Nomura: total returns for software debt in collateralized loan obligations have been lower than all other sectors in 2026, amid fears about AI's impact on SaaS
Amid broad euphoria in credit markets, one type of debt is facing growing fear. — Software companies, larded up with debt …
Context & Ripple Effects
Software credit was already a weak point before the current AI debate: related coverage identified nearly $30 billion of distressed software-and-services debt, second only to real estate. The current underperformance puts that earlier distressed-debt overhang alongside a new concern about whether AI can erode SaaS companies' defenses.
The concern is broadening from loan performance into trading behavior. Later coverage found divergent declines across actively traded software loans as investors differentiated companies by their perceived resilience to AI disruption.
First-order effects
- CLO investors holding software loans are receiving the weakest total returns among sector peers in 2026, making software exposure an immediate drag on portfolio performance.
- Software borrowers carrying substantial debt face more investor scrutiny as AI-related doubts are incorporated into how their loans perform.
Second-order effects
- Loan investors are likely to differentiate more sharply between software companies with credible defensive moats and those seen as more exposed to AI disruption, rather than treating SaaS credit as a uniform sector.
- The pressure can extend into single-name hedging and credit trading, consistent with rising trading in tech-company credit derivatives amid concerns over technology borrowing.
Third-order effects
- If the pattern persists, AI exposure may become a durable credit-underwriting variable for software, affecting the sector's access to leveraged financing as much as its equity narrative.
- The split between heavily financed AI infrastructure and challenged application-software credit could make AI's financing cycle more uneven, particularly for smaller or less-proven businesses.
The trend: AI is increasingly being priced not only as a growth driver but also as a source of credit risk for incumbent software business models.