UBS Raises Alarm on Private Credit Defaults Amid AI Fears
Analysts at UBS Group AG have issued a stark warning, revising their worst-case scenario for defaults in the private credit sector upward to a concerning 15%. This represents a significant increase from their previous forecast of 13%, published just weeks ago, as fears of artificial intelligence-driven economic disruption intensify.
Escalating Concerns Over AI Impact
Strategists, including Matthew Mish, now project that private credit could see default rates surge as high as 15 percent, marking a two-percentage-point jump from their earlier assessment. The initial report had cautioned that direct lenders might face a 13 percent default rate if AI triggered aggressive disruption among corporate borrowers. However, recent developments have led to an even more bearish outlook.
"What is new: a clearer catalyst — rapid, severe AI disruption," stated the UBS report published on Tuesday. The strategists emphasized that technology sectors are particularly vulnerable to upheaval from AI adoption or rapid retrenchment, posing acute risks of cascading defaults.
Market Anxiety Builds
Fears of such an event have been mounting in recent days. Stocks declined at the start of the week following a report from Citrini Research, which alarmed investors with a scenario where AI advancements could lead to a double-digit U.S. unemployment rate by 2028. Adding to the tension, Blue Owl Capital Inc. recently blocked investors from making withdrawals from one of its private credit funds, heightening concerns about loans issued by direct lenders, especially to software firms.
"The most acute risk is a sector-specific shock triggering cascading defaults," the UBS strategists wrote. They noted that private credit defaults are currently reported between three percent and five percent, with signs of strain—such as interest paid-in-kind—nearing post-pandemic highs.
Broader Implications for Credit Markets
The warning extends beyond private credit. UBS strategists also see elevated default risks for leveraged loans and high-yield bonds, projecting worst-case rates of up to six percent and ten percent, respectively. These figures are up from previous estimates of four percent and eight percent, indicating a broader tightening of credit conditions.
This revised outlook underscores the growing apprehension in financial markets about the potential for AI to destabilize corporate borrowers and the broader economy. As investors grapple with these uncertainties, UBS's heightened forecast serves as a critical reminder of the vulnerabilities within the private credit landscape.
