Software loses its throne in the leveraged loan market
Software’s two-decade run atop the leveraged lending market may be over, at least for now. Just 9% of all loans issued in the US broadly syndicated loan market this year (excluding repricings) have come from software companies, the lowest share since 2013 and roughly half the 2025 level. The pullback is even more striking within…
Software’s two-decade run atop the leveraged lending market may be over, at least for now.
Just 9% of all loans issued in the US broadly syndicated loan market this year (excluding repricings) have come from software companies, the lowest share since 2013 and roughly half the 2025 level. The pullback is even more striking within the PE-backed universe, where software’s share has collapsed to 9%, from 21% in 2025 and a 24% peak in 2020, when the sector was the undisputed darling of the Covid-era deal boom.
“This is a market of haves and have-nots, and software is among the have-nots,” says Engin Okaya, managing director at PGIM Credit. “Right now, you’re either getting really good execution given the amount of dry powder out there, or, if you have a more complicated business, or something that has a characteristic about it that the market doesn’t like, those deals are having a hard time getting done.”
The LBO market tells the most compelling story here. Software deals peaked at 34.5% of all LBO-related financing in the US broadly syndicated loan market last year, a testament to PE’s long-held conviction that recurring revenue, high margins, and scalability make software the ideal buyout candidate. With software companies under threat of disintermediation from AI, however, that share has since fallen to 17.5%, a level not seen in a decade.
“The amount of capital available to deploy in technology transactions has decreased. At the same time, there hasn’t been a great deal of M&A in the space, and the incremental financing dollar that was available has largely evaporated,” says Milwood Hobbs Jr., deputy CIO of Oaktree’s strategic credit platform. “As a result, we haven’t seen many buyouts. Private equity firms are being selective about where they deploy capital in software, and financing conditions are likely to remain challenged.”
Whether this is merely a pause or the beginning of a more structural shift, driven by valuation resets, higher-for-longer rates, or a broadening rotation into sectors like healthcare, remains a major question for the leveraged loan market heading into the second half of 2026.
Healthcare claimed the top spot in institutional loan issuance for the first time since 2015, accounting for a record 14% of volume so far in 2026. The sector has long been a fixture near the top of the rankings, but spent much of the past decade overshadowed by software. In absolute terms, Healthcare borrowers raised $25 billion from the broadly syndicated market this year, though the figure is heavily concentrated: two January mega-deals — the $7.25 billion term loan backing the Hologic buyout and the $4.4 billion facility supporting the Ensemble Health Partners dividend recapitalization — accounted for nearly half of that total. However, the pattern holds for deal count as well. Software accounted for just 7.4% of all transactions in the broadly syndicated market this year, excluding repricings, which bring no new money to the market. That’s roughly half the 2025 share and the 10-year average. Healthcare, meanwhile, rose to 8.8%, second only to professional & business services, gaining ground from both its 2025 level and its long-term average.
Beyond the software-to-healthcare rotation, 2026 has been marked by a broad-based diversification of issuance. Seven of the top 10 sectors by volume have increased their share relative to both 2025 and their 10-year average, suggesting that many of this year’s leading industries are punching above their historical weight. Deal count shows a similar pattern, with six of the top 10 sectors running ahead of both their prior-year and long-term averages. Energy and aerospace/defense illustrate the trend well, both running meaningfully above historical norms.
Shrinking footprint The rotation away from software in new issuance is beginning to impact the composition of the $1.5 trillion US leveraged loan market. Software remains the top sector in the Morningstar LSTA US Leveraged Loan Index, with a 12.5% share, but that’s down from a peak of 13% in May 2025. Without new buyouts to replace repaid loans, the software universe in the index is shrinking. Eight software borrowers have fully paid down term loans so far this year, including Worldpay, whose acquisition by Global Payments removed roughly $5 billion in par amount outstanding from the index.
In absolute terms, the sector represents $194 billion of outstanding loans, and notably, 58% of that exposure carries a borrower rating of B-minus or lower, highlighting the credit risk concentration embedded in the market’s largest sector.
Software also faces a modestly heavier near-term maturity profile: 21% of outstanding loans in the sector mature in 2028, compared with 14% on index loans broadly. Until sentiment toward the sector deteriorated this year, software borrowers enjoyed broad access to refinancing in the broadly syndicated loan market. That window appears to have closed, with leveraged loans from the sector down 4.73% in the year to May 31, against a market that is up 1.24%.
Direct lenders are unlikely to fill the gap, at least in the near term. Their portfolios are already under investor scrutiny for elevated software exposure, and an early read of LCD’s soon-to-be-published Private Credit Market Sentiment Survey finds that more than half of respondents are actively reducing their allocation to the sector, either modestly or significantly. What’s more, lenders that are willing to underwrite software deals will increasingly demand better pricing, tighter covenants, or both, reflecting a more cautious reassessment of the sector’s risk profile.
“Appetite for software deals is lower as people pull back and assess who the winners and losers might be. Some will make bets and lean in, and others will lean out,” a tech-focused private credit market participant says. “The BDCs that need liquidity to satisfy redemption requests are effectively staying out of the software deals. They have to focus on exits more than new deployments.”
When the music stops The question now: What happens to software borrowers with looming maturities that cannot grow into their capital structures?
The market consensus is that two key factors will determine the next steps for these issuers: whether a company’s underlying software assets retain their value, and whether the company’s sponsor remains committed to the borrower. When both conditions are met, amend-and-extend deals could be the first step. In these deals, borrowers push back maturities in exchange for a fee and a wider spread. The deals often require the sponsor to kick in fresh equity to partially pay down debt and reduce lender exposure.
In other situations, a sale process can substitute for a refinancing. A strategic or financial buyer acquires the asset and refinances the existing debt at close, resetting the capital structure.
When sponsor conviction or asset quality starts to fall apart, liability management exercises have become increasingly common as sponsors look to preserve value and senior lenders move to consolidate their position.
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Featured image by Dan Kurtzman/Getty Images
This article originally appeared on PitchBook News
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