According to Andrew Ross Sorkin, while bad actors and speculation are always present, the single element that transforms a market downturn into a systemic financial crisis is excessive leverage. Without it, the system can absorb shocks; with it, a domino effect is inevitable, making guardrails against leverage paramount.

The "canary in the coal mine" for private credit isn't SaaS debt but any over-leveraged company. A firm burdened by debt repayments lacks the capital to invest in AI and automation, making it vulnerable to disruption by less-leveraged, more innovative competitors in any industry, not just software.

A company's ability to adopt AI and robotics is directly limited by its debt load. Highly leveraged incumbents cannot afford the necessary capital investments to retool their operations. In contrast, unlevered competitors can reinvest freely, creating a decisive advantage and ultimately winning the market.

Not all discounted stocks are equal. A company trading at 60% of its value with no debt is more attractive than a highly leveraged one at the same discount. The leveraged company's price-to-enterprise value might be much higher, indicating greater risk and lower future returns.

While low rates make borrowing to invest (leverage) seem seductive, it's exceptionally dangerous in an economy driven by debt management. Abrupt policy shifts can cause sudden volatility and dry up liquidity overnight, triggering margin calls and forcing sales at the worst possible times. Wealth is transferred from the over-leveraged to the liquid during these resets.

In a potential recession, highly levered companies like Global Payments and Shift4 (3.5x net debt/EBITDA) make a mistake prioritizing buybacks. Fiserv's new strategy of pausing buybacks to deleverage is more responsible, as de-risking the balance sheet can increase equity value.

The prolonged period of near-zero interest rates encouraged businesses, especially in private equity, to take on massive leverage. These companies, structured for cheap debt, are now struggling to survive in a normalized rate environment, creating a significant systemic risk.

Once considered safe due to low CapEx and recurring revenue models, the technology sector now shows significant credit stress. Investors allowed higher leverage on these companies, but the sharp rise in interest rates in 2022 exposed this vulnerability, placing tech alongside historically troubled sectors like media and retail.

Issuing equity, even at a seemingly low price, can be value-accretive if the capital is used to de-lever. A cleaner balance sheet makes the company investable for a new class of institutional funds that avoid highly leveraged businesses, thereby expanding the potential buyer pool and removing a valuation discount.