Senior Loan Talking Points
Managing Director, Head of Bank Loans and Global CLOs
Weekly Notables
The U.S. loan market remained under pressure this week, as continued weakness in the software sector weighed on returns. The Morningstar LSTA US Leveraged Loan Index (Index) returned -0.54% for the seven-day period ending February 5, while the average Index bid price moved lower by another 61 basis points (bps), ending the week at 95.39.
Consistent with the subdued tone in the back half of last week, primary market activity was light this week amid the weaker secondary backdrop, amounting to just $5.5 billion. The bulk of the new supply was tied to refinancing transactions, while M&A deals were muted. Not surprisingly, repricing activity declined to just three new launches,compared to 27 last week. The forward calendar also reflected some caution, with repayments now exactly in line with expected supply, compared to net supply of $5.9 billion last week.
In the secondary market, higher-quality credits continue to hold in better in the volatile environment. The B and CCC-rated segments, which have a higher concentration of software loans, extended their underperformance, with CCCs now losing 354 bps on a market value basis through the YTD period.
CLO issuance accelerated for a second consecutive week, as managers priced ten new deals, bringing YTD issuance to $10.3 billion. However, US retail loan funds recorded a $924 million outflow for the weekly period ending February 4, according to Morningstar. This marks a sharp reversal from the positive start to 2026 and represents the largest single-week redemption since mid-October of 2025. In addition, this pushed the YTD tally firmly into negative territory, with net outflows now at $572 million for the year.
There was one payment default in the Index this week (Cubic). As a result, the trailing 12-month payment default rate by principal amount increased to 1.38%.
Source: Pitchbook Data, Inc./LCD, Morningstar LSTA US Leveraged Loan Index. Additional footnotes and disclosures on back page. Past performance is no guarantee of future results. Investors cannot invest directly in the Index. *The Index’s average nominal spread calculation includes the benefit of base rate floors (where applicable).
Monthly Recap: January 2026
The US loan market returned -0.31% in January, representing the first negative monthly reading since April 2025 and the lowest January return in 10 years. Although performance started the year off on a positive note (+46 bps through January 19), market conditions deteriorated sharply later in the month. This was driven by a strong sell-off in the software space, which is among the largest 3 sectors in the loan market (at about 12%). Broader weakness in tech equities, driven by disappointing earnings, combined with some skepticism of AI’s near-term impact, and a potential threat of AI negatively impacting software companies all weighed on sentiment. This was reflected in the weighted average bid price for software loans falling by 364 bps, leading to a return of -2.97% for the sector. Outside of software, loan prices for performing loans declined by 49 bps on average to 96.87, and 90 bps overall for the entire market (now sitting at 95.74). By ratings, a clear risk-off sentiment was evident, with BBs posting modest gains of 0.06%, while Single-Bs returned -0.39%, and CCCs experienced losses of -2.11%.
The primary market was busy to start the year despite the weaker secondary market, with about $176 billion in total supply including repricing activity. Repricing transactions drove the bulk of January’s deal flow, as $111 billion in volume was repriced during the month (the most since July 2025). As a result, new-issue spreads continued to compress, as the weighted average nominal spread of the Index is now at just 318 bps. Excluding repricing activity, institutional issuance also increased, with roughly $53.9 billion issued during the month. A good chunk of this volume represented acquisition related activity at $16 billion – the most since September 2024. Refinancing deals were also prevalent at $19.2 billion, which represents a 4-month high. On the other hand, measurable investor demand was positive but more modest to start the year. CLO managers priced $8.7 billion across 19 deals, as CLO issuance is typically subdued to start the year. Meanwhile, retail loan funds experienced a modest inflow of about $0.5 billion in January, driven mostly by ETFs.
Default activity picked up in January, as there were two payment defaults and three (liability-management exercises) LMEs in the Index. As a result, the trailing 12-month payment default rate increased modestly to 1.29% (from 1.23% in December). LCD’s dual-rate tracker that includes LMEs also ticked higher to 3.53%, up 18 bps month-over-month. For 2026, we expect defaults to remain modest overall and continue to be primarily driven by LME transactions. Since LMEs often don’t yield positive outcomes in sustaining long-term operational performance for a company, as evidenced by a significant number of borrowers eventually returning to a traditional bankruptcy filing, we continue to expect a protracted but (importantly) modest default cycle going forward.
Source: Pitchbook Data, Inc./LCD, Morningstar LSTA Leveraged Loan Index. Additional footnotes and disclosures on back page. Past performance is no guarantee of future results. Investors cannot invest directly in the Index. *The Index’s average nominal spread calculation includes the benefit of base rate floors (where applicable).