January Wrap: Hot leveraged loan primary market meets cold secondary amid software slump

US leveraged loans started the year under pressure, falling 0.31% in January, with losses concentrated in the technology sector. Even as secondary prices stumbled, overall primary market activity remained strong, rising to a six-month high behind a flood of repricings and elevated M&A. Robust repayments skewed market technicals in favor of borrowers, pushing new-issue spreads to decade-plus lows in parts of the market despite the choppy secondary backdrop. Investor demand, however, remained uneven.

January market highlights:

• US leveraged loans lost 0.31%, a 10-month low. It was the weakest January in 10 years.
• Software-sector loans, the largest segment of the syndicated loan asset class, fell 2.97%, their weakest return since September 2022.
• By Jan. 30, the LLI’s weighted average bid had fallen to 95.74, the lowest level since late April, though the decline was much milder when excluding Software.
• The share of outstanding loans priced below 90 rose to 10.5% by month-end, the highest reading since April 2025.
• The risk-off environment was reflected in performance by credit rating, with CCCs dropping 2.11% and BB credits gaining marginally.
• Primary loan market activity surged to a six-month high in January, led by a spike in repricings amid uneven investor demand that weighed on technology borrowers but drove increased opportunistic activity in non-tech sectors.
• New-issue spreads test new lows: BB/BB-minus term loans compressed to S+194 (the tightest in 6+ years), while B/B-plus spreads fell to S+282 (post-GFC low).
• Repayments were elevated, driven largely by M&A and other takeouts rather than refinancings, limiting index growth.

US leveraged loans got off to a quick start to the year, rising 46 bps through Jan. 19, before market conditions deteriorated sharply late in the month. A broad sell-off in technology stocks — triggered by disappointing earnings signals, particularly around cloud and AI spending, along with growing investor skepticism about AI’s near-term economic payoff and concern about the effect of AI on software companies — reverberated through credit markets. Given the tech sector’s sizable presence in the broadly syndicated loan market, with Software alone representing roughly 12% of the Morningstar LSTA US Leveraged Loan Index, loan returns were negative 0.65% in the final week of January, the steepest seven-day decline since April. As a result, January’s return at negative 0.31% was in the red for the first time since April and marked the worst January in 10 years.

Loan returns were dragged down by sharply weaker secondary prices, with the market-value component falling 0.91% — the lowest reading in 10 months — compared with an average decline of 17 bps per month last year. By Jan. 30, the index’s weighted average bid had fallen to 95.74, its lowest level since April 27 and 89 bps below where it began 2026. Excluding defaulted names, the average bid on performing loans followed a similar trajectory, sliding to 96.20 by month-end, down 88 bps from its year-end 2025 level.

Software under pressure
Removing Software paints a less severe picture for the loan market. The weighted average bid of performing loans outside the sector declined 49 bps in January, to 96.87, while Software loans plunged 364 bps over the same period, ending the month at 91.56. It was the Software sub-index’s lowest month-end level since December 2022, and the year-over-year decline was 433 bps. By comparison, the rest of the index fell 128 bps over the past 12 months.

With AI increasingly viewed as a potential disruptor to software business models, secondary prices for software loans posted their steepest decline in more than three years. The last time the average bid on performing Software loans fell by more than 300 bps month over month was September 2022, following a series of Fed rate hikes earlier that year. Software borrowers skew toward the lower end of the credit spectrum: in mid-2022, 55% carried a B-minus rating, roughly double the share in the broader index.

While the share of B-minus Software loans edged down to 49% as of January, it remains about twice the index share. And despite widespread refinancing and repricing activity over the past two years — and some easing in base rates — interest burdens remain elevated. If earnings weaken under AI-related pressure, the risk of downgrades will rise, further weighing on investor demand for Software loans.

The software sub-index fell 2.97% in January, the weakest performance since September 2022. The Morningstar LSTA US Leveraged Loan Index tracks 63 industries based on the GICS III industry classification system, with over half representing less than 1% each of market share. Among industries with an index weighting above 1%, Software was hardest hit in January. In fact, 11 of the 20 worst contributors to index returns last month came from this sector, compared with just one software company among the top 20 contributors.

Among other January laggards, technology broadly underperformed. Healthcare Technology loans fell 1.64%, their weakest performance in more than three years, while IT Services declined 0.75%, a 28-month low. Outside of tech, the Commercial Services & Supplies industry — representing roughly 4% of the loan market and potentially exposed to AI-related disruption — also struggled, posting a 78 bps loss for the month, its weakest showing since September 2022.

Aerospace & Defense, which has a relatively small footprint in the loan market with 1.8% share, declined 1.00%, its worst return since September 2022. Cubic, a global provider of transportation and defense-related training services, informed creditors that it plans to defer an interest payment on its debt, according to LCD News. As a result, the company’s $1.4 billion first-lien, second-out term loan B dropped to the low 20s in late January, from the low 50s earlier in the month. In fact, the borrower was the biggest decliner for the LLI overall in January.

Top-performing borrowers, in contrast, were primarily in non-technology sectors spanning consumer, industrial, energy, and financial services.

Risk-off
Performance by borrower credit rating underscores a clear flight to quality in January.

Double-B loans, representing roughly 22% of the market, led returns, gaining 0.06%. Single-B loans — the largest segment, at 62% of the index — fell 0.39%. Triple-C loans were the weakest performers, falling 1.33%.

While lower-rated loans offer higher coupons, the incremental interest income was insufficient to offset steeper market-value declines. Double-B loans recorded the mildest market-value loss of 0.47%, compared with a 1.01% drop for single-B loans. Triple-C loans fared significantly worse, with a market-value loss of 3.00%. Triple-C loans account for only about 6% of the market — 123 facilities — and idiosyncratic price movements within this cohort can materially influence overall performance.

Par plus share deflates
As the tech-driven sell-off weighed on secondary prices in the last two weeks of January, the share of loans priced at par or above — often used as a proxy for strengthening investor demand — retreated to 26% by month-end, from an intra-month peak of 65%. For context, the metric peaked at 67% a year ago and settled at 58% by the end of 2025.

Sentiment soured across the full credit quality spectrum. Among issuers rated BB-minus, 21% of loans were priced at par or above at the end of January, down from 76% two weeks prior and 65% at the start of the year. At the lower end of the market, 11% of B-minus loans were priced at par or better, compared with 45% in mid-January and 39% in December.

At the same time, tail risk continued to rise. The share of loans priced below 80 — often viewed as an indicator of distress — increased to 5.3%, from 4.4% at the start of the year. In addition, another 5% of loans sat in the 80-to-just-below-90 bucket, growing slightly last month. In fact, the 10.5% below-90 share hit double digits for the first time since April 2025.

Primary market — uneven opportunity
Despite the secondary market turbulence, primary market activity in January rose to a six-month high of $176 billion — busier than the entire fourth quarter of 2025. Of that amount, repricing activity surged to $111 billion, the most since July ($159 billion) and one of the busiest months in the current two-year repricing wave.

New-issue spreads continued to compress, extending the tightening trend that closed out last year. Average spreads on BB/BB-minus term loans narrowed to S+194 in January — the tightest level in more than six years — while B/B-plus spreads fell to S+282, the lowest since the Global Financial Crisis.

Although the repricing window remained open throughout January, investor demand was uneven. Weakness in the software sector materially constrained activity, with tech companies accounting for just 8% of repricings by deal count — roughly half of its 2025 share. The sector was even less represented late in the month, contributing only one of the 28 repricings in the final week of January and accounting for the month’s sole cancelled transaction, Team.blue. Separately, while Blackhawk Network completed its repricing in line with talk, the global fintech company removed a proposed $150 million fungible add-on that had been intended to fund a shareholder distribution.

At the same time, several non-technology sectors significantly increased opportunistic activity. Oil & Gas borrowers were particularly active, with nine issuers tightening spreads on existing facilities through amendments in January, representing 12% of total activity; most of these credits were rated B+ or higher. Transportation accounted for eight repricings, or 11% of the total. Both sectors roughly doubled their respective shares compared with last year.

Beyond repricings, primary loan issuance rebounded in January after a sluggish fourth quarter. Refinancing-driven volume rose to $19.2 billion, a four-month high, while issuance excluding refinancings and repricings was $34.7 billion, the strongest level in a year. More notably, issuance tied to buyouts and other M&A transactions climbed to $26 billion — the most since September 2024 — providing a boost to supply for loan investors. Even excluding the $7.25 billion Hologic LBO term loan, M&A-related activity would still stand at a 12-month high.