UBS warns that defaults in private credit markets could rise materially in the months ahead as advances in artificial intelligence put new pressure on borrowers. In a report circulated by the bank, UBS said it expects private credit default rates to climb from about 4.4% at present to a range of 9% to 10% over the coming quarters. On top of that baseline, the report says AI-related disruption could add a further 3% to 4% of default risk.
The bank identifies software companies as a segment that could be disproportionately affected. According to UBS, AI advances may reduce revenue growth for some software providers, weaken their pricing power, compress margins and produce contract cancellations during the next year. Those strains are expected to become more acute toward the end of 2026 and to carry into 2027.
UBS stressed that default outcomes will not be uniform across credit markets. The bank projects private credit defaults of 9% to 10% by the end of 2026, while forecasting materially lower default rates for other parts of the credit spectrum: 3.5% to 4% for leveraged loans and 1.75% to 2% for high-yield bonds over a similar period.
The report draws a parallel between current conditions and the U.S. shale credit downturn of 2014-2016, noting that stress concentrated in one sector previously spread to wider credit markets. UBS says that technology-related leveraged loans are already showing signs of repricing and cautions that further spread widening in that area could extend to other sectors.
UBS also highlights the interconnectedness of private and public credit markets. It notes overlapping investor bases, shared issuers and common financing structures as channels that raise the potential for spillover effects if defaults accelerate. Those links increase the probability that stress in private credit could influence public corporate financing conditions.
Under the bank's base-case scenario, private credit does not currently represent a systemic threat. Still, UBS warns that a severe downturn spurred by software-related losses could tighten lending conditions and weigh on broader corporate funding markets.
The report points to growing leverage in the private credit ecosystem. UBS estimates that leverage associated with private credit and private equity markets now totals at least $1.5 trillion, with funding coming from both bank and non-bank financing channels.
Despite these risks, UBS says credit markets at present retain the capacity to finance continued investment in AI. The bank adds, however, that if defaults rise materially, they could become a more significant constraint on funding conditions in 2027.
Key takeaways
- UBS projects private credit defaults could increase from about 4.4% to 9% to 10% over the coming quarters, with AI disruption potentially adding 3 to 4 percentage points of risk.
- Software companies are identified as particularly vulnerable, with revenue, pricing power and margins at risk and contract cancellations possible over the next year; pressures are expected to intensify toward the end of 2026 and into 2027.
- Default risks differ across instruments - UBS forecasts 9% to 10% for private credit by end-2026, versus 3.5% to 4% for leveraged loans and 1.75% to 2% for high-yield bonds - and interconnected markets raise spillover potential.
Risks and uncertainties
- Concentration risk in technology: Losses centered in software and related technology sectors could trigger wider repricing and spread widening across credit markets.
- Market linkages: Overlapping investors and common financing structures between private and public credit increase the chance of contagion if defaults accelerate.
- Leverage in the ecosystem: At least $1.5 trillion of leverage tied to private credit and private equity, supported by bank and non-bank channels, raises vulnerability to tightening lending conditions.