Software stock rout spreading to bonds

Investment Analysis Clubs Macro Economic Trends and Risks
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It’s the 1999 story all over again. Companies with a rah-rah novel technology borrow massive amounts to execute. Oops, the customers don’t spend enough to pay the debt or a disruptive technology makes them obsolete. The companies default and the lenders are crushed.

This article is about SaaS companies but the whole AI sector is up to its ears in a mountain of debt to build data centers. Similar story.

https://www.wsj.com/finance/investing/the-software-rout-is-spreading-pain-to-the-debt-markets-d6dd1397?mod=hp_lead_pos3

The Software Rout Is Spreading Pain to the Debt Markets

Tech sector has an outsize presence in loan portfolios, raising risk of contagion

By Sam Goldfarb, The Wall Street Journal, Feb. 5, 2026

Pressured by growing worries about the disruptive potential of new AI coding tools, shares of large software [SaaS] companies such as Salesforce and ServiceNow have been sliding for months. But now the prices of software-company bonds and loans are also dropping…

Software currently makes up 13% of the Morningstar LSTA U.S. Leveraged Loan Index—which tracks speculative-grade loans that are originated by banks and broadly distributed to investors—more than double the share of the next largest sector. The sector makes up an even larger percentage of private-credit loans made by asset managers directly to companies, with estimates putting the share at around 20% to a third of those loans. …

Software companies that might be particularly vulnerable to AI disruption include companies that make “horizontal” software serving an array of businesses rather than a particular industry; companies that analyze publicly available data rather than their own proprietary data set; and companies that have particularly large debt loads relative to their earnings… [end quote]

These companies typically don’t pay off their loans. They roll them over when they mature which makes them vulnerable to refinancing risk. Many of them are “speculative grade” to start with (i.e. junk bonds). Any downgrades could be like garlic to a zombie.

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These charts show how traders are dumping the bonds which leads to higher interest rates on the bonds.

Wendy

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Often, there is lot of hype on the demise of technology. I am not dismissing how steaming has disrupted “cable” industry. But, it is not overnight, but over a decade and half.

Also, keep in mind while the earnings may not immediately drop, but the multiples for those multiples will come down rapidly. So, the ability to service the debt is very different from the market price of those equities.

Those who can identify the companies that will survive, thrive and those will die slow death will be able to make money both on equity and bond side.

Separately, the market reaction on higher capex shows there is healthy fear, and skepticism and it is not a behavior of unbridled exuberance.

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As always, there will eventually be good deals on some of these bonds. BUT beware, do not ever buy a bond that isn’t backed by the actual corporation collecting the revenue and profits. Don’t buy bonds backed by “shell” corporations created just to hold a specific asset (like a data center), because those are specifically created to be allowed to go bust if necessary at some point.

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If the new coding tools have value (which they do), then Salesforce and Servicenow and other software companies can layoff most of their developers (keep a few to tell AI what to do) and replace them with the AI tools, reduce operating expenses accordingly and show more profit margin and help contribute to the AI productivity boom.

Problem solved for software.

New problem for developers.

Amendment: I forgot that if AI replaces some of the customers needing software licenses, because they are now more efficient, then that is a software problem and another labor problem. Bleh.

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