Software firms delay debt deals amid AI disruption and higher costs

Software companies are delaying debt deals as rising borrowing costs and tighter scrutiny from lenders hit the sector, while concerns grow over how artificial intelligence could disrupt business models.

Industry sources say both U.S. and international software firms have paused or postponed fundraising amid fears that AI could upend the industry. In loan markets, spreads for riskier borrowers have widened to account for potential defaults, particularly in leveraged loans, which are more exposed than high-yield bonds, News.Az reports, citing Reuters.

Matthew Mish, head of credit strategy at UBS, said the disruption could play out over the next two years, with defaults in lower-quality credit sectors expected to rise 3–5% in a faster disruption scenario.

Even higher-quality software firms are waiting to tap markets until trading levels recover. For example, Qualtrics is preparing a $5.3 billion acquisition financing package for its purchase of Press Ganey Forsta, but the deal’s reception will be closely monitored by investors.

Technology borrowers dominate the leveraged loan market, with software companies accounting for 60% of tech loans, valued at roughly $260 billion. Most of these loans carry lower credit ratings, about 50% are “B- or lower,” denoting higher default risk, according to Morgan Stanley.

Banks are likely to demand higher yields and stricter covenants on future deals to protect investors. Several transactions in the sector, including loans for European provider Team.blue, have already been delayed. Analysts say software and business services are unlikely to be active sectors for debt issuance over the next year due to rapid technological change.

News.Az 

By Aysel Mammadzada