underwriting is no longer just about borrower fundamentals; investors also need to carefully consider sponsor incentives, time horizon, and sponsors' willingness to support a firm's on software-exposed credit, most notably in the broadly syndicated loan (BSL) market. As sectors like insurance, brokers, and other services exposed to Al disintermediation emerged and investors worry about downstream implications, for traditional software companies, which would erode interest software accounts for a meaningful share of the BSL market, fundamentals continue to deteriorate. That said, the benign risk of a turn in the credit default cycle. the BSL market (16%). While many IG software issuers are large incumbents (including the Al hyperscalers), software- index. Particularly important to watch would be the implications repriced disruption risk. HY software has shifted from trading of such shifts for the CLO community, the main buyer of leveraged loans. CLOs have built-in rules or covenants roughly double index spreads, while secondary prices for software loans have fallen to the lowest levels since April 2025. limits (concentration, over-collateralization and collateral-quality tests). The downgrading of too many loans to a CCC rating (BSL CLOs typically have a limit of 7.5% for CCC exposure) could trigger various penalties. As a result, prices for these potentially shifts from CCC-averse CLO buyers. That said, bifurcation in loans isn't new. Even in periods when lower-quality loans cheapen, the broader index can remain loans at lower spreads and new loan supply is muted, as has been the case this year. Overall, while some impairment in software-exposed loans is hard to avoid, we don't think this impairment is sufficient to catalyze a credit default cycle, for two reasons. First, the macro backdrop remains benign, and predict the broader cycle. Second, lower interest rates and incremental relief to floating-rate borrowers. Source: Bloomberg, Pitchbook LCD, Goldman Sachs GIR. Pain in direct lending, but de-leveraging risk looks contained Beyond the BSL market, direct lending—and by extension to sponsor-driven M&A and LBO financing. Another 10% of and mid-sized, often private, firms—-has been in the crosshairs given meaningful allocations to software. Indeed, our equity amid a less favorable exit environment. The upshot is that