- AI is impacting debt markets and disruptions could create problems for loans to software companies.
- Software firms' business models are being threatened, creating concerns about debt service.
- IDX Advisor's Ben McMillan says he's concerned about lax underwriting in the space.
AI has thrown a wrench into various pockets of the stock market this year. An investment chief says it also has the potential to cause problems in the debt market.
Over the last few weeks, AI updates from Anthropic and other firms have threatened business models in numerous industries, but perhaps none more than software. Publicly traded software firms have seen their share prices decline sharply, and private companies have delayed IPOs after seeing valuations fall.
The rout has created concerns that some firms won't be able to service their debt. Shares of Blue Owl Capital, a private credit firm, are the latest flashpoint for these fears. Its stock is down 32% year to date and has dropped more than 16% over the last week alone after it halted withdrawals from a private debt fund.
"The concern is there's a lot of lax underwriting that has been taking place, particularly in the software community," said Ben McMillan, the chief investment officer at IDX Advisors.
"They haven't gone to the public markets to get bonds because they probably wouldn't have gotten them," he continued. "So they've been going to the private market getting loans, and now with the AI SAAS apocalypse, and just general concerns about AI profitability, that's starting to reprice."
In the private credit space, leveraged loans get packaged into collateralized loan obligations and sold to investors. While rising risks in the debt market might not directly affect retail investors, they could start to hurt pension funds and endowments with exposure to CLOs and private credit, McMillan said, as they tend to be more reliant on fixed income.
For now, there's little risk of contagion in the broader economy, he said.
"This is not a contagion high-yield bond issue," McMillan said. "In fact, if anything, quality high yield, given the soft landing narrative increasing, is doing very well, actually."
"For the everyday investor, this probably isn't something I'd stay up at night worrying about," he continued. "A lot of these institutional investors that loaded up the boat on private credit, they're gonna have their reckoning."
Private credit has generated a lot of headlines in recent years amid its rapid growth, as well as a push to make the asset class more accessible to everyday investors. While risks in the space are being flagged more often, anxiety in private credit has been at a fever pitch lately. Former PIMCO CEO Mohamed El-Erian drew parallels between Blue Owl's move to halt redemptions on one of its funds to the start of the financial crisis, when BNP Paribas froze withdrawals for some investment vehicles.
"I think that's kind of the canary in the coal mine now," McMillan said. "It's like, all right, the private credit apocalypse might actually be here."
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