Leveraged loan distress hits its highest level since the pandemic

The riskiest corner of the US corporate loan market is flashing its brightest warning light since March 2020.

According to a JPMorgan Chase & Co. report dated October 6, 2026, deeply distressed leveraged loans now total $65 billion. Technology, and software in particular, is doing most of the bleeding.

A quick primer: leveraged loans are loans made to companies that already carry heavy debt loads. They tend to get packaged, traded and held by funds hungry for yield. When their prices sink well below face value, the market is betting that some borrowers will struggle to pay.

The numbers behind the stress

JPMorgan sorts the trouble into two tiers.

The first is the “deeply distressed” bucket, meaning loans trading below 60 cents on the dollar. That category reached $65 billion as of October 6, up from $40 billion a year earlier.

The second tier is wider. Loans trading at or below 80 cents on the dollar, the broader distressed category, hit $139.8 billion.

That represents a nearly 90% jump year over year. It also puts the figure close to the peak recorded in May 2020, when the global economy had effectively been switched off.

Why software is in the crosshairs

Technology companies account for 39% of the distressed loan pool, or roughly $54.4 billion. No other sector comes close to that share in the JPMorgan data.

Two pressures are converging on these borrowers. The first is refinancing: companies that loaded up on debt now face difficulty rolling it over on workable terms.

The second is artificial intelligence. Investors are increasingly worried that AI tools could disrupt the business models of software firms, making their future cash flows look less dependable.

Distressed volume within the software sector alone surged to record levels, peaking at $25–40 billion during AI-related selloffs.

Prices are falling, but defaults are not

Despite the slump in loan prices, actual defaults remain rare. The trailing 12-month payment default rate for the leveraged loan index has stayed below 1% in recent months, with a reading of 0.93% in July 2026.

Part of the explanation lies in a widening split in credit quality. Stronger borrowers continue to see their loans trade near par, meaning close to full face value. Weaker credits, especially in tech, are absorbing nearly all the selling pressure.

The return of creative debt fixes

Another reason defaults look tame: companies are finding ways to avoid formally defaulting at all.

The market has seen an ongoing shift toward liability management exercises and distressed exchanges. These are tools that let a struggling borrower rework its debt, often by pushing out maturities or swapping existing loans for new ones on terms less favorable to lenders.

These strategies echo the playbook companies leaned on at the height of the pandemic. Their return suggests that a meaningful number of borrowers are already under enough pressure to need them.

What this means for investors and lenders

The key indicator to watch is whether the sub-1% default rate starts climbing toward what loan prices are implying. If those deals start failing, the $139.8 billion distressed pile becomes more than a pricing signal, with the software sector’s $54.4 billion slice sitting at the front of the line.