The software sector faces a significant, under-the-radar credit risk. Over $330 billion in high-yield and leveraged loan debt is due for repayment by 2028. This looming 'maturity wall' creates a source of potential 'landmines' for investors as software stocks are already beginning to roll over.

A slowing economy leads rating agencies to downgrade loans. Since Collateralized Loan Obligations (CLOs) have strict limits on lower-rated debt, they become forced sellers. This flood of supply depresses prices further, creating a negative feedback loop that harms even fundamentally sound but downgraded assets.

There is a growing risk of downgrades in the high-grade market. The minimal yield premium for a single-A rating over a triple-B rating incentivizes higher-quality companies to increase leverage, potentially leading to a wave of downgrades as issuance ramps up.

Despite strong current performance driven by technicals, the real risk for leveraged loan issuers is their ability to refinance in 2-3 years. This looming "refinancing wall" could force many companies back into the high-yield market, creating a new wave of opportunities for credit investors.

Third Point expects the next structured credit opportunity to come from forced selling driven by ratings downgrades, not fundamental defaults. If BBB-rated CLO tranches are downgraded, insurance companies, who are major holders, will be forced to sell due to regulatory constraints, creating price dislocations.

The upcoming maturity wall is dangerous not because of its size, but because over 50% of the debt is rated B3 or lower. These companies, financed in a zero-rate environment, now face a refinancing cliff at much higher costs and with tighter documentation, increasing default risk.

The concentration of software loan maturities in 2028 is not an impending cliff but a timeline for a market shakeout. Over the next few years, AI's impact will differentiate companies with durable business models that can refinance from those that are existentially threatened and will likely default.

Beyond the long-term threat of AI disruption, highly leveraged, lower-quality software companies funded by private credit face a more immediate problem: a $65 billion wall of debt maturing by 2028. They must refinance this debt amid high uncertainty, creating significant near-term risk separate from AI's eventual impact.

Collateralized Loan Obligations (CLOs) have a structural covenant limiting their holdings of CCC-rated (or below) loans to typically 7.5% of the portfolio. As more loans are downgraded past this threshold, managers are forced to sell, even if they believe in the credit's long-term value. This creates artificial selling pressure and price distortions.