Software Stock Collapse Could Trigger The Next Credit Crisis

Wall Street analysts have raised concerns that the substantial volume of software debt held by Business Development Companies (BDCs) could act as a catalyst for a future credit crisis, and signs of that risk are beginning to surface in markets. BDCs, which play a central role in the private credit ecosystem by financing small and mid‑sized enterprises—often privately held—carry significant exposure to software issuers, roughly 16% of their aggregate portfolios. As the software sector endures an unprecedented sell‑off, BDCs face heightened risk of asset impairments.

A February 3 report from JPMorgan credit analyst Kabir Caprihan notes that, despite ongoing monitoring of software exposure by BDC management teams over the past year, recent declines in software loan prices and sharp falls in BDC share prices have materially worsened market sentiment. Data from Goldman Sachs indicate that software equities fell on nine of the last twelve trading days, testing critical support levels, and that the sector’s long‑term performance relative to semiconductors has been described as an “epic disaster.” The market rout is largely attributed to perceived disruptive threats from artificial intelligence, with clients citing Anthropic’s new agent features and earnings weakness at certain AI‑related firms as factors that have amplified investor panic. That panic has disproportionately affected BDCs, which are major lenders to software‑as‑a‑service companies and therefore vulnerable to even modest market shocks.

JPMorgan suggests the BDC industry may require a stress‑testing episode comparable to the pressure experienced by aircraft‑leasing firms during the pandemic. Credit analysts and traders view the current juncture as a critical test of BDCs’ ability to demonstrate resilience, and market reactions have been pronounced.

JPMorgan’s tracking shows that, as of the third quarter of 2025, the 30 BDCs under its coverage held combined portfolios of approximately USD 359 billion, with software exposure near USD 70 billion, representing about 16% of assets; a broader technology exposure raises the total to roughly USD 80 billion. Exposure concentrations vary markedly across managers: Blue Owl Technology Fund’s software allocation approaches 40% of its portfolio, while a subsequent JPMorgan update highlighted that Sixth Street BDC’s TSLX software loans account for 31.68% of its portfolio fair value, underscoring deep reliance on the sector for some firms. Although portfolio managers have prioritized investments in “mission‑critical” software companies and applied bottom‑up AI risk scoring, distinguishing future winners from losers remains challenging. JPMorgan observes that market unease persists because it is unclear whether AI represents a speculative bubble or an existential threat to parts of the software industry.

To quantify potential losses, JPMorgan performed stress tests on BDC software holdings. Under a simplified “33% rule” scenario—where one‑third of companies default, one‑third become zombie firms, and one‑third survive—the 30 BDCs would incur roughly USD 22 billion in losses, reducing aggregate net assets by about 11% and increasing leverage from 0.86x to approximately 1.0x. Under a far more severe “extreme” scenario—assuming a 75% default rate with only 10% recovery—industry‑wide cumulative net losses over a year could approach USD 50 billion, diluting book value by about 24%. Even in that extreme case, most BDCs would retain leverage below 2x, and some lower‑leveraged entities, such as OTF, would display comparatively stronger stress resilience.

The report identifies specific software loans that are under pressure within BDC portfolios and notes widening discounts in the broadly syndicated loan market relative to BDCs’ marked valuations. Cornerstone OnDemand is cited as a widely held risk asset, with six BDCs holding its TLB 1L loan; its secondary price has fallen roughly ten points since November 2025 to about 83, while BDCs marked it at an average of 97 in the third quarter. Finastra loans are trading near 88 versus an average mark of 101. Other sizable exposures include Medallia, with approximately USD 1.8 billion in loans trading near 80 despite some managers marking them above 90, and Auctane with about USD 1.3 billion in loans. Cloudera’s loan price has also declined by roughly 13 points, although its weight in NMFC and BCRED portfolios is relatively modest. These price dislocations indicate that impairment pressures on BDC assets may be in the early stages.