Software Sector Stress Sends Leveraged Loans Lower
February 5, 2026
The U.S. loan market rang in the new year with a strong start, gaining 0.46% through Jan. 19 and new issuance surged to its highest level in six months.1 Momentum, however, faded quickly as January progressed. Bids weakened sharply, and the loan market ultimately ended the month in negative territory, marking its first monthly loss since April 2025.2 The abrupt reversal was driven primarily by mounting concerns surrounding the software sector, which weighed heavily on overall market sentiment.
The software sector is the largest component of the leveraged loan index, representing roughly 12%.3 Due to its size, performance within the sector has a significant impact on the broader index. In January, software‑related loans declined nearly 3%, marking their weakest performance since 2022.4 Taking a closer look, while 47% of software names in the leveraged loan index were trading above par at the beginning of January, that figure has since dropped to below 10%.5 High loan-to-value, leveraged buyout software names were among the hardest hit, trading down approximately seven to 10 points.6
Historically, software companies have been viewed as relatively stable, while being highly leveraged with debt. Investor sentiment has shifted, however, as advances in artificial intelligence (AI) have raised concerns that many existing software products and services could become obsolete. AI is increasingly viewed as a potential disruptor to software business models. Loan prices have been feeling this pressure, with many loans trading at their lowest levels in months by the end of January.7 The bid has evaporated for loans with software exposure amid growing questions around growth prospects. Despite these headwinds, not all developments in the loan market have been negative. An estimated $17.2 billion of loan repayments unrelated to new issues came due in January—the highest monthly total since July 2019—providing investors a continued influx of cash.8
Key Takeaway
The loan market started the year on solid footing but quickly lost momentum. Early gains gave way to fading confidence and declining prices, leaving the market in negative territory by the end of January. The downturn was largely driven by growing concerns regarding the software sector, a sizeable component of the leveraged loan index that saw sharp declines as investors questioned how AI could disrupt traditional software businesses. This pressure also affected the high-yield corporate bond market. While high yield holds materially less exposure to software issuers than their loan counterparts, it still exhibited some weakness. It remains unclear how many of the companies currently under pressure are at risk of being undermined. Nonetheless, this is a trend worth monitoring, particularly given the continued need for investors to redeploy cash.
Sources:
1-4PitchBook Data, Inc. – January Wrap: Hot leveraged loan primary market meets cold secondary amid software slump; 2/2/26
5,6JPMorgan
7Bloomberg
8Credit Sights; 1/30/26
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