Loan investors push back on borrower-friendly terms, signaling higher costs for PE and AI firms

The leveraged loan market is sending a clear message to borrowers: the easy money era is over, at least for now. Loan investors are pushing back against borrower-friendly terms with enough force to widen credit spreads, delay debt issuances, and nudge borrowing costs meaningfully higher for private equity firms and AI-related companies.

Software companies caught in the crossfire

Software companies have begun postponing debt deals amid rising lender scrutiny. When borrowers voluntarily delay tapping the market, it means the terms on offer have gotten uncomfortable enough to wait out.

UBS has modeled stress scenarios that paint a sobering picture. Under baseline conditions, default rates in the space sit around 1-2%. A moderate disruption scenario pushes that to 3-5%. But in an aggressive AI disruption scenario, defaults could spike as high as 13%.

US banks have responded by raising interest rates on loans extended to private credit funds themselves, creating a daisy chain of higher costs. When the funds that make the loans face more expensive capital, those costs flow downstream to every portfolio company refinancing or raising new debt.

Private credit managers feel the heat

The market’s unease has already shown up in public equity prices. Shares of major private credit managers have taken hits, with Blue Owl Capital falling approximately 10% in early February as AI concerns weighed on borrower valuations. Other prominent names, including Ares Management and Blackstone, have also seen significant declines in their share prices.

Private credit has grown into a roughly $2 trillion asset class over the past decade. It’s worth noting that private credit’s exposure to the software sector is substantial, as the asset class leaned heavily into tech-adjacent lending precisely because software companies offered the predictable cash flows that made leveraged lending comfortable.

CoreWeave, the AI infrastructure company, has experienced investor pushback on its debt terms, signaling that the market’s caution extends beyond just software companies vulnerable to disruption.

What this means for investors

Investors should watch two things closely. First, whether the spread widening stabilizes or accelerates. Second, whether default rates in leveraged software portfolios begin ticking up toward UBS’s moderate scenario of 3-5%.

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