Software stocks plunge: Could this spark the next round of credit crisis?

Wall Street analysts warn that the massive software debt held by BDCs could become a potential trigger for the next round of credit crisis, and this concern has already begun to appear in the market.

BDCs, or Business Development Companies, are a key part of the private credit market, specializing in providing funding for small and medium-sized businesses (usually private companies) and holding a substantial amount of software company debt (about 16% of their portfolios). As the software industry faces an unprecedented wave of sell-offs, BDCs are confronting severe asset impairment risks.

According to the latest report published on February 3 by JPMorgan credit analyst Kabir Caprihan, although BDC management has been continuously assessing their software exposure for more than a year, recent declines in software loan prices and BDC stock plunges have sharply soured market sentiment. Data from Goldman Sachs shows that the software sector has fallen on nine out of the last twelve trading days, is testing key support levels, and its long-term performance relative to the semiconductor sector is an “epic disaster.”

The main causes of this collapse are centered around the disruptive threat of artificial intelligence technology. Goldman Sachs clients point out that new agent functions launched by Anthropic and falling EPS for some AI-related companies (such as Publicis and IT) have heightened market panic. Investors fear AI could be the end of software companies, and this panic has inflicted heavy damage on BDCs, which are seen as the main lenders to SaaS businesses—making the market react to BDCs as if any minor disturbance could give them “a serious cold.”

Although it is not yet clear which companies will ultimately be winners or losers, JPMorgan believes the BDC sector needs to undergo a stress test moment similar to what aircraft leasing companies experienced during the pandemic. Seen by credit analysts and traders as a “self-proving” narrative, BDCs are now facing a critical moment where they must demonstrate their resilience to risk, and the market's response is intense.

$70 Billion of Risk Exposure

According to JPMorgan's tracking data, by Q3 2025, the total portfolio size of the 30 BDCs under focus is about $359 billion, with software exposure totaling roughly $70 billion, or about 16%. Including broader tech exposure, the total reaches about $80 billion.

Exposure risk varies greatly among institutions. Blue Owl Technology Fund’s software exposure is as high as about 40%. Notably, a follow-up report by JPMorgan points out that software loans under Sixth Street BDC’s TSLX account for 31.68% of its portfolio’s fair value, showing some institutions’ deep reliance on the sector.

Although management tries to focus on investing in “mission critical” software companies and applies bottom-up AI risk grading to portfolios, differentiating winners and losers remains difficult. JPMorgan believes that it is currently impossible to determine whether AI is a bubble or the end of the software industry, but either extreme view unsettles the market.

Extreme Stress Test: Asset Shrinkage in the Worst Case

To assess potential impact, JPMorgan performed stress tests on BDCs’ software portfolios. Under a simplified “33% rule” scenario (33% default, 33% become zombie firms, and 33% survive), these 30 BDCs would face about $22 billion in losses, net assets would decline by 11%, and leverage would rise from 0.86x to about 1.0x.

In a more severe “extreme scenario”—assuming a 75% default rate in the software industry and a recovery rate of only 10%—the sector’s cumulative net loss in one year would approach $50 billion, and book value would be diluted by 24%. Even under such extreme conditions, most BDCs’ leverage would still remain below 2x, and some institutions with initially low leverage (such as OTF) have demonstrated strong resilience.

High-Risk Loans To Watch

The report also details specific software loan assets under stress in BDC portfolios. JPMorgan analyzed the syndicated loan (BSL) market and found that numerous software loans are trading at steep discounts on the secondary market, in stark contrast with high values marked on BDCs’ books.

Among them, Cornerstone OnDemand is one broadly held risky asset, owned by six BDCs. Its TLB 1L loan price has dropped about 10 points since November 2025, currently trading at around 83, while BDCs’ Q3 average mark is 97. In addition, Finastra’s loan trades at 88, far below the average mark of 101.

Other notable large loans include Medallia ($1.8 billion, market mark around 80, but FSK marks it above 90) and Auctane ($1.3 billion). Cloudera’s loan has also recently dropped around 13 points, though it accounts for a relatively small portion of NMFC and BCRED portfolios. These “anchoring” price discrepancies suggest that BDC asset impairment pressure may just be beginning.

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