industry. The second group consists of investment-grade software firms with strong balance sheets, such as Salesforce and Adobe, that are well-positioned to leverage AI technology. The third group comprises private equity-owned software and data services companies with high levels of debt, which are likely to face the most challenges in adapting to the AI-driven market changes.

Overall, the impact of AI disruption on credit markets is a complex and evolving issue that requires careful monitoring and analysis. While the risks are real and growing, the ultimate outcome will depend on a variety of factors, including the pace of AI adoption, the ability of companies to adapt, and the broader economic environment.