U.S. Distress in Software Lending Surges as Troubled Loans Rise $18 Billion

Credit tied to the software industry shifted from manageable to fragile in a compressed window, with lenders reporting roughly $18 billion more in problem loans over several weeks. That jump reflects not just idiosyncratic misses on revenue and cash flow among growth-oriented vendors, but also a wider market repricing: bond and loan investors are increasingly penalizing firms that face margin pressure or the need for substantial near-term investment in AI infrastructure. Fixed-income desks are seeing wider yields and lower secondary prices on issuance linked to software names, which raises the effective cost of capital for companies that must refinance or raise debt. Smaller, single-product vendors and those with heavy professional-services revenue appear most exposed; high-margin platforms with strong free cash flow are being rewarded. The squeeze is compounded by downstream supply‑side dynamics — concentrated hyperscaler and cloud-provider procurement, along with chip and system delivery bottlenecks, are shortening windows for deployments and lifting costs for compute‑intensive projects. Recent policy moves to onshore foundry capacity will help long term but can create near-term construction, capacity and talent dislocations that disproportionately hit smaller borrowers. For banks and non-bank lenders, the result is higher provisions, increased workout activity and more frequent covenant amendments; private-credit funds also face mark-to-market losses and reduced ability to syndicate or sell positions. Secondary-market illiquidity and the tougher terms in public debt markets are nudging some issuers toward private placements or equity raises instead of broad public issuance. Treasury teams and rating agencies are reworking downside scenarios to account for supply-chain timing risks and elevated capex requirements, while risk officers revisit concentration limits and underwriting assumptions tied to recurring‑revenue models. Short-term impacts will be felt in lenders’ earnings and capital planning; medium-term consequences could include consolidation among smaller software firms, slower product road maps, and a lasting shift in how underwriters price growth-dependent business models. Market observers should track loan-loss provisions, covenant amendment rates, secondary market bid‑ask spreads, and issuer demand for private capital as leading indicators of whether stress will broaden beyond the software subsector.