AI impact on software won’t trigger save of downgrades, S&P Says

The impact of artificial intelligence on the software industry will not be severe enough to cause a sector-wide wave of credit rating downgrades, S&P Global Ratings said.

AI has the potential to fundamentally change software companies, but will do so unevenly and be felt on a case-by-case basis, S&P said in a note published in response to questions it has received about the risks. That means it’s unlikely to underpin a widespread decline in credit quality, it said.

Rising concern among investors that the rapid development and adoption of AI will displace some software companies has seen debt issued by the sector’s borrowers slide this year. It’s also led to a selloff in the private credit industry’s publicly traded lending vehicles and changed the way some private equity managers approach investing in software firms.

“Today’s environment reflects structural technological evolution rather than an abrupt macroeconomic shock,” S&P’s analysts said in the March 11 note, adding that made the effects for ratings more gradual and different to the Covid-19 pandemic.

Companies with near-term maturities might be some of the most at risk should current market volatility persist. Issuers with debt coming due in 2027 or 2028 could face higher funding costs or limited access to financing, it said.

While the private credit market’s exposure to software is significant, accounting for some 20% of borrowers, S&P noted that the credit quality of these issuers has remained resilient. That said, the analysts flagged that this data was based on deals reviewed last year and “this year’s trends could look different.”

Software businesses with sector expertise and proprietary data are likely to be the most insulated from AI displacement, while more commoditised products could face pressure. For companies producing software vulnerable to AI substitution, downgrades would likely be triggered by signals that a competitive position had weakened and revenues been eroded, S&P said.

“We believe less-differentiated, rule-based, point-solutions software providers may face higher margin pressure and displacement than established platform leaders with deep domain expertise and proprietary data,” its analysts said.

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