Morgan Stanley has cautioned that concerns over artificial intelligence potentially disrupting a large portion of the software industry are beginning to affect the credit market. The software sector accounts for approximately 16% of the $1.5 trillion U.S. loan market, amounting to $235 billion.

For months, financial markets have been buoyed by investor enthusiasm surrounding AI-related trades. However, last week, global software stocks experienced a sharp decline as worries intensified that rapidly advancing AI tools could upend the industry.

In a report released on Monday, Morgan Stanley indicated that the majority of credit exposure within the software industry carries low credit ratings:

- 50% of loans are rated B- or lower, typically indicating higher default risk. - 20% are rated B. - 26% are rated CCC. - Only 7% are rated BB or higher.

Unlike the equity market, over 80% of loans in the software sector are issued by private companies, with nearly 78% backed by institutional sponsors. This suggests limited financial information is available to assess the risks posed by AI disruption.

The software industry also faces more concentrated maturity pressure: approximately 30% of outstanding loans are set to mature before 2028, compared to 22% for the overall market. Additionally, 46% of software debt is due within the next four years, while the broader loan market has less than 35% maturing in that period.

If concerns about AI-driven disruption materialize rapidly, refinancing risks could become particularly pronounced.

**Key Insight**

Despite these concerns, the bank believes the risk of large-scale systemic disruption in the software sector remains limited in the near term. Morgan Stanley stated, "We expect loan prices to remain volatile, but a sharp spike in default rates in the short term appears unlikely."