UBS, Switzerland's largest bank, has warned that the "credit market," especially leveraged loans and private credit totaling over $3.5 trillion, could be the next area to be hit hard by the faster-than-expected AI transition.
Originally seen as a new wave of growth, AI has increasingly raised global stock market concerns this year about technological shifts creating clear winners and losers. Recently, stock markets have begun punishing software and businesses vulnerable to AI replacement, with heavy sell-offs spreading to sectors including finance, real estate, and transportation, reflecting investor worries about winner-take-all competition favoring major AI firms.
Matthew Mish, Head of Credit Strategy at UBS, told CNBC that the combined $3.5 trillion leveraged loan and private credit markets may face significant pressure from accelerating AI adoption—particularly software and data service companies owned by private equity funds with high debt burdens. Rapid revenue pressure from AI competition could lead to widespread defaults.
Mish noted that recent model developments by companies like Anthropic and OpenAI have accelerated the AI transition beyond his and his team's prior estimates. However, the market has been slower to react. He stressed that AI risks are no longer issues for 2027 or 2028 but must be reassessed immediately.
Mish's baseline scenario assumes that default rates in the $1.5 trillion leveraged loan market could rise up to 2.5%, while the $2 trillion private credit market could see defaults increase up to 4% by the end of 2026. He estimates that new defaults could total approximately $75 billion to $120 billion by the end of this year.
Additionally, Mish warned of longer-term risks or worse-case scenarios where a faster, more severe AI transition could double default rates beyond baseline projections, leading to a "credit crunch" in lending markets. This would trigger widespread repricing of leveraged loans and potentially cause systemic shocks originating from the credit side.
Mish categorizes AI-related companies into three main groups:
Mish said if the transition is rapid and severe, the third group faces the greatest risk of losing. However, timing is crucial. Despite rising risks, final outcomes depend on uncertain factors, including how quickly large organizations adopt AI and the pace of new AI model development.
"We have not declared that the worst-case scenario will occur, but the trend is moving in that direction," he said.Mish concluded that UBS's warning reflects a broader perspective that AI may shock the financial system more widely than many expect—from being seen as a market booster to a rapid transition many businesses cannot adapt to in time. The question remains whether the credit system is prepared for a faster, more disruptive AI-driven change.
Source Information CNBC
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