A&M's latest Debt Market Update highlights critical pressures shaping private credit, leveraged lending, and macro-economic conditions as the market navigates a confluence of structural challenges. AI-driven disruption in software companies, rising valuation concerns, mounting refinancing risk, and heightened redemption pressure are reshaping how investors, lenders, and managers assess portfolio quality and risk. Despite pockets of activity in certain sectors, market sentiment remains cautious as participants recalibrate expectations for credit quality, default rates, and the path to exit.

Key Themes for 2026 and the Outlook for 2027 Include:

• Software and technology lending face acute pressure from AI disruption, with weighted average bids for software loans at 87.71 as of May 2026, roughly 990 bps wider than non-software peers. Spread-to-maturity for software loans widened 395 bps since December 2025, reaching 809 bps.
• Valuation inconsistency has become a material risk, with portfolio overlap across the top 10 BDCs reaching 66.1% by Q4 2025 (up from 2% in 2015-2020). The same loan can be marked 91%, 82%, and 77% by three different lenders simultaneously, raising systemic concerns.
• New-issue spreads continue to migrate into the 450 to 500 bps range, with average cash spreads around 525 bps in Q4 2025 (median 500 bps). Despite market volatility, competition remains intense with excess capital pushing deal economics.
• Default rates have accelerated sharply, with private credit reaching 5.8% in January 2026 and 9.2% for US corporates in 2025. UBS predicts default rates could double in 2026, with software loans at high AI disruption risk potentially seeing defaults as high as 11%.
• Refinancing risk is building acutely, with debt maturities concentrated in the 2028-2030 window. Many 2021-era investments made at peak valuations face significantly more challenging refinancing terms as lender bargaining power increases.
• PIK (payment-in-kind) adoption continues to rise as sponsors cooperate with lenders for liquidity relief. Technology leads with 95 companies on PIK arrangements, followed by industrials (62) and healthcare (53).
• Redemption pressure is mounting, with redemption requests for US perpetual non-traded BDCs rising 36% quarter-on-quarter in Q1 2026. Major managers including Apollo, Ares, Morgan Stanley, and Blue Owl have capped redemptions as concerns about software exposure and valuations grow.
• The Federal Reserve held rates steady at 3.5-3.75% with limited near-term relief expected. Inflation remains a concern driven by geopolitical uncertainty and energy costs, constraining the path to further rate cuts and adding pressure to borrower leverage multiples.
• Investor confidence in private credit has deteriorated, with sector concentration risk, high leverage, and opacity now under SEC scrutiny. Limited partners are demanding more capital contributions from general partners and pushing for reduced management fees.
• M&A activity remains challenged as a path to exit, particularly for 2020-2021 vintages. Valuation mismatches between sponsors and buyers, combined with refinancing risk, are expected to constrain exit windows through 2027 and into 2028.
• Secondaries volumes are expected to accelerate significantly as institutional investors opportunistically enter the asset class. The secondary private credit market continues to gain traction with major capital commitments from institutional LPs.

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