The US leveraged loan market experienced its sharpest monthly decline since September 2022 in February 2026. This downturn wasn't caused by a broad economic slowdown, but by a very specific shockwave originating from the world of Artificial Intelligence.
The chain of events began with new product releases from AI companies like Anthropic. Investors grew concerned that these advanced AI tools could disrupt the business models of established software companies, essentially making their products obsolete. This fear triggered a massive sell-off in software stocks, an event some dubbed 'software-mageddon.'
From there, the panic quickly spilled over into the credit markets. First, investors who had loaned money to these software companies began to demand higher interest rates to compensate for the new, higher perceived risk. Second, as sentiment soured, many started selling off these loans, causing their prices to fall sharply. This pushed about $17.7 billion worth of tech loans into what's known as "distressed territory," where a loan trades for less than 80 cents on the dollar, signaling a high risk of default.
Two other factors made the situation worse. The Federal Reserve was holding interest rates steady, which meant there was no immediate prospect of relief for companies with floating-rate debt. At the same time, the market for issuing new loans completely froze. After a booming January, new issuance collapsed by over 84% in February, draining liquidity from the market and amplifying the price drops.
In short, a potent mix of an AI-driven sector shock, a cautious central bank, and poor market mechanics created a perfect storm, culminating in the largest monthly loss for the leveraged loan asset class in years.
- Leveraged Loan: A type of loan extended to companies that already have a significant amount of debt, making it riskier than a standard loan.
- Distressed Territory: A term for debt trading at a significant discount to its face value (typically below 80 cents on the dollar), indicating a high perceived risk of default.
- Primary Issuance: The process where companies create and sell new loans to investors for the first time to raise capital.