In an environment of AI disruption, the most durable software businesses are vertically integrated into critical sectors like finance or healthcare. Furthermore, companies with usage-based pricing models are more resilient than those with seat-based models, as their revenue is tied to utilization, not just headcount.
The market is not heading for a 2008-style crisis with massive default spikes. Instead, it will experience a sustained period of 3-5% default rates for several years. This cumulative "slow burn" will be painful as many over-leveraged companies, financed in a zero-interest-rate environment, face restructuring.
The frequency of aggressive Liability Management Exercises (LMEs) is declining. Sponsors and lenders recognize they operate in a small world and must return to the same markets for future financing. Damaging relationships is no longer tenable, leading to more rational, pro-rata solutions instead of punitive, non-consensual deals.
The era of easy money is over, forcing a reckoning on EBITDA adjustments. Lenders are more skeptical of prospective add-backs, while sponsors must now generate real operational improvements to achieve target returns. The tailwinds of cheap financing and multiple expansion that previously masked underperformance have disappeared.
Geopolitical tensions in the Middle East have a non-obvious second-order effect. By disrupting shipping routes like the Strait of Hormuz, they slow down Asian chemical companies that rely on feedstock from the region. This creates a competitive advantage and a short-term opportunity for U.S.-based chemical producers.
The growing credit secondaries market offers liquidity to limited partners in private credit funds. Rather than selling underlying loans, investors sell their LP interests, often at a discount, to firms like Sycamore Tree. This market is rapidly expanding, from single-digit billions to an expected $35 billion by 2026.
Due to massive fund growth, PE firms are shifting focus. They allocate resources to winning portfolio companies and use liability management to extend runway for underperformers, rather than committing fully to every investment. This portfolio-centric approach differs from the traditional model of being deeply married to each deal.
While over $40 billion in software loans are stressed, this reflects market perception of future AI disruption rather than current performance degradation. Key fundamentals like net retention and revenue growth remain relatively healthy. The real risk lies in a company's inability to adapt and its software's ease of replacement.
The gap between single-B and riskier triple-C rated loans has widened to double its 10-year average. This high dispersion, driven by sector-specific fears and LME-related technicals, separates skilled from unskilled CLO managers. It creates an environment where proactive risk management and credit selection are paramount.