Quantifying Software Risk in CLOs

This Analytics Research Report quantifies software risk in collateralized loan obligations (CLOs) amidst fears of AI disruption. It details a significant selloff in the CLO market, with software loans experiencing a price drop of over 7 points from January to February 2026, while the overall market saw a modest decline of 2 points. The report classifies 633 software companies with material exposure into three categories based on their vulnerability to AI disruptions: Category 1 (least vulnerable), Category 2 (vulnerable), and Category 3 (most vulnerable). The findings indicate that 33% of issuers fall into Category 1, 57% into Category 2, and 10% into Category 3. The underlying credit profile of the software sector is described as healthy, with lower default percentages compared to other sectors. The report also discusses the implications of CLO managers' software exposure and the potential impact of rating downgrades on their portfolios, emphasizing the need for careful evaluation of sector concentrations in light of evolving market dynamics.