Distressed Loans in U.S. Loan Index Jump to $131 Billion
Key Facts
The value of loans in Morningstar’s leveraged loan index priced below 80 cents on the dollar reached $131 billion on October 29, 2026, its highest level since May 2020. A price below 80 cents on the dollar is a common threshold for classifying a loan as distressed, according to Axios. These loans rose to 8.3% of outstanding loans by value, compared with 4.3% at the end of 2025 and 3.4% a year earlier. The increase indicates that more companies may face the risk of default, but does not by itself mean the market is in a systemic crisis. The report said distress remains below levels seen in 2020 and during the 2008 financial crisis.
The index tracks loans traded by investors, made to heavily indebted companies with weak credit ratings, and often backed by private equity firms. This category differs from loans whose cost does not change with market rates, as most leveraged loans carry floating interest rates. As a result, borrowers’ payments rise when rates increase, while refinancing existing loans becomes more expensive. Axios attributed the pressure to years of high interest rates and economic uncertainty, which increased debt-servicing and refinancing burdens. Marina Lukatsky, head of global research for U.S. credit and private equity at PitchBook, said companies had to devote a larger share of their earnings simply to paying interest as rates rose.
A large share of distressed loans is concentrated in the software sector, which accounts for 32% of them, despite representing only 12% of the loan index. The report said investor concerns about AI’s effect on software companies’ business models were among the factors linked to this concentration. This gap puts the sector at the center of pressure within the index, as its share of distressed loans is far greater than its share of the index overall. The report does not conclude that distressed loans will necessarily turn into defaults, but links their expansion to a larger number of companies exposed to that risk. This remains a development within the leveraged loan market, with the overall level still below the peaks of 2020 and 2008.
The maturity schedule highlights a near-term challenge for borrowers: 53% of the volume of distressed loans comes due in the three years following the October 29 report. This means the companies concerned will need to refinance a large share of their debt during that period, when borrowing and refinancing costs are rising. The combination of maturities and higher interest payments will test companies’ ability to service their debt, particularly as leveraged loans are mostly floating-rate. The report quoted Lukatsky as saying companies were spending a larger share of earnings on interest, and also pointed to higher refinancing costs. The report described the risks as significant, without tying them to a firm forecast of default.
The loan data came as the U.S. Bureau of Economic Analysis announced that real gross domestic product grew at an annual rate of 3.4% in the third quarter of 2026, following growth of 2.2% in the second quarter. The bureau described the third-quarter reading as an advance estimate and set November 25 as the date for the next GDP release. In September data, the headline personal consumption expenditures price index rose 0.5% from the previous month, while the core index, excluding food and energy, increased 0.3%. The personal income and outlays report for October is scheduled for release on November 25. In its decision issued on October 28, the Federal Reserve kept the target range for the federal funds rate at 3.75% to 4%, effective October 29. The central bank’s next meeting is scheduled for December 8 and 9, 2026.