A Glimmer of Light in a Challenging Credit Landscape

There’s no denying it: the past six months have been uncomfortable for credit markets. Concerns that generative AI could fundamentally disrupt software and SaaS business models have rippled far beyond the stock market, bleeding into leveraged loans, high yield and alternative/private credit more broadly.

But there are signs that parts of the credit market may be finding their footing – specifically, the leveraged loan market, which posted their first positive monthly return of 2026 in March, adding 0.54% and trimming the year-to-date loss to 0.55%.

On its own, this may not look like the savior that the market seems to need. And yes, for those of you out there who take a glass-half-full approach, there is still a YTD loss.

But to appreciate why it’s worth celebrating this development, it’s worth recalling how poor the opening months of 2026 were: PitchBook says that loan returns in Q1 were among the weakest starts to a year in over a decade (rivalled only by the onset of the pandemic in 2020), secondary prices slid sharply, liquidity thinned, and investor sentiment soured, especially toward software‑heavy capital structures perceived as vulnerable to AI‑driven disruption. There’s nothing like a bit of fear to move markets, right?

And while March’s performance didn’t, and hasn’t, erased those concerns completely, it still did something important, which is that it suggested prices may have found a floor (software in particular). Secondary loan prices stabilised during the month and edged modestly higher, signalling that forced selling pressure was easing and that marginal buyers were willing to re‑engage. In credit markets, stabilisation is often the necessary precursor to recovery.

There are, of course, nuances to the broader observation. Higher‑quality loans fared better, while distressed names continued to struggle, so there wasn’t necessarily the “rising tide lifts all boats” environment here, sadly. But selectivity is not a bad thing for private credit investors because it plays directly to the strengths of the asset class: deep underwriting, structural protections, and the ability to focus capital where risk is appropriately compensated.

One particularly encouraging detail is that lower‑rated single‑B loans modestly outperformed BBs in March, snapping a multi‑month pattern of underperformance. This suggests that investors are beginning to differentiate between idiosyncratic risk and existential risk (a subtle but meaningful shift). Even within software, which remains under pressure, some credits posted gains during the month, indicating that the market narrative may be evolving from blanket avoidance to granular analysis.

None of this means issuance is roaring back, of course. PitchBook’s article says that new leveraged loan supply remains light, reflecting lingering macro uncertainty and a cautious M&A environment. But from a private credit perspective, restrained issuance is not necessarily negative. Limited supply, combined with large amounts of dry powder across private capital generally creates the conditions for disciplined deployment rather than rushed capital allocation.

The more important takeaway is psychological, though. Credit markets are forward‑looking, and even small positive returns matter. They influence behaviour, unlock incremental liquidity and, over time, restore confidence. March’s performance does not mark the end of volatility, nor does it resolve the long‑term questions around AI’s impact on software business models. But it does suggest that the market is beginning to price risk rather than simply fear it.

After a first quarter of the year where negative headlines prevailed, that distinction is worth noting. And for private credit investors with or without software allocations, it might just be the first sign this year that, even in a (very) disrupted world, fundamentals matter just as much as, if not more, than, fear.

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Anthony D. Mascia is Managing Partner at EFSI. Drop him a note to connect here.

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