The AI fear trade is hammering leveraged loans, with over $17.7 billion in software debt turning distressed in just four weeks
The Bloomberg US Leveraged Loan Index, a benchmark that tracks USD-denominated, high-yield, floating-rate institutional loans, is experiencing its worst stretch of price action since 2022. The average price across the index dropped 1.34% in February 2026.
Software is ground zero #
Software loans make up roughly 12% of the entire Bloomberg US Leveraged Loan Index. Software-related loans fell nearly 3% in January 2026 alone. The percentage of software loans trading above par collapsed from 47% to below 10%.
High loan-to-value leveraged buyout names in the software space got hit hardest, with trading prices dropping 7 to 10 points.
Distressed debt is piling up fast #
Over $17.7 billion in software-related loans transitioned to distressed trading levels within just four weeks. That brought total tech distressed debt to approximately $46.9 billion.
Sub-$60 loans, essentially debt trading at deeply distressed levels where recovery expectations are grim, have been increasing notably. When a loan trades below 60 cents on the dollar, the market is pricing in a meaningful probability of default or significant restructuring.
The February 2026 decline being the largest monthly drop since 2022 is a notable benchmark. The 2022 selloff was driven by aggressive Federal Reserve rate hikes and broad macro uncertainty. This time, the catalyst is a sector-specific existential threat from AI concentrated in the index’s largest technology exposure.
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