Artificial intelligence may be creating a new fault line in leveraged finance, with PIMCO warning that the technology could erode the software business models underpinning billions of dollars in private credit and leveraged loan deals.
Software has become a cornerstone of both direct lending and broadly syndicated leveraged loans, thanks to recurring revenue, high margins and relatively stable cash flows. Those characteristics fueled higher leverage and more aggressive deal structures during the post-pandemic credit boom.
PIMCO said AI is now undermining that stability by creating uncertainty around pricing power, customer retention and profit margins. As AI reshapes competition, the financial assumptions supporting many leveraged deals may prove less durable than expected.
Software accounts for a significant share of leveraged-loan and private-credit portfolios. As a result, earnings pressure could ripple through the broader credit market.
PIMCO added that weaker underwriting during the recent credit cycle—including looser covenants and more permissive financing terms—has left portfolios more vulnerable if software fundamentals deteriorate.
