PGIM Limits AI-Exposed Debt in Recent CLO

PGIM, one of the largest asset managers in the world, has taken a cautious approach to lending by anchoring a recent collateralized loan obligation (CLO) with a hard cap limiting AI-exposed debt to 15% of the deal's portfolio.

This move reflects growing concerns among institutional investors about the risks associated with lending to companies that may be vulnerable to artificial intelligence disruption. According to PGIM, roughly 11% of US CLO portfolios currently carry exposure to sectors facing near-term AI disruption, while European CLOs are somewhat less exposed at around 7%.

Software and technology-adjacent loans typically make up 12% to 15% of US CLO collateral pools. JPMorgan estimates that up to $150B in US CLO-held leveraged loans sit in sectors that face meaningful AI disruption risks, which is roughly a tenth of the entire US CLO market's value of approximately $1 trillion.

PGIM's analysts estimate that 11% of US CLO portfolios currently carry exposure to sectors facing near-term AI disruption. This shift highlights a broader change in credit risk philosophy among CLO managers, who are adjusting their portfolios in response to AI-related risks by reducing exposure to companies whose business models look most vulnerable to automation or substitution.

The $150B figure from JPMorgan raises systemic questions about the impact of CLO managers collectively pulling back from these credits. If borrowing costs for tech-adjacent companies rise, it could potentially accelerate the very distress that the managers are trying to avoid.