Goldman Sachs Group Inc. is presenting hedge fund clients with a novel derivative trade designed to take positions on corporate loans, particularly those tied to the software industry, as anxieties over artificial intelligence's impact ripple through credit markets. According to sources familiar with the discussions, the investment bank is pitching a total return swap, a financial instrument that enables investors to speculate on the price movements of a basket of loans without directly owning the underlying debt. As of now, no transactions have been completed.
AI Fears Spread from Equities to Credit
The initiative emerges as apprehension about AI's disruptive potential, previously concentrated in stock markets, begins to seep into the realm of corporate credit. Mahesh Saireddy, co-head of Goldman's Capital Solutions Group, highlighted the significant uncertainties facing lenders, identifying the next 24 months as a critical period where AI-related concerns transition from equities into credit assessments and capital raising activities. Goldman emphasized that its collaboration with clients on trading strategies spans all asset classes, irrespective of the prevailing market environment.
This strategic move coincides with a major Wall Street push into the private credit arena—a fast-growing segment involving direct lending to companies outside of public bond markets, which typically carries higher risk. According to reports, Bank of America has committed $25 billion to this sector, while JPMorgan Chase has allocated a substantial $50 billion. Citigroup further amplified the trend this year by partnering with Apollo Global Management on a $25 billion direct-lending venture.
Market-Wide Jitters and Pressure on Issuance
The unease is not confined to banking institutions. In February, Nationwide's chief market strategist Mark Hackett attributed a sell-off in private-equity and asset-management stocks to a wave of software sector selling and mounting worries over loan risk. Wasif Latif of Sarmaya Partners noted that the AI trade was "subsuming parts of the market," placing firms like Blackstone, Apollo, Blue Owl Capital, Carlyle, KKR, and Ares Management under increased scrutiny.
Financing activity has also suffered. Reports from late February indicated a complete absence of new leveraged loan deals from software companies, as potential borrowers opted to wait for prices of existing debt to recover. Matthew Mish, head of credit strategy at UBS, singled out AI disruption risk as a particular threat to lower-quality credit sectors within the United States.
Morgan Stanley analysis reveals the scale of exposure: software-related debt constitutes approximately 16% of the massive $1.5 trillion U.S. leveraged loan market. Alarmingly, about half of that software loan segment is rated B- or lower, signaling a heightened vulnerability to default. While the bank does not anticipate an immediate surge in defaults, it warns that conditions are ripe for increased price volatility.
Goldman's Positioning and Implementation Hurdles
Goldman's credit division has been preparing for this shift. In a late-February investor letter reviewed by Reuters, the bank disclosed that its GS Credit unit had an enterprise software credit exposure of roughly 15.5% as of the third quarter—positioning it at the lower end compared to industry peers. The letter explicitly cautioned, "We do not underestimate the risk of AI disruption."
However, executing a large-scale short trade on individual loans presents formidable challenges. As noted by the Financial Times, loan contracts are highly customized, and trading terms are dictated by the specifics of each deal. This inherent lack of standardization has kept this corner of the market relatively illiquid and complex, even as bearish sentiment grows.
Signs of stress are evident across private credit. Blue Owl Capital saw record short interest this month, driven by asset sales and new fund restrictions that reignited longstanding questions about liquidity and credit quality. Blackstone's flagship private credit fund, BCRED, faced client redemptions totaling $3.7 billion in the first quarter. The underlying risk is that if pessimistic bets begin to propagate through a market already nervous about liquidity, the resulting pressure could intensify rapidly. In early trading on Tuesday, shares of Goldman Sachs advanced approximately 0.9%.
