The spread in asset performance will “accelerate”, according to senior executives at Oaktree Capital, who cited a combination of concerns about private debt exposure in the software sector, “recurring” inflation and “persistently high” interest rates.
In the latest Oaktree credit report covering the first quarter of 2026, Robert O’Leary, chief executive and portfolio manager, and Armen Panossian, chief executive and head of credit operations, said that after three months of identifying dissolution as a “central theme”, “it is already very prominent”.
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“The CCCs [rated loans] “doesn’t look healthy but the many headlines about vulnerability in credit markets – especially related to software debt – have had an impact on investor sentiment,” they wrote.
O’Leary and Panossian acknowledged that, while the “bulk” of the credit universe “remains in decent health”, a small group of borrowers is under increasing pressure.
“In making credit strategies, managers must avoid losers in order to maintain the yield of the contract that is attractive. With opportunistic strategies, there are more chances that they will pursue sacks,” they said.
So far in 2026, CCC’s rated loans have seen spreads widen by more than 300 basis points. In contrast, the spread of BB-rated loans “tightened slightly” this year, yielding just over six percent, which they wrote was “the kind of aggressive bifurcation often seen in recessions”.
“Market participants are expressing a clear view: very weak credits cannot handle higher interest rates and will have difficulty recovering through conventional channels,” said O’Leary and Panossian. “Given default risk and the reality of low liquidity levels, buyers expect to be compensated in the form of higher spreads. Meanwhile, high-quality names continue to attract the buyer base, particularly in subprime mortgages, thus keeping spreads tight.”
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In the quarterly letter, Oaktree’s senior executives also discussed the “growing pains” of direct lending, including the reliance on payment-in-kind (PIK), which represents about 10 percent of total interest in community business development companies (BDCs), and 4 percent in non-permanent BDCs, although with “great diversity” among executives.
“PIK loans are currently marked at 91 cents to the dollar, which shows that all is not well in this category of loans,” they added.
O’Leary and Panossian point to the “liquidity mismatch” in greenback funds as another growing pain, with the increase in redemption requests above the standard five percent limit prompting some BDCs to limit spending this year, including those owned by Blue Owl Capital, and Blackstone.
Finally, they noted growing concern among investors about the level of exposure to the software sector as AI threatens to upend its business model.
For O’Leary and Panossian, all three direct lending methods “growing pains” are “a good reminder of the importance of added choice in direct lending”, while “pockets of weakness may create potential access points for opportunistic investors”.
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