Mapping Software Exposure in Leveraged Credit

Morgan Stanley analyzes the elevated software exposure in leveraged credit, finding it highest in BDCs and private credit. The report warns that AI-disruption fears and high leverage in the 2021 vintage create significant downside risks for loans relative to HY bonds.

Key Takeaways

• 1.Software exposure in credit is highest in Business Development Companies (BDCs) at ~26%, followed by private credit CLOs (19%) and US loans (16%).
• 2.Software loans are heavily skewed toward lower credit quality (50% B- or lower) and weaker underwriting vintages (2020-2021).
• 3.The report highlights a preference for High Yield (HY) bonds over leveraged loans due to HY's significantly lower software exposure (<5%) and better quality skew.

Table of Contents

• Overview of software exposure across credit segments
• Our thoughts in the near term
• Investment takeaways
• Thinking medium term
• Mapping the bull and bear cases
• US Credit – Loan Exposure to Software Is High/Skewed to Low Quality; HY More Insulated
• US CLOs: Lower Exposure versus the Broader Loan Markets, with Dispersion Across Managers
• Private Credit Through a BDC Lens – Higher Exposure than Other Asset Classes
• European Credit: Less Exposed than the US, but Loans at Risk of Further Downside
• European CLOs: Lower Exposure than US CLOs; Don't Dip Below BBs

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