PitchBook has indicated that the distressed credit landscape in early 2026 continues to reflect ongoing pressures in leveraged loans and high-yield bonds, particularly in sectors vulnerable to economic shifts and technological disruptions. According to recent analyses shared by PitchBook, the volume of distressed debt has surged in specific industries, signaling broader implications for investors and issuers.
This overview from the research team at PitchBook highlights key developments in the US and European markets, focusing on default rates, restructuring activities, and sector-specific challenges.
In the US, the leveraged loan market has shown notable strain, with the default rate climbing to 1.29% by outstanding amount as of January 2026.
This uptick underscores a cooling secondary market amid a previously robust primary issuance environment.
A standout concern is the software sector, where distressed loans have ballooned to a record $25 billion.
These facilities, part of the Morningstar LSTA US Leveraged Loan Index, are trading below the critical 80 cents on the dollar threshold, doubling from prior levels in just one month.
Software now comprises 13% of the overall leveraged loan market, but it accounts for a disproportionate 31% of all distressed loans in the index.
This concentration amplifies the sector’s drag on aggregate returns, as losses here ripple through broader portfolios.
The software industry’s woes are linked to factors like AI-related uncertainties and market selloffs, which have prompted issuers to rethink financing strategies.
For instance, Team.blue, a European tech firm, recently abandoned a planned repricing of its leveraged loans—originally set to extend a €1.353 billion term loan and adjust a $771 million portion—due to unfavorable conditions in the secondary market.
Such moves highlight how sector-specific volatility can halt refinancing efforts, potentially leading to more defaults or amendments.
Restructuring trends further illuminate the distress.
In 2025, software companies led out-of-court liability management exercises, representing 21% of distressed exchanges and similar maneuvers.
This pattern persists into 2026, as firms navigate covenant pressures and seek to avoid formal bankruptcies.
Private credit markets are not immune; the default rate in this space rose to 2.46% in the fourth quarter of 2025, with non-accrual issues contributing to significant value erosion.
A notable example is BlackRock’s business development company, which experienced a 19% drop in net asset value during that period, reflecting heightened risks in illiquid assets.
Across the Atlantic, Europe’s distressed credit environment appears somewhat more resilient, at least in the software domain.
Within the Morningstar European Leveraged Loan Index, software holds a 7% share, but only 2% of distressed loans originate from this sector as of late January.
Fewer facilities have slipped into distress compared to their US counterparts, possibly due to differing economic buffers or less aggressive leverage practices.
However, broader European high-yield bond activity remains watchful, with potential spillover from US trends.
Looking ahead, market participants should monitor upcoming maturities and covenant amendments closely.
The transition to standardized industry classifications, such as the Global Industry Classification Standard implemented in mid-2022, has refined tracking of sectors like software, previously bundled under broader categories.
This enhances transparency but also exposes vulnerabilities more starkly.
PitchBook concluded that overall, the global distressed credit scene in early February 2026 paints a picture of selective but intensifying pressures, dominated by tech-related debt.
Investors are advised to prioritize diversification and rigorous due diligence to mitigate risks in this evolving landscape.
As default rates edge higher and restructurings proliferate, the coming weeks may reveal whether these trends stabilize or accelerate.