August's loan rebound came from software, the year's worst corner

The US syndicated loan market returned 0.93% in August, better than July, and software loans did the heavy lifting—their rebound pared the sector's year-to-date loss to 2.60% and closed some of the gap with the broader market, according to the Morningstar LSTA Leveraged Loan Index analysis published September 15. The release does not say whether that 2.60% describes the index or software alone, and the two readings are not interchangeable: one leaves the market still down on the year behind a single decent month, the other leaves software carrying the entire hole. Either way, a 0.93% August does not recover a year.

Software was the cohort whose rebound did the paring, which implies software was the drag—the sector that made this a losing year for the index and the one that just made August a winning month. For private credit, the useful number is not the index return but the price at which software credits change hands. Direct lenders and broadly syndicated funds hold overlapping borrowers in that sector, so a firmer loan tape is the nearest thing to a public price for private books holding the same names.

August looks like demand returning to the secondary market rather than credit improving at the borrower, and a bid that returns because buyers need product can leave as quickly as it arrived. As this publication has argued, the collapse in direct lending volume has pushed managers toward asset sales, continuation vehicles and CLO resets, and every one of those channels prices off the same secondary market the LSTA measures. A reset clears only if the collateral can be marked at a level the equity cheque can live with, which is why the managers who cannot write that cheque end up selling collateral instead.

That makes the August print an input to decisions already on the calendar, not a headline about the market's mood. Watch September. A second month led by software keeps shrinking the year-to-date loss; a reversal puts the index back where the first half left it.