A $24 Billion Asset Management Ceo Sees Software Loans Driving A 'massive' Default Wave In Private Credit

• Bruce Richards sees trouble brewing for private credit.
• The Marathon Asset Management CEO outlined a distress scenario stemming from bad software loans.
• The default rate on some private credit loans could reach 15%, he estimated.

Bad software loans could spark major turmoil in private credit, according to the top executive at a $24 billion asset manager.

Bruce Richards, the chairman and CEO of Marathon Asset Management, said he sees major losses for private credit investors in the coming years, as he believes many software loans — a prominent corner of the private debt market — are about to slide into distressed territory as new capital dries up.

Speaking to Bloomberg earlier this week, he outlined one scenario in which the default rate for direct lending to the space could rise to 15% and remain in the double-digit range for at least three years.

Defaults of that magnitude would be among the worst distress in private credit's history. The default rate among US private credit borrowers rose to a record 9.2% last year, according to a recent report from Fitch Ratings, though Richards was speaking specifically about direct loans, a smaller, but significant segment in the wider private credit market.

"It's going to be extend and pretend initially, followed by distress or defaults, followed by massive losses flowing through the software sector," Richards said.

For lenders, Richards speculated that recovery rates on bad loans could be as low as $0 to $0.30 on the dollar. Spreads on new software loans could widen by about 700 basis points, he said, a significant increase that would imply investors are pricing in a greater risk to holding the debt.

Investors have grown increasingly anxious about the private credit sector in recent months as asset managers face a wave of redemption requests.

Software loans have become a particular area of scrutiny after AI jitters sent software stocks tumbling into a bear market earlier this year. The fear is that many companies in the sector may be heavily exposed to disruption by AI.

Most private credit debt today is not distressed, but Richards noted that many software makers are highly leveraged. Some direct loans in the space are 8 to 10 times a borrower's annual earnings, he said.

Capital could also dry up in the future, he predicted.

"I know that there's very little money available to make the new software loan," he said. "There's no one that's going to refinance that anywhere close to the levels of financing that was provided previously. And that is the problem."

Others on Wall Street are also eyeing the potential for increased private credit defaults.

In February, UBS estimated that defaults could reach 15% in its worst-case scenario.

Direct lending, one form of private credit financing that software has a heavy exposure to, has also emerged as an area of concern. Defaults in direct lending could to 8%, Morgan Stanley estimated.