Private Credit Defaults Hit Five-Year Highs as AI Threatens the Software Loans Behind Them

Private credit funds are booking their worst default numbers in at least five years, according to a Wall Street Journal analysis, and the timing lines up with a separate warning from Bloomberg that artificial intelligence is undermining the software business model much of that lending was built on.

The Journal's numbers are specific. Blue Owl Capital Corp. saw nonaccrual loans, meaning borrowers who've stopped making payments, hit 2.8% in the second quarter of 2026. That's the highest level in at least five years for the fund. Similar funds run by Ares, Golub Capital and Blackstone all posted nonaccrual rates at five-year highs too, according to the Journal's reporting, surpassing even 2023 levels, when the Federal Reserve's rate hikes were squeezing leveraged borrowers hard.

It's not just missed payments. Ares, Golub Capital and KKR have all reported growing watchlists this year, according to the Journal, meaning more borrowers are showing signs of financial trouble even before they default. Those watchlists are now at their highest levels since roughly 2022 and 2023. Golub Capital co-CEO David Golub told the Journal the industry is "clearly in a credit cycle," which is about as blunt an admission as you'll get from someone who runs one of these funds.

For most of this year the private credit story was about liquidity, not solvency, according to commentary from ZeroHedge contributor QTR's Fringe Finance. Investors wanted their money back, some funds limited withdrawals, and the industry's defenders argued the underlying loans were fine even if redemptions were messy. Rising nonaccruals and expanding watchlists make that argument harder to sustain.

The AI Angle Nobody Priced In

Separately, Bloomberg reported that the rapid rise of AI tools is rattling investors who bet heavily on software-as-a-service, or SaaS, companies over the past decade. Private equity and credit funds loved SaaS because of its predictable subscription revenue and fat margins. Generative AI threatens to replace or devalue a chunk of that software, and some in the industry are calling it a "SaaSpocalypse."

According to Bloomberg's reporting, some private credit funds have already refused loans to software borrowers, and deals to sell software companies have stalled out. More than $150 billion in software-related debt is set to mature in the coming years, which puts real pressure on how that debt gets priced and refinanced. Rating agencies have flagged specific software companies as facing high disruption risk from AI, and mutual funds have cut their private software holdings by roughly 20% on average, per Bloomberg.

The mechanism is straightforward: if a general-purpose AI model can replicate what a niche vertical software product does, at a fraction of the cost, that software loses pricing power and customer stickiness. Lenders who priced loans on the assumption of durable subscription revenue are now re-underwriting that assumption in real time.

Private credit funds hold thousands of loans across dozens of sectors, and software is just one slice of that book. A 2.8% nonaccrual rate at Blue Owl, while a five-year high, is not a collapse. It means roughly 97% of loans are still performing.

Fund managers would also argue that watchlists rising isn't the same as defaults happening. Golub, Ares and KKR flagging more borrowers for scrutiny could reflect prudent risk management in a slowing economy rather than an industry unraveling. Managers who spot trouble early and work with borrowers on amendments or extensions can often avoid the losses that a spike in nonaccruals might suggest are coming.

But that defense gets weaker each quarter the trend continues. The Journal's data shows the deterioration is broad, hitting four of the largest, most closely watched funds in the space, and it's happening at a point in the cycle when the Fed isn't hammering rates the way it was in 2023. If defaults are worse now than during an aggressive hiking cycle, something else is driving it, and the AI disruption story gives that something else a name.

What's Unresolved

Neither the Journal nor Bloomberg reporting establishes a direct causal link proving AI disruption is what's pushing nonaccruals to five-year highs at Ares, Golub, Blue Owl and Blackstone specifically. The two trends are documented separately, in different reporting, and connecting them requires inference, not confirmed fact.

What is confirmed: nonaccrual rates are up, watchlists are up, software lending has tightened enough that some borrowers are being turned away outright, and over $150 billion in software debt is coming due into a market where lenders are already nervous. Whether that debt refinances smoothly or becomes the next visible crack in private credit is the open question heading into the back half of 2026.