IG & HY Strategy: Software Glitch

Research evidence excerpt

IG & HY Strategy: Software Glitch

21 May 2026

IG & HY Strategy

current market pricing, we estimate that 29% of current US Leveraged Loan

software names are trading with an implied CCC rating, vs. only 11% rated as CCC

by the rating agencies. Given the large weight of software (~13%) in the US Lev

Loan index, this could spike the share of CCCs in the Loan Index to 7-8.5% (from

5.8% today), on par with 2008-2009, 2011-2013, 2016-2017, 2020 & 2022-2023

levels. Note this 7-8.5% CCC basket is just looking at the software downgrade risk

in isolation, without accounting for any additional downgrades hurting other

sectors, whether from direct AI disruption of non-software sector business models

to indirect AI disruption tightening financial conditions through tighter Fed policy

and higher rates.

And from the third-party valuer perspective, it is a very similar dynamic. Third

party valuers effectively use calibration models to assess the “fair-value” of a

private credit loan each quarter, using both market-wide macro inputs (such as

traded loan index and sector spreads) and company-specific fundamentals to

inform their view. Currently, the dramatic widening in US Leveraged Loan software

spreads is factoring into private credit loan markdowns today. But 1) the health of

the broader Leveraged Loan Market (ex-software) & 2) the lack of any tangible

impact on company fundamentals is limiting the amount of loan markdowns that

private credit funds have to take. A raft of weak software earnings coupled with

rating downgrades and rising CCC buckets in US Loan indices would lead both of

these macro & company specific fundamental factors to deteriorate, instigating a

far more rapid pace of software loan markdowns in Figure 2 than we have

experienced so far.

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