The stock market has been swift in penalizing software companies and other sectors perceived as losing out from the artificial intelligence (AI) surge in recent weeks. However, UBS analyst Matthew Mish suggests the next area where AI disruption risks may become evident is in the credit markets.
Mish, in a Wednesday research note, highlighted that tens of billions of dollars in corporate loans are expected to default over the next year. This prediction is primarily targeted at companies—especially software and data services firms owned by private equity—that are feeling the squeeze from the AI threat.
"We're pricing in part of what we call a rapid, aggressive disruption scenario," said Mish, who leads credit strategy at UBS, in an interview with CNBC.
The urgency in updating forecasts stems from the expedited expectations of AI disruption, fueled by the latest models from companies like Anthropic and OpenAI. "The market has been slow to react because they didn't really think it was going to happen this fast," Mish noted. "People are having to recalibrate the whole way that they look at evaluating credit for this disruption risk, because it's not a '27 or '28 issue."
This month saw investor concerns regarding AI reaching new heights as the market's perspective shifted. Once viewed as a rising tide that lifts all technology companies, AI is now seen as promoting a winner-take-all scenario where firms like Anthropic and OpenAI pose serious threats to existing companies. Initially hit hardest, software firms have been soon followed by distinct sectors including finance, real estate, and trucking experiencing successive sell-offs.
In his note, Mish along with other UBS analysts suggest a baseline scenario where borrowers of leveraged loans and private credit might see between $75 billion to $120 billion in new defaults by year's end.
CNBC derived these figures using Mish’s projections of up to 2.5% increase in defaults for leveraged loans and up to 4% for private credit by late 2026. The markets for these credit forms are estimated at $1.5 trillion and $2 trillion, respectively.