By Bill Alpert

The commercial lenders known as business development companies have seen their shares laid low by credit-quality fears in the last year, not to mention falling interest rates.

The latest leg down came last week, in the panic that new AI tools would kill existing software businesses and lead to loan defaults. The large BDC Blue Owl Capital Corp., for instance, is down nearly 25% since a year ago.

Veteran industry analyst Robert Dodd, at Raymond James, thinks most BDCs will be all right.

"We firmly believe fears of AI-driven disruption in BDC software assets are currently overblown," he wrote in a Thursday note. "We lean toward a more sanguine view."

Investors have worried that BDC disclosures understate the lenders' exposure to AI-threatened software. Dodd worked through the filings, and concludes the industry isn't understating its level of software loans. They more or less match those of other leveraged loan categories, such as broadly-syndicated loans.

The cumulative default rate of BDC loans to software firms is 4.5% in the last 10 years, Dodd notes. That's actually better than for all of their loan assets, where the rate is 10.5%.

Of course, the worry is that AI will break what software businesses have been, so Dodd considered scenarios in which the BDC software borrowers default.

The worst year in BDC software lending was 2021, and there was really one cause: a company called PluralSight. That online education firm's subsequent defaults have raised the cumulative defaults for all loans made that year to 8.9%, so far.

But investors have to remember that these loans are part of diverse BDC portfolios. If software defaults rose to the 10.5% average level of all BDC loans, Dodd estimates that the growth rate in BDC book value per share would get pinched just 0.2 percentage points. In the worse scenario of 2021-level defaults, and no recoveries after the defaults, per-share book value growth would be reduced 0.8 percentage points.

The valuation of BDCs now are priced for much worse outcomes, Dodd says. At today's median 77% of net asset value (which is the book value of the portfolio's loans), investors are pricing BDCs as if two-thirds of their software loans defaulted with no recovery.

Thinking about AI's risks to software and its lenders shouldn't be based on the past, of course. So a complete analysis should consider how much of a BDC's software loans are to firms likely to be displaced by AI.

The healthcare software business Athenahealth shows up in many BDC portfolios, Dodd notes. It's an example of an entrenched, regulated software business that won't soon disappear. Overall, the Raymond James analyst believes BDCs have probably done a good job of picking their software borrowers.

"Risk certainly exists here," he concludes. "Market concern regarding imminent, significant problems seems to be extremely overblown."

Write to Bill Alpert at william.alpert@barrons.com

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February 12, 2026 16:30 ET (21:30 GMT)

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