(Feb 27): Software default rates are at risk of soaring into double digits as disruption from artificial intelligence (AI) spreads and loans come due, according to Bain Capital.
“We’re going to see real stress in the market,” said Angelo Rufino, the head of special situations in North America and corporate special situations in Europe. “This is just classic credit cycle where a sector received undue attention and enormous amounts of money,” he said on the latest Bloomberg Intelligence Credit Edge podcast.
Software default rates could jump to “high-single digits, low-double digits,” according to Rufino. That compares with a projected US default rate for leveraged loans overall of up to 5% this year, unchanged from 2025.
Across Wall Street alarm bells have been ringing on how AI’s new productivity tools could disrupt, not just software, but financial services and asset management businesses as well.
Rufino’s comments echo those of Marathon Asset Management LP Chairman Bruce Richards, who said earlier on Thursday that private credit software defaults could hit 15%. That’s about three times the rate Richards expects in direct lending overall and similar to what UBS Group AG analysts called a worst-case scenario.
Bain has been an active in the sector, holding companies like Rocket Software Inc. in its portfolio, while citing software as one of its areas of expertise. Rocket’s debt has been under pressure of late. The investment firm didn’t give an overall figure on software debt holdings but said that the special situations group has less than 5% exposure.
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While Rufino says many software service companies have stable subscription revenues and sell utility products at relatively low costs, he expects their ability to negotiate price increases to be constrained by the rise of AI. That will hurt multiples and what enterprise value they can support, making debt refinancing tougher, he added.
“We will see a full credit cycle as the reckoning really comes to resize capital structures to the earnings power of these business models,” said Rufino. “We are going to see challenged refinancings for sure.”
Still, the software storm is unlikely to spiral into a broader credit market problem following years of deleveraging and given steady US economic growth, according to Rufino.
See also: Salesforce eases AI fears with strong outlook and big buybacks
“This will be largely contained to a few specific sectors — I don’t think credit at large is going to see massive increases in defaults,” said Rufino.
But he does view credit spreads as too tight at current levels, considering the potential hazards in the market. With a premium to Treasuries of about 300 basis points, “the risk-reward just isn’t there” for high-yield bonds, he said.
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