The $2 trillion private credit market just discovered that AI is not only a tech story. It is a credit story. And not the good kind.

Reuters reports that US banks are raising borrowing costs for private credit funds as AI-driven disruption hammers the valuations of companies those funds lent against. The banks extending credit lines to private debt funds are looking at the collateral, seeing legacy software companies getting eaten alive by AI competitors, and quietly hiking their rates.

This is a cascading problem. Private credit firms borrowed from banks to lend to companies, many of them mid-market software firms. Those software firms are now watching their products get replicated or replaced by AI tools at a fraction of the cost. The loans are still on the books, but the businesses backing them are worth less every quarter.

The Domino Effect

Here is how the chain works. Bank lends to a private credit fund at a certain rate. Fund lends to a software company at a higher rate, pocketing the spread. Software company starts losing customers to an AI startup that does the same thing for 90% less. Software company's revenue drops. Fund's collateral is now worth less. Bank raises the rate on the fund. Fund has to either absorb the cost, raise its own rates, or cut new lending. Everyone gets squeezed.

The timing is significant. This comes right as Blackstone and other major private equity firms have already started restricting investor redemptions from funds heavy on legacy tech holdings. When the biggest players in the room start locking the exits, that tells you exactly how confident they are in the collateral.

Sources told Reuters that borrowing costs have firmed up across the entire market, with private credit firms also charging more to absorb higher funding costs. That means the squeeze is not isolated. It is systemic.

The Take

We have been covering AI eating legacy software for weeks now. But this is the first concrete evidence that the damage is reaching the financial system. When banks start repricing risk because of AI disruption, it means the disruption is no longer theoretical. It is showing up in loan books and credit assessments.

The private credit market ballooned to $2 trillion on the back of mid-market lending, much of it to exactly the kind of companies AI is now threatening. Nobody modeled this risk when those loans were written. The borrowers were stable software businesses with recurring revenue. Now they are sitting ducks.

This is not 2008. The leverage ratios are different, the systemic exposure is smaller, and the banks themselves are not holding the toxic assets. But it is the clearest signal yet that AI disruption has crossed from the tech sector into the financial sector. And that transition tends to accelerate, not slow down.