Failures due to AI: UBS warned of 'cascading defaults' in US private credit market

Strategists of UBS Group AG worsened their "gloomiest forecast" on defaults in the private credit sector in the U.S., writes Bloomberg. They believe that the number of defaults on private loans in the U.S. could jump to 15%. This is two percentage points higher than the forecast published by analysts less than a month ago.

"What's new: a clearer catalyst - rapid and severe disruptions due to AI," UBS strategists said Feb. 24.

An initial report from analysts led by Matthew Misch warned that direct lenders could face a 13 percent default rate if artificial intelligence triggers "aggressive failures" among corporate borrowers. However, that outlook has become even more pessimistic in recent weeks amid growing concerns that AI could destabilize the U.S. economy, Bloomberg reported.

"The most acute risk is a sector-specific shock that could trigger cascading defaults," UBS strategists wrote. - The technology sector is particularly vulnerable both in the face of AI adoption and in the event of sharp spending cuts."

Direct lenders, which have played a leading role in financing software companies in recent years, now look vulnerable to the impact of AI, prompting comparisons to the 2008 financial crisis, Bloomberg points out.

In addition, UBS strategists noted that "default rates in private credit are [now] reported to be between 3% and 5%, but signs of stress - such as interest payments in paper instead of cash - are approaching post-pandemic highs."

UBS strategists also forecast an increased risk of defaults on syndicated loans - large loans issued not by one company, but by a whole group of financial institutions to one borrower - and high-yield bonds. In a worst-case scenario, their level could reach 6% and 10%, respectively, UBS said. This is higher than estimates from the previous UBS report, where the same indicators were projected at levels of up to 4% and 8%, respectively, Bloomberg writes.

UBS strategists' concerns about the possible development of the situation in the private lending market have sharply increased in recent days, which contributed to a chain of alarming events in the financial market, notes Bloomberg. The first serious signal was the restriction of withdrawals from Blue Owl's private credit fund, which occurred on February 18. This move by one of the biggest players in the alternative asset space caused investors to become acutely concerned about the quality of loans made by direct lenders. The news caused Blue Owl's own stock to plunge 10% on Feb. 19, dropping its market value by $2.4 billion, and triggering declines in other asset managers, including Ares Management, Blackstone and Apollo Global Management.

The situation escalated on February 22 after the publication of an essay by the financial and analytical organization Citrini Research "Global Intelligence Crisis 2028," which described a hypothetical economic collapse in the United States due to AI. The analysts predicted that the widespread introduction of AI would lead to mass layoffs of "white-collar workers" and trigger a "deflationary cascade" that could raise U.S. unemployment above 10% and crash the U.S. stock market. By the morning of February 23, this essay had become a major talking point in the U.S., triggering a massive sell-off as trading opened in New York. The S&P 500 index quickly went into negative territory and closed the day down more than 1%. Since the beginning of the year, it has risen by 1% overall.

This article was AI-translated and verified by a human editor