Distressed Debt Outlook for H2 2026: Elevated Capital Costs and Software Sector Exposure
As of mid-2026, distressed investors are identifying growing opportunities amid a strong U.S. economy and equity market performance. Despite the overall macroeconomic stability, concerns persist around rising capital costs and sector-specific vulnerabilities. Jeremy Burton from PineBridge Investments notes that while oil price increases may affect certain regions, other areas benefit economically, balancing out broader impacts. However, data reveals an uptick in distress within leveraged loan markets. The Morningstar LSTA US Leveraged Loan index shows a 6.87% distress ratio as of June 2026 — the highest since early 2022 and driven by six consecutive monthly increases. About 45% of distressed debt is concentrated in software-related sectors, raising concerns about sector-specific exposure. Elevated interest rates are a key concern for market participants like Surbhi Gupta from Houlihan Lokey and Jonathan Barzideh from Canyon Partners. They highlight the ongoing impact of high capital costs on leveraged buyout vintages from 2021–2024, with continued restructuring activity expected as sponsors grapple with debt obligations.
Tickers: $MS
Topics: default rates distress ratio economic outlook leveraged loan index