CLO Managers Reduce Software Debt Exposure Over AI Risks

Investors are increasingly offloading software-related debt at discounted rates, signaling growing anxiety over how artificial intelligence might disrupt the industry. Managers of collateralized loan obligations (CLOs) have begun exploring strategies to trim their software exposure in the United States as they prepare for potential credit rating downgrades and defaults among junk-rated borrowers. This movement reflects ongoing volatility in the private credit and software sectors following a significant market rout earlier this year, which was largely fueled by the emergence of advanced AI tools from companies like Anthropic. According to Jim Egan, co-head of securitized products research at Morgan Stanley, the software sector is currently seeing more selling pressure than buying interest from CLO managers. Morgan Stanley notes that software and services represent approximately 15% of the collateral in outstanding syndicated CLO deals, with software alone accounting for 12%, making it the largest single subsector concentration. > "Software is a sector where there is more selling coming from CLO managers than there is buying right now," said Egan. Market data indicates that the risk premium, or spreads, on CLOs has widened as investors grow wary of the $1.8 trillion private credit market. Al Remeza, associate managing director at Moody's Corporation, observed that some managers are reducing positions particularly where they are overweight or facing upcoming refinancing activities. > "We’re seeing some CLO managers reduce exposure to software — particularly where positions were overweight or ahead of refinancing activity," said Remeza. In late February and early March, debt instruments for companies such as Intuit Inc., Dayforce Inc, and Citrix were traded between 89 and 98 cents on the dollar, according to the Trade Reporting and Compliance Engine (TRACE). This represents a shift from just months ago when these same loans and bonds were trading at a premium. While Citrix and Dayforce Inc did not provide comments, Intuit Inc. has seen its shares decline by roughly 32% this year amid broader sector concerns. Despite the market pressure, an Intuit spokeswoman emphasized the company's long-term commitment to AI integration. > "Our strategy is working; in the first half of our fiscal year 2026, we delivered 18 percent revenue growth while expanding margins," an Intuit spokeswoman said. The credit profile for some of these entities remains stable in the eyes of some agencies. S&P Global Inc. upgraded the credit rating for Intuit Inc. to A from A- in October, and its investment-grade bond spreads remain largely consistent with their 2023 issuance levels. However, the broader outlook for the CLO market remains cautious. Analysts at JPMorgan Chase & Co. estimate that between $40 billion and $150 billion of United States CLO holdings are in sectors highly sensitive to AI risk. Rishad Ahluwalia, head of CLO Research at JPMorgan Chase & Co., noted that investor sentiment has turned more bearish as transaction volumes dip. > "For CLO managers, the appetite for stressed loans in orphan sectors, like software and services, is weaker," said Ahluwalia. The difficulty in finding buyers for these loans is compounded by a lack of immediate catalysts for a market turnaround. Gavin Zhu, head of U.S. CLO Research at Barclays PLC, suggested that rotating back into software is difficult without a clear positive trigger. > "It's a bit more difficult to suddenly and opportunistically rotate back into software without a true catalyst," said Zhu. Joyce Jiang, head of U.S. CLO Research at Morgan Stanley, added that the CLO community is currently developing frameworks to assess AI risk at a single-name level. > "The majority of the CLO community is really taking its time to think about how to come up with a framework to assess AI risk, more on the single-name level, to really scrub their book to identify which are the names that are more prone to AI risk," said Jiang. Global CLO loan supply is projected to drop by 25% this year to approximately $150 billion, according to estimates from JPMorgan Chase & Co., as widening spreads and concerns over loan quality dampen investor demand.