Wall Street is sorting software firms into winners and losers

Moves in the loan market show pockets of strength in a sector hit by fears of AI disruption

- Sam Goldfarb

The threat that artificial intelligence tools will fuel a software apocalypse has rattled stocks, triggered record withdrawals from private-debt funds and stirred fears of a new type of credit crisis.

But a key market is sending a more mixed message: Not all software companies are equally endangered. While prices of software-company loans have fallen sharply on average since late January, a Wall Street Journal analysis of more than 100 loans showed wide variations in price moves, with parts of the sector hit much harder than others.

The Journal's analysis focused on first-lien software-company loans in the Morningstar LSTA US Leveraged Loan Index, which tracks loans that are originated by banks and broadly distributed to investors. Software makes up about 13% of that index and an even larger share of loans in private-credit portfolios, the result of a wave of private-equity buyouts that crested a few years ago.

Unlike those held by private-credit funds, the loans that were originated by banks are actively traded, offering daily insight into how investors are assessing their risk of default. Here’s a look at what they're saying:

A mixed picture

To observe the hit from AI fears, it can be helpful to split the sector into four main categories:

Of these groups, vertical software performed the best through Thursday, with 40 loans falling an average of 4.2 cents on the dollar since Jan. 20, according to the Journal’s analysis of S&P Global Price Viewer data.