Bad loans in the U.S. software industry are surging, and a

# Source: Wall Street Insights

By Zhao ying

Data compiled by Bloomberg shows that over the past four weeks, more than $17.7 billion of loans to technology companies have slipped into distressed territory, pushing the total volume of distressed debt in the U.S. tech sector to a staggering $46.9 billion—the highest level since October 2022. The fallout from this crisis is spreading to private credit, which is now reeling from two simultaneous shocks: the collapse of the lending logic for software firms and a fading appetite for private credit itself. As equity valuations of software companies plummet, private credit lenders are likely to tighten credit terms, creating a dangerous **software-PE death spiral**.

The U.S. software industry is grappling with an AI-fueled credit crisis.

According to Bloomberg-compiled data on Thursday, over $17.7 billion in tech company loans have fallen into distressed status in the past four weeks, sending the total distressed debt in the tech sector surging to approximately $46.9 billion, a peak not seen since October 2022. Dubbed the "SaaS apocalypse" by the market, this crisis is rapidly spreading from the stock market to the private credit space.

The core driver of this sell-off is market fears that artificial intelligence is upending traditional software business models. The Software-as-a-Service (SaaS) industry is seen as particularly vulnerable, as AI displaces traditional software functions such as coding and data analysis.

The crisis’s ripple effects are widening, with distressed debt now including loans to healthcare software firm FinThrive and Perforce Software, both backed by private equity firm Clearlake Capital.

Analysts at Bank of America note that roughly 14% of the leveraged loan market’s assets are exposed to the tech sector, a figure that jumps to 20% in private credit. For Collateralized Loan Obligations (CLOs)—securities bundling leveraged loans—the software sector accounts for 11% to 16% of exposure. The private credit market is currently under dual pressure: the breakdown of the fundamental logic for lending to software companies, and a waning allure of private credit as an asset class.

## A Rapid Deterioration of Software Sector Debt

Bloomberg Intelligence data reveals that the $17.7 billion in tech loans that turned distressed over the past four weeks are concentrated almost entirely in the SaaS space. Distressed loans are defined as those with yields trading more than 10 percentage points above the benchmark Secured Overnight Financing Rate (SOFR).

Beyond the debt already in distress, more software company loans are edging closer to pressure levels. Leveraged loans for human resources management software provider Dayforce and call center technology firm Calabrio—both owned by private equity firm Thoma Bravo—are teetering on the brink of distress. Loans for data integrity software company Precisely, backed by Clearlake and TA Associates, dropped 8 cents on the dollar this week.

Jack Parker, Portfolio Manager at Brandywine Global Investment Management, described the current environment as a "sell first, ask questions later" moment. "It’s been really painful for the sector," he said. "People are selling everything in the space broadly, without much regard for how much AI will actually disrupt these businesses, or how long that disruption will take."

Bank of America analysts found that 80% to 90% of issuers in the enterprise software and tech services space have posted negative price returns since January 9—a date the bank has labeled the "inflection point" for the sector. "As AI advances at a rapid pace, fears are mounting that it could threaten software and service providers, pressuring their revenue streams if not rendering them obsolete entirely," the analysts wrote in a note.

## Private Credit Trapped in a Double Bind

The software sector’s woes are sending shockwaves through the private credit market. Shares of alternative lenders including Blue Owl, Runway Growth Finance and Golub Capital have begun to plummet in lockstep with the software industry.

Data from a team led by Bank of America analyst Ebrahim Poonawala shows that software represents one of the largest industry exposures for Business Development Companies (BDCs), using the tech category as a broad proxy. Raymond James analyst Robert Dodd notes that actual exposure is likely even higher, as loans to software firms are often categorized by their end market. For example, a company providing SaaS for healthcare may be classified under "healthcare" rather than "technology" or "software".

Analysts believe the private credit market is undergoing two simultaneous unwinds:

First, the core logic for lending to software companies has collapsed. Annual Recurring Revenue (ARR) was once viewed as a source of stable, bond-like cash flow, a predictable stream that justified lending even to companies with negative free cash flow. But this argument rested on the belief that subscription revenue would remain steady. When business models face an abrupt risk of obsolescence, that "stable annuity" becomes a binary bet.

Second, the appeal of private credit itself is fading. The promised "illiquidity premium" looks far less attractive as public market yields continue to rise. And the so-called insulation benefits—no daily mark-to-market, limited volatility, and calm in the storm—are much harder to sell when defaults are now seen as a real risk, and every headline in the market seems to relate to a sector with significant exposure.

## A Death Spiral Takes Shape

Jeffrey Favuzza of Jefferies’ Equity Trading division described the current environment as the "SaaS apocalypse", noting that trading activity has devolved into a panic sell-off of "just get me out at any cost"—with no signs of a bottom yet.

Analysis from JPMorgan and Goldman Sachs shows the market is experiencing an unprecedented divergence: on one side, semiconductor companies seen as beneficiaries of the AI supercycle, and on the other, software firms viewed as the biggest losers. This divergence is fueling a dangerous negative feedback loop.

As software equity valuations crash, private credit lenders face pressure to revalue their balance sheets, which in turn could lead to tighter credit terms. This will further squeeze growth for software companies already fighting for survival. Firms with loans trading at distressed levels will struggle to access traditional debt markets, exacerbating funding crunches.

## Risk Warning and Disclaimer

The market is risky, and investment requires prudence. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial conditions or needs of individual users. Users should assess whether any opinions, views or conclusions in this article are consistent with their specific circumstances. Any investment made based on this article shall be at the investor's own risk.