Loan investors push back on borrower-friendly terms, signaling higher costs for PE and AI firms

The leveraged loan market is sending a clear message to borrowers: the easy money era is over, at least for now. Loan investors are pushing back against borrower-friendly terms with enough force to widen credit spreads, delay debt issuances, and nudge borrowing costs meaningfully higher for private equity firms and AI-related companies. Software companies caught in the crossfire Software companies have begun postponing debt deals amid rising lender scrutiny. When borrowers voluntarily delay tapping the market, it means the terms on offer have gotten uncomfortable enough to wait out. UBS has modeled stress scenarios that paint a sobering picture. Under baseline conditions, default rates in the space sit around 1-2%. A moderate disruption scenario pushes that to 3-5%. But in an aggressive AI disruption scenario, defaults could spike as high as 13%. US banks have responded by raising interest rates on loans extended to private credit funds themselves, creating a daisy chain of higher costs. When the funds that make the loans face more expensive capital, those costs flow downstream to every portfolio company refinancing or raising new debt. Private credit managers feel the heat The mar...