Artificial intelligence has unsettled software stocks for months. Now it is testing European credit markets and exposing fault lines in parts of private credit that were sold to investors as stable and uncorrelated. “If the software issue remains isolated, markets can cope. If it bleeds into the real economy, then all bets are off.”
The shift is visible not only in software-linked leveraged loans, particularly in the United States, but also in retail-oriented private credit. Blue Owl’s decision last week to permanently restrict redemptions in one of its credit vehicles has underscored the tension between illiquid assets and periodic liquidity promises. Against that backdrop, some investors argue Europe now offers better compensation due to lower structural exposure to AI.
“If you are going to allocate to a CLO anywhere in the capital stack, Europe screens better than the US at this moment in time,” said Henry Craik-White, who runs European loans and high income credit strategies at Schroders, told Investment Officer.
Collateralized loan obligations account for the majority of demand in leveraged loans. Their positioning has shifted, said the Schroders expert.
“CLOs came into this period overweight software because it was seen as stable and cash generative,” Craik-White said. “That perception has clearly been challenged.”
Both the US and European markets for CLOs just finished a record year, with new issuance amounting to 60 billion euro in Europe and 200 billion dollars in the US. The European CLO market this year is already “running ahead” of 2025, said Craik-White, referring to 17 billion issued in the first six weeks of the year.
Meanwhile, it has emerged that software firms have issued between 450 to 500 billion dollars in debt during the past decade, according to 9Fin, a London-based data intelligence company.
Wider spreads
Investors are now reassessing whether AI will compress margins in software subscription models tied to headcount and workflow automation, Craik-White said. In leveraged finance, that reassessment is showing up in wider spreads and tougher underwriting terms.
Software issuers have delayed transactions as banks are demanding higher yields and stronger covenants. Investors are asking more directly how durable certain revenue models are under accelerated technological change.
“The software sell-off is this year’s theme,” Craik-White said. “Markets are in ‘shoot first, ask questions later’ mode.”
If pricing power of software firms weakens while leverage remains elevated, capital structures that once appeared conservative can quickly look stretched. At the same time, incumbent software groups are embedding AI into their platforms, arguing the technology will reinforce rather than erode competitive positions.
“AI is creating an uncertainty premium around business models,” Craik-White said. “The question is not whether AI matters, but how quickly it changes pricing power.”
“New CLOs are trying to launch underweight software or with no software exposure at all,” he said. “Launching with 10 percent of your book trading at 90 is not great marketing.”
Europe versus US
The European market presents a different configuration of risk, according to Craik-White. Software exposure in European syndicated loans is materially lower than in the US.
Documentation standards have historically been tighter, limiting aggressive liability management exercises more common in the US market, he said. And the investor base is also less influenced by retail fund flows. Despite that, European spreads are currently wider than US spreads.
“Europe trades wider than the US despite having lower direct software exposure,” Craik-White said. “On fundamentals alone, that does not make a lot of sense.”
Labor market dynamics reinforce the contrast. Technological disruption can translate into faster restructuring in the US. In Europe, workforce adjustments tend to be slower and more complex. “The speed of disruption is likely to be faster in the US than in Europe,” he said.
Valuation debate
The key question is whether current spreads adequately compensate for disruption risk.
Yields around 10 percent are now available in parts of the European loan market, levels not seen in some time relative to other fixed income segments.
“The debate right now is whether 10 percent is enough compensation or whether this is the opportunity of the cycle,” Craik-White said. “If the software issue remains isolated, markets can cope,” he said. “If it bleeds into the real economy, then all bets are off.”