Software Poses 'All-Time' Risk To Speculative Credit, Deutsche Bank Warns

The software and technology sectors pose one of the all-time great concentration risks to the speculative-grade credit market, according to Deutsche Bank AG analysts. Bloomberg: They comprise $597 billion and $681 billion of the speculative-grade credit universe, or about 14% and 16% respectively, analysts led by Steve Caprio wrote in a Monday note. Speculative debt spans high-yield debt, leveraged loans and US private credit. That's "a meaningful chunk of debt outstanding that risks souring broader sentiment, if software defaults increase," the analysts wrote, with "a potential impact that would rival that of the Energy sector in 2016." Unlike in 2016, pressures would likely first emerge in private credit, business development companies and leveraged loans, with the high-yield market weakening later, the analysts added. The rapid adoption of artificial intelligence tools risks further weighing down multiples and revenues for software-as-a-service firms, while the US Federal Reserve's hawkish stance since 2022 has pressured cash flows, the analysts wrote. For instance, software payment-in-kind loan usage has risen to 11.3% in BDC portfolios, over 2.5 percentage points higher than the already elevated index average of 8.7%, according to Deutsche. PIK deals typically allow borrowers to pay interest in more debt rather than cash.

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