Private Credit Defaults Would Hit 13% in UBS Worst Case for AI

(Bloomberg) — Private credit could see default rates surge to as high as 13% in the US if artificial intelligence triggers an “aggressive” disruption among corporate borrowers, according to UBS Group AG.

The asset class is more exposed to AI risk than the markets for leveraged loans and high-yield bonds, which could see default rates rise to as high as 8% and 4%, respectively, in an aggressive disruption scenario, UBS strategists including Sachin Ganesh wrote in a note Monday.

AI disruption fears are accelerating weakness in credit globally, as investors grapple with the prospect that it renders existing business models obsolete. The impact is more outsized in leveraged finance markets, the strategists wrote, noting US high-yield tech spreads have widened by more than 90 basis points despite the broader index tightening. US leveraged loans in the tech sector have also dropped in price from 95 cents to 93 cents.

“We attribute at least part of this underperformance to markets pricing in a disruption risk premium for pockets of the sector,” the strategists wrote. “It is still too early to say when exactly AI disruption plays out at scale, but we believe that the trend is set to accelerate this year.”

UBS analysts have estimated that as much as 35% of the $1.7 trillion private credit market is exposed to the risks of AI disruption, driven by technology and services. Despite having less exposure to technology, European markets are vulnerable to the risks as well, according to UBS.

Private lenders have financed AI’s build-out through strategies including direct lending, infrastructure debt and asset-based finance, joining banks in providing capital for the booming industry. Morgan Stanley expects about $20 billion of AI-related deals in leveraged-finance markets in 2026, and JPMorgan Chase & Co. projects $150 billion over the next five years.

According to the Bank for International Settlements, there are already more than $200 billion of outstanding private credit loans to AI-related companies and that figure could triple by 2030.

The unease reverberated through markets last week, as loans from companies such as Cloudera Inc., Dayforce Inc. and Rocket Software Inc. declined in the secondary market. Meanwhile, German healthcare software firm Dedalus paused a €1.3 billion leveraged loan deal amid rising investor concern.

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