In PitchBook LCD’s latest US Leveraged Finance Survey, we asked market participants about their expectations for the leveraged finance markets after a tumultuous first quarter. Volatile oil & gas prices and the war in the Middle East have overshadowed the AI-disruption concerns that dominated financial headlines just a few weeks ago, leaving plenty for investors to navigate for the rest of the year. After credit spreads tightened in 2025, to what extent will credit spreads widen in 2026? How will inflation, geopolitics and other challenges play out in the rest of the year? Will AI disruption further add to credit risk concerns for the software sector? Are more defaults on the horizon?
As always, LCD surveyed buyside, sellside, and advisory professionals to gauge market expectations. The full results of the Q1 2026 US Leveraged Finance Survey, conducted from March 24-30, are detailed below.
Key takeaways:
- Two-thirds of respondents anticipate an increase to average equity contributions of buyouts in the next six months.
- 78% of market participants believe credit spreads will widen moderately to significantly.
- Geopolitical turmoil/exogenous events topped the list of headwinds to the leveraged loan market in the next six months, at 36%; with 92% of survey participants expecting the default rate to increase.
- 89% believe inflation will be greater than 2.5%, up from 59% in last quarter’s survey.
- 23% are concerned that AI-disruption will impact their investment portfolios over the next two years.
Spreads widened sharply across the credit spectrum in February and March as the market grappled with software sector stress, geopolitical uncertainty, and deteriorating macro sentiment. The move was most pronounced in the B-flat segment — the most active part of the market, and therefore the clearest signal of where price discovery is occurring. Spreads in that bucket have widened roughly 100 bps from the end of January, to S+388, and are about 40 bps wide of where they cleared in the immediate aftermath of “Liberation Day.”
When asked about credit spreads over the next six months, 11% said spreads would widen significantly, 67% said spreads would widen moderately, and 19% forecast spreads to be broadly unchanged, with just 3% suggesting spreads would tighten. Lenders are expecting a ‘risk-off’ stance for credit.
One respondent additionally commented that “Private credit spreads will be 25-100 bps wider given declining funds flows, particularly for larger deals.”
Inflation is expected to be 3% or higher in 2026, according to 53% of survey respondents, including 11% who anticipate greater than 4% inflation.
In February, inflation stood at 2.4%, and the market expected another Fed rate cut on the horizon. However, with oil and gas prices spiking and remaining volatile upon the outbreak of the war in the Middle East, expectations for lower inflation and lower interest rates have been tossed aside. With the Strait of Hormuz shut down by Iran, supply constraints beyond just oil could hamper the global economy.
Market participants ranked geopolitical turmoil/exogenous events (36%), tightening credit conditions (15%) and sourcing assets/M&A deal flow (14%) as the three most significant concerns for the loan market over the next six months. Stress/default risk dropped to a tie for fourth place, from first in the prior survey.
Respondents also noted key concerns with the following comments:
- “Iran issues and therefore oil and its knock-ons, software and potential for further redemptions, the public sentiment and headlines on private credit being misconstrued as the asset class performing poorly.”
- “All variables considered, the ability to predict the future is very low.”
- “US$ falls and international investors lose confidence in USA.”
Healthcare Equipment & Services, Capital Goods, Commercial & Professional Services, and the Software & Services industries were seen as the most favorable credit investment opportunities. Software loans account for the largest share of the Morningstar LSTA US Leveraged Loan Index, with about 16% by debt amount outstanding, or $250 billion. The sector, however, was also deemed the least favorable by a majority of respondents.
Healthcare Equipment & Services repeated as the most favored sector for credit investment, picking up one percentage point from last quarter. Software, on the other hand, dropped to fourth at 11%, from 25% last quarter. Other mentions included Oil & Gas, Energy, Logistics, and Specialty Chemicals.
Amid the widely reported fears of AI disruption, Software easily repeated as the least favorable sector, with 69% of the vote, compared to 39% in the last survey. Commercial & Professional Services was second at 17%, while Capital Goods took 6%. Other noteworthy mentions included Insurance and Building Products.
Forty-four percent of respondents reported that AI-related investments accounted for less than 10% of their portfolios, while 22% indicated exposure of 10-20% and 6% in the 20-30% range. Last quarter, 10% reported 20-30% exposure and 5% reported 30-40% exposure. This time, no respondents reported greater than 30% exposure.
Survey results reflected clear concern over the impact of AI disruption on respondents’ investment portfolios over the next two years.
M&A activity outlook
Market sentiment for M&A activity is tentative, as 31% of respondents (0% last quarter) believe issuance volume will fall in the next six months. Only 36% of respondents (compared to 51% last quarter) believe that M&A issuance will pick up and the technical backdrop will remain the same, while another 11% believe issuance will increase and the technical supply shortage versus demand would improve.
Only 11% of respondents expect leverage multiples on buyouts to increase, a steep drop from 44% last quarter, while 53% expect them to decrease, indicating a pullback in risk appetite.
Two-thirds of respondents said equity contributions of buyouts will increase. By contrast, last quarter, a majority of respondents (51%) did not expect equity contributions of buyouts to change over the following six months. The shift suggests that debt capacity could be limited should credit standards tighten and spreads increase.
Ninety-two percent of respondents believe that in the next six months, default levels will at least increase slightly, while 8% think that the pace of defaults will be roughly the same.
Similarly, nearly all (94%) of respondents believe that in 2026, the default rate (excluding distressed exchanges/LMEs) for the leveraged loan market will rise above the current 1.44% level. This includes 40% who believe that it will rise to or surpass the historical average of 2.55%.
Featured image by Imaginima/Getty Images
Learn about our editorial standards.
