Unlike the public equity markets, software exposure in credit markets is concentrated in private, not public, companies. An estimated 80% of these issuers are private, and 50% are rated B- or lower, creating a unique and more challenging risk profile due to lower credit quality and less transparency.
Evaluating AI-driven disruption in BDC software portfolios is complex because these are private companies with no public financial reporting. Analysts must effectively re-underwrite each investment from scratch to determine which companies are at risk and which might benefit, making traditional risk assessment inadequate.
While software exposure is a serious concern for credit markets, it is unlikely to cause a systemic crisis. Mitigating factors include low leverage in BDCs (around 2x), minimal direct linkage to the core banking system, and a recent corporate credit cycle characterized by de-leveraging rather than aggressive debt accumulation.