The Changing Landscape of Software Leveraged Loans
For over twenty years, software companies were considered the most reliable borrowers in the leveraged loan market. Investors favored these businesses for their recurring revenue streams, robust profit margins, and loyal customer bases. However, in 2026, the landscape shifted dramatically, and the primary reason is the growing fear of AI disruption in software markets. This concern is now causing major changes in how credit investors approach software leveraged loans.
AI Disruption in Software: The Numbers Tell the Story
The impact of artificial intelligence on software’s perceived safety as a credit investment is evident in recent statistics. According to a June 2026 PitchBook LCD analysis, software companies accounted for only 9% of all loans issued in the U.S. broadly syndicated market this year, excluding refinancings. This is the lowest proportion since 2013 and marks a dramatic drop from the previous year’s 18%. For private equity-backed deals, the decline is even sharper—down to 9% from 21% in 2025 and a peak of 24% in 2020.
Buyout financing tells a similar story. The share of software loans has fallen to 17.5%, nearly halving from 34.5% just the year before. Notably, while the overall leveraged loan market has seen gains of 1.24% in 2026, software loans have lost 4.73% in value over the same period. These figures underscore how AI disruption in software is reshaping risk assessments in the credit markets.
The Core Fear: AI Replacing Traditional Software Models
At the heart of this shift lies a fundamental investor worry: the rise of AI-powered tools, especially agent-style software, could undermine the traditional seat-by-seat licensing model. If businesses can replace multiple software licenses with a single AI-driven solution, the predictable recurring revenue that once made software loans so attractive becomes uncertain. As a result, equity investors were the first to retreat, with software stocks facing steep sell-offs. Now, credit markets are following suit.
Loan Managers and CLOs Respond to Changing Risks
Collateralized loan obligations (CLOs), which bundle and sell leveraged loans to investors, are the largest buyers in this space. In response to AI disruption in software, major CLO managers are reducing their exposure to the sector. Blackstone, for example, has trimmed software holdings in new deals, while Guggenheim Investments recently marketed a $560 million CLO as software-free—something unthinkable just two years ago when software was considered the market’s anchor asset.
Despite its shrinking share, software remains the single largest sector in the $1.5 trillion Morningstar LSTA US Leveraged Loan Index, representing 12.5% (down from 13% in May 2025). That equates to about $194 billion in outstanding loans, but 58% of these now carry a B-minus or lower borrower rating, placing them on the edge of default territory. Furthermore, 21% of software loans are due in 2028, compared to only 14% for the broader index, creating additional refinancing pressure.
Private Lenders and Shifting Sector Preferences
Direct lenders, such as private credit funds, are also pulling back from software. Their portfolios are under increased scrutiny for heavy software exposure, leading many to cut allocations. According to PitchBook LCD’s Private Credit Market Sentiment Survey, over half of respondents are actively reducing their software positions. On top of this, Moody’s recently gave negative outlooks to major business development companies like Blackstone and Golub, citing concerns over AI disruption in software loans.
As institutional money exits software, it’s flowing into other sectors. For the first time since 2015, healthcare has overtaken software as the top sector for institutional loan issuance, accounting for 14% of volume in 2026. Major deals, such as the $7.25 billion Hologic buyout and the $4.4 billion Ensemble Health Partners recapitalization, contributed to healthcare’s rise. Meanwhile, seven of the top ten loan market sectors have increased their share compared to both 2025 and their ten-year averages.
The Future for Software Borrowers
With fewer lenders and tighter terms, software borrowers now face an uncertain future. Some may manage to extend their loan maturities through “amend-and-extend” deals with higher fees and interest rates, while others could be acquired and refinanced by new owners. However, in cases where neither the asset nor the owner’s commitment holds firm, lenders may resort to liability management exercises and complex restructurings to recover value.
While there is no immediate wave of defaults, the sector’s reputation as a “safe bet” has clearly eroded. Now, every software loan must be justified anew, and the terms of borrowing are dictated by lenders’ reassessment of risk in light of AI disruption in software.
Conclusion: The New Reality of Software Loans
The era when software represented the safest bet in the leveraged loan market has come to an end. As AI technology continues to evolve and threaten traditional software revenue streams, investors and lenders are re-evaluating their strategies. The future will depend on how software companies adapt to AI disruption in software, and whether they can retain their once-unshakable position in the world of leveraged loans.
This article is inspired by content from Original Source. It has been rephrased for originality. Images are credited to the original source.