Daily: What do AI disintermediation risks mean for credit markets?

Credit from relatively insulated sectors, especially those with more tangible physical assets or moats, like energy, utilities, and capital goods, have outperformed. We think AI disintermediation risks in credit are real. But the more pressing question is how and where this translates into pressure on cash flows, leverage, and refinancing risk: Disruption risks are credible, though credit should be buffered. Certain business models, especially those reliant on easily automated workflows or commoditized services, face credible long-term threats from AI.

However, actual credit impairment typically requires sustained deterioration in earnings and cash flow, which triggers downgrades or refinancing challenges. Most IG and large HY issuers retain strong balance sheets and financial flexibility, making them resilient to near-term disruption. Risks are more pronounced for smaller, highly leveraged HY issuers, but these represent only a small fraction of the broader market. Agentic AI tools are accelerating automation risk, particularly for software and services.