Private lenders built a $235 billion empire on one simple bet: software companies print predictable revenue. AI is now shaking that foundation, and the cracks are showing fast.
The Information reports that AI is weighing heavily on the software debt market, a trend that’s been building since late 2025 and accelerated sharply into 2026. The core issue is straightforward but far-reaching: AI tools can now perform many of the tasks that traditional software companies charge for, threatening the stable margins and recurring revenue that made these companies dream borrowers for private credit funds.
What’s actually happening
Software stocks dropped nearly 30% between October 2025 and February 2026. Some on Wall Street have started calling it the “SaaSpocalypse.” Around $300 billion in market value vanished from the software sector in just three days this February.
But the real stress point isn’t in public equities. It’s in the debt markets.
Here’s why that matters: leveraged buyout firms loaded software companies with debt over the past decade, betting on their fat margins and sticky customer bases. Now those same qualities are under threat. AI lowers barriers to entry, enables customers to build their own tools, and compresses the pricing power that justified all that leverage.
Morgan Stanley reports that nearly 50% of outstanding software debt is rated B- or lower. About 46% of the $235 billion software loan market comes due for refinancing by 2030. If margins shrink and cash flows stagnate, many of these companies could become zombies, unable to innovate or service their debt.
The lender response
Major players are already moving:
- JPMorgan marked down software loans, limiting credit available to firms that lend to software companies
- Morgan Stanley warned default rates in private credit could surge to 8%, far above the 2-2.5% historical average
- UBS estimates $75-120 billion in fresh defaults across leveraged loans and private credit by year-end
- Deutsche Bank issued its own warning about AI threats to software debt
- Three major funds hit redemption caps as investors rushed for the exits
The Bank for International Settlements (BIS) published a dedicated analysis of how AI disruption is reshaping private credit’s software exposure. When the BIS starts writing about your sector’s credit risk, it’s no longer a fringe concern.
Why this matters beyond Wall Street
This isn’t just a financial story. It has real consequences for the software industry:
- Funding dries up. Software companies that relied on debt financing for growth will find it harder and more expensive to borrow.
- M&A shifts. PE-backed software companies may face fire sales as sponsors look to exit before conditions worsen.
- AI-ready vs. AI-vulnerable. Debt investors are starting to separate companies into two buckets: those integrating AI into their products, and those about to be replaced by it. The spread between these two categories will widen.
- IT budgets are redirecting. Corporate IT spending growth is decelerating to 3.4% in 2026, with dollars shifting from application software to AI infrastructure and compute.
What comes next
The market is repricing risk in real time. Companies with genuine AI integration, strong customer lock-in, and manageable debt loads will survive and likely thrive. Companies sitting on legacy products with heavy leverage face a brutal 18-24 months.
For AI practitioners and founders, the takeaway is clear: the financial markets are now pricing in AI disruption of traditional software as a near-certainty, not a distant possibility. That creates both pressure and opportunity. The same AI capabilities threatening incumbents are creating openings for new entrants, though the easy debt financing that fueled the last decade of software growth won’t be available to them either.
The full analysis is available at The Information.