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The Credit Market Lens

The Credit Market Lens: Improved Optics But Unchanged Economics in Software Loans

Amid AI disruption risk and elevated refinancing costs, we can expect a valuation gap to persist between software loans and the broader loan market.
The Credit Market Lens: Improved Optics But Unchanged Economics in Software Loans
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This year, the software sector has been one of the worst-performing pockets of the leveraged loan market amid fears that AI would severely disrupt existing business models. The sector’s underperformance has also weighed on the leveraged loan asset class as a whole, given its more than 10% weight in the overall Morningstar LSTA US Leveraged Loan Index.

Software loan spreads tightened over the summer, retracing about one-third of this year’s widening and moving roughly 100 basis points (bps) inside their June wides (see Figure 1). That improvement has partially reversed, however, with spreads widening again since early September. The recovery therefore remains incomplete. The average bid price for software loans is still about 8 points (i.e., 8 cents on the dollar) below that of non-software peers, compared with roughly 10 points in June (see Figure 2).

Figure 1: Software loan spreads have somewhat recovered since their peak sell-off

Line chart showing cumulative option-adjusted spread (OAS) changes for software and ex software leveraged loans from December 2025 through September 2026, measured in basis points. Software OAS rises sharply in early 2026, peaks above 300 basis points in February and June, and ends near 248 basis points. Ex software OAS increases more moderately and ends near 112 basis points. The shaded difference between the two series remains substantial throughout most of the period.
Source: Bloomberg and PIMCO as of 14 October 2026. Loans are proxied by the Morningstar LSTA US Leveraged Loan Index.

Figure 2: Software’s valuation gap vs. the broader market remains significant

Line chart showing weighted-average bid prices for software and ex software leveraged loans from December 2025 through September 2026. Software loan prices fall sharply from about 95 to the mid-80s during the first half of 2026, then recover partially to end near 88. Ex software loan prices remain comparatively stable, generally between 95 and 97, and end near 96. The valuation gap between the two groups remains wide at the end of the period.
Source: PitchBook and PIMCO as of 14 October 2026. Loans are proxied by the Morningstar LSTA US Leveraged Loan Index. Loan prices are quoted in cents per dollar of par value.

Looking ahead, AI disruption risk and elevated refinancing costs are likely to keep the software sector’s valuation gap versus the broader loan market material. Uneven exposure to these pressures should also sustain elevated dispersion across issuers.

Figure 3: Dispersion in software loans has increased since the AI-driven sell-off

Line chart showing normalized interquartile range, a measure of loan OAS dispersion, for software and ex software loans from January 2023 through October 2026. Software dispersion becomes more volatile and rises substantially beginning in the second half of 2024, reaching approximately 2.6 times median OAS in late 2026 before ending near 2.1. Ex software dispersion increases more gradually and ends near 1.3 times median OAS.
Source: Bloomberg and PIMCO as of 14 October 2026. Loans are proxied by the Morningstar LSTA US Leveraged Loan Index. Normalized interquartile range (IQR) is the difference between the 75th and 25th percentiles of constituent option-adjusted spreads (OAS), divided by the sector’s median OAS, with each loan weighted equally. Higher values indicate greater spread dispersion relative to the sector’s typical spread level.

Figure 4: $62 billion of software loans will mature in 2028 and 2029

Bar chart showing the leveraged-loan maturity wall for software, measured by amount outstanding in billions of dollars. Approximately $3.9 billion matures in 2027, $29.8 billion in 2028, $32.4 billion in 2029, $23.7 billion in 2030, $54.7 billion in 2031, and $60.6 billion in 2032 or later. The largest maturity amounts occur in 2031 and 2032 or later.
Source: PitchBook and PIMCO as of 14 October 2026. Loans are proxied by the Morningstar LSTA US Leveraged Loan Index.

Recent amend-and-extend transactions show that financing options are available, but at sharply different costs depending on the issuer and situation. Some issuers that recently extended maturities were able to tap the market for just a 25-bp increase in their spread over the overnight (baseline) rate, according to PitchBook reports. Others, however, faced a spread increase of 150 bps over previous levels and had to accept a discount on their issue price, placing it below par. That range highlights how differently the market is pricing issuers based on perceived quality and resilience to AI disruption.

The takeaway is that maturity relief is available, but not always cheaply. Even after the recent rally, refinancing costs remain prohibitively expensive for many issuers relative to the borrowing costs put in place during the low-rate era.

We believe that for weaker credits, spread compression has improved the optics more than the economics. The software loan market appears to be increasingly defined by winners, losers, and wider dispersion. Until the disruptive effects of AI on software-related loan issuers become clearer, choices made during the low-interest-rate regime of yesterday are likely to drive further differentiation within the sector tomorrow.

Michael Puempel and Gabriel Cazaubieilh contributed to this report.

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