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. In the broadly syndicated loan market—the largest and most liquid segment of the leveraged bank loan market—just 9% of all loans issued in the US this year, excluding repricings, have come from software companies. That’s roughly half the 2025 level and the lowest share since 2013.

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, either you’re getting really good execution with the amount of dry powder out there, or you have a more complicated business or something the market doesn’t like, and those deals are having a hard time getting done.” (Dry powder refers to the amount of committed but unallocated capital a firm has on hand.)

Software Buyouts Fall to Multiyear Low

The leveraged buyout market tells the most compelling story here. In 2025, Software deals peaked at 34.5% of all LBO-related financing in the US broadly syndicated loan market—a testament to private equity’s long-held conviction that recurring revenue, high margins, and scalability make software the ideal buyout candidate. But with software companies under threat of disintermediation by artificial intelligence, 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 [mergers and acquisitions activity] 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 Deals Rise

Healthcare has claimed the top spot in institutional loan issuance for the first time since 2015, accounting for 14% of volume so far in 2026. The sector has long been a fixture near the top of the rankings, but it 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 $4.40 billion facility supporting the Ensemble Health Partners dividend recapitalization—accounted for nearly half of that total.

However, the pattern holds for deal count. 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. Meanwhile, healthcare rose to 8.8%, second only to professional and 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.

Software Remains the Top Loan Sector, for Now

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 13.0% in May 2025.

Without new buyouts to replace repaid loans, the index’s software universe 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. Notably, 58% of that exposure carries a borrower rating of B-minus or lower, highlighting the concentration of credit risk 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 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 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,” says a tech-focused private credit market participant. “The [business development companies] 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 is 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 its 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 positions.