A&M's latest Debt Market Update highlights the private credit industry's continuing headwinds, although parts of the market have shown positive momentum and signs of improvement. Artificial intelligence remains in the headlines, and its potential impact on portfolio companies is becoming clearer. As some software companies fall out of favor, opportunities are also emerging in sectors viewed as lower risk, such as fire safety and utilities. The private credit market is bifurcating along AI-exposure lines: software credits continue to reprice at higher interest rates, while non-discretionary, less-cyclical sectors and borrowers insulated from AI disruption are seeing renewed lender competition.

Key Themes Include:

• Software debt marks fell 249 bps to 96.4% in Q1'26. Managers are increasingly distinguishing mission-critical software, which is difficult and costly to displace, from seat-based and discretionary software more exposed to AI substitution.
• The share of debt positions marked below 80% of cost increased, a level commonly viewed as an indicator of distress.
• Direct lenders are showing interest in non-discretionary, less-cyclical sectors, including fire safety and utilities. In the US utilities sector, rising data center and infrastructure spending is creating potential financing opportunities for private credit.
• Lender liquidity is building as paydown activity rises toward 30% (from approximately 20%), pushing lenders to price more aggressively.
• BDC redemption pressure is broad-based, with at least seven BDCs across six managers capping Q2'26 redemptions, but the underlying composition is less alarming than the headline.
• Leveraged loan pricing has moved through three regimes in 2026: compression in January, a sharp widening from February and March (driven by software-sector anxiety and the Iran conflict/Strait of Hormuz closure), and a partial recovery since, concentrated in B and B+ credits, which have retraced roughly 70 bps, while B- and lower-rated credits have lagged.
• New-issue spread data confirms the widening: the share of PE-backed direct lending loans pricing tighter than S+500 fell from 53% in Q1'26 to 27% in Q2'26, and the share of respondents expecting a non-cyclical unitranche loan to price below S+500 dropped from 67% at year-end 2025 to 21%.
• AI disruption is complicating the exit outlook for long-held software investments. More broadly, US PE exit value fell to $102.6 billion in Q2'26, down 46.3% from Q1'26 and 7.4% YoY; sponsor-to-sponsor deals hit a decade-low 94, and mega-exits of $1 billion or more accounted for over 61% of exit value. However, the IPO window improved, with 12 companies going public, double the Q1'26 count.
• Refinancing risk is building toward 2028. By then, 34% of software debt and 45% of PIK debt will have come due, while 21% of total debt is due in 2028. Sponsors may be less willing to support structurally disrupted companies, increasing refinancing risk into that window.
• Exits continue to be challenging, especially for 2020–2022 vintages. Continuation funds remain a possible route for sponsors.

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