US Software Sector Quarterly: Software Outperformed HY Index Since July as Most Names Reprice, RV Narrows to Oversold Situations; Financing and M&A Activity Reopens

• Software capital markets reopened after a sluggish start to 2026, with a measurable pickup since mid September. OpenText and Consensus Cloud addressed upcoming maturities, Bending Spoons raised roughly $1.7 billion, and PTC ($23.7 billion enterprise value) and CCC Intelligent Solutions ($6.1 billion purchase price, 44% premium to the unaffected price) agreed to be acquired.
   
• Software credit outperformed the broader high-yield market. Over three months, the weighted average spread on the Octus-constructed software bond index widened 11 bps compared with 44 bps for the ICE BofA HY index, while the median bond tightened 6 bps. The yield gap to the high-yield index on the largest 50 bonds continued to narrow from prior months.
   
• Software equities rebounded, but a recent selloff driven by inflation data pared the gains. IGV returned 11% and WCLD 18% over three months compared with 0.7% for the Nasdaq 100, while SMH fell 4.5% and AIPO fell 11.8% as AI infrastructure underperformance weighed on aggregate tech.
   
• Early earnings reads show that retention has held up against AI pressure, with issuers using their own AI spending as a defense. Most lacked clear AI monetization, with Twilio and RingCentral the exceptions.
   
• Relative value opportunities remain concentrated in credits that oversold on events or which have detached from fundamentals amid longer-term displacement concerns. Fair Isaac’s 2033 and 2034 notes widened after regulatory decisions introduced formidable competition, leaving them modestly wide of the BB index despite BB+/Ba1 ratings. We view coexistence against competition as more likely than FICO losing its mortgage position, and cash flow directed to debt paydown supports tightening if the company avoids a tail scenario. ZoomInfo’s 2029 notes still trade about 500 bps wide of the single B index even though leverage in the low 2x area and ample free cash flow look closer to a BB credit, with the shift to usage-based pricing the key swing factor.
   

After the widely publicized software selloff in early 2026 due to building fears that many software companies would become severely displaced from AI-related factors such as replication and headcount reduction, software-related financing and M&A activity has been extremely sluggish for most of the year. That seemingly hit an inflection point over the past few months as several high-yield refinancings were accomplished and a recent flurry of software acquisitions has commenced.

As shown in our chart in the Capital Market Activity section lower in this piece, software financing activity has recommenced at relatively high volumes over the past few months with a measurable pickup since the middle of September. Several high-yield credits including OpenText and Consensus Cloud have addressed upcoming maturities, helping to relieve refi risk, while Bending Spoons issued roughly $1.7 billion of debt to fund acquisitions and repay RCF drawings among other general corporate uses.

M&A activity, also highlighted via a chart in the Capital Market section of this piece, included several high-profile acquisitions including the recent PTC and CCC Intelligent Solutions deals, which were valued at roughly $24 billion and $6 billion, respectively. Both deals reflect the increasing appetite for mission critical infrastructure software at multiples at or below pre-selloff levels.

Software equities have continued to rally as the negative sentiment from earlier in the year has cooled and the sector has greatly outperformed broader tech over the past few months as shown below.
 

IGV and WCLD, two software focused ETFs we track, have returned more than 18% and 11%, respectively, over the past three months (end date measured as Oct. 16), far exceeding the Nasdaq 100’s gain of about 0.7% over the same period, however we note that a sharp recent selloff has pared some of these gains. The AI trade has seemingly reversed over the past three months, with semiconductor and AI infrastructure equities now weighing on aggregate tech equity performance, offsetting a substantial rebound from software stocks.

Zooming out to year-to-date performance, the story looks more like a repricing largely tied to rate concerns as stocks that are heavily levered to the AI boom have still greatly exceeded aggregate tech performance. SMH and AIPO are giving back only a portion of the scorching rally from earlier in the year even after a recent selloff sparked by interest rate and financing concerns. Cybersecurity has separated itself from broader software; the market views it as an AI beneficiary that has also not suffered the material drawdowns to the extent that AI hardware and infrastructure have seen during episodic downward sentiment shifts for AI demand.

The credit market has told a similar story, with high-yield software bonds outperforming the broader high-yield index over the past few months as highlighted below by the weighted performance of an Octus-constructed index of high-yield software bonds combining to an aggregate principal of about $85 billion.
 

While the aggregate weighted yield of the largest 50 bonds within that index indicates yields that are roughly 40 bps wide of the high-yield index, the gap has tightened significantly over the past few months.
 

Looking at the spread performance of the entire index of software bonds discussed above, the group has skewed toward spread-tightening over the past few months, though there remain plenty of credits where idiosyncratic situations have led to significant widening.
 

An early read on retention trends against AI pressures across software issuers from the most recent earnings period shows that retention has mostly stayed resilient thus far, though issuers are clearly using their own AI spending as a protection mechanism to avoid perceived threats.

We found that while many software companies identified either new AI-driven products or AI-driven demand as accretive to its growth prospects, most lacked clear monetization of those efforts with the exception of communications software companies including Twilio and RingCentral.

While the worst fears around software have not come to fruition thus far and the market appears to be gradually repricing those risks, most software companies have yet to prove they can be a net beneficiary of the AI boom. This remains a trend to watch closely.
 

Relative value opportunities across performing software bonds remain concentrated in idiosyncratic situations where credits have oversold on either events or weakened sentiment.

Fair Isaac’s notes fall into this category after several tranches widened materially on regulatory-driven concerns that developed mostly through September. As we discussed in our recently published analysis, the 2033 and 2034 notes indicate spreads that are modestly wide of the BB index despite BB+/Ba1 ratings, which we view as pricing in part of a downgrade that our base case would likely avoid. We see the company remaining very free-cash-flow generative even with the market share risk VantageScore poses, with free cash flow after debt service of $539 million to $702 million a year in our base case and still positive at $245 million to $321 million in our downside. We view deleveraging from these levels as likely, particularly as management has said near-term cash will go to debt paydown, and we see spread-tightening potential in the 2033s and 2034s if the company avoids a tail scenario.

ZoomInfo’s and Verra Mobility’s notes shown above remain some of the higher-yielding credits in the performing software bond universe, though each has tightened significantly over the past few months and now more accurately price in risk. However, with the spread on Verra’s and ZoomInfo’s 2029 notes about 80 bps and 200 bps wide of the single-B index, there is room for further spread-tightening. There is also risk of widening back out rapidly, depending on near-term operational performance. For ZoomInfo, spread-tightening will hinge mostly on its success or lack thereof in transitioning its pricing from seat-based to usage-based. If it can do this, the credit may begin to trade closer to its fundamentals, which reflect closer to that of a BB credit supported by moderate leverage in the low 2x area and ample free cash flow generation rather than one with high customer attrition and refi risk.

Verra has less near-term uncertainty after its recently announced renewals with major customers Avis and Hertz, though the new pricing terms greatly damage its fundamentals. Free cash flow becomes much more strained in the near term and it becomes a lower margin, low growth business which could make it difficult to refi. We believe after the post-renewal tightening, that the notes more accurately price in risk.

Twilio’s several tranches of notes continue to indicate IG-level spreads, limiting spread-tightening potential. The company has strong fundamentals, is relatively insulated from AI-driven displacement and is positioned to benefit from AI as a tailwind due to demand being driven by AI agents in the software communications space, however it appears to fully price in any ratings-driven upside. Investors may view the notes as more of a defensive option, likely to hold spreads at current levels rather than tighten.
 

Over the past three months, ZoomInfo’s 3.875% unsecured notes due 2029 recovered much of the selloff from earlier. The spread on ZoomInfo’s notes had widened to as much as 1,038 bps in May, and while they had tightened back in by about 200 bps as of our latest iteration of this report, the notes are still indicated roughly 600 bps wide of where they began the year. Since mid-July the notes have tightened further to about 500 bps or 300 bps wide of where they were indicated at the beginning of the year. While the company’s third-quarter results did not show a drastic improvement in its operational performance, it did not show a meaningful deterioration that the notes were likely pricing in. We continue to believe that the company’s success or lack thereof in converting its pricing model to usage-based from seat-based will be the largest factor in how the spread on the notes will trend.
 

Fair Isaac’s bond spreads widened materially toward the end of September as regulatory moves favored competition. As discussed above, Federal Housing Finance Agency Director Bill Pulte announced that all government-sponsored enterprises, or GSEs, would accept VantageScore in addition to FICO, introducing the first real competitive alternative in mortgage scoring. Fannie Mae and Freddie Mac then announced a move to a single pricing grid for FICO and VantageScore, effective Oct. 1.

VantageScore had previously been priced on an alternative grid that applied a 20-point reduction to offset the higher scores it tends to produce, which had largely erased the savings lenders earned from its lower pull cost.

The notes widened only marginally on the initial GSE acceptance reports but significantly on the pricing grid announcements and have since tightened modestly. In our recent analysis, we view coexistence between the two scores as more likely than FICO losing its place in mortgage scoring, and FICO faces relatively stronger conditions in the non-GSE mortgage and nonmortgage segments.

We expect strong cash flow generation to support deleveraging despite potential mortgage share loss, supporting a likely refi of the 2028 notes and spread tightening in the longer-dated notes.
 

Dye & Durham’s 8.625% secured notes due 2029 have continuously plunged in price throughout the year and declined to as low as 54 over the past three months. The company’s operational results have deteriorated significantly over the past few quarters, spurring several ratings downgrades.

More recently, the company drew an additional 31 million Canadian dollars on its revolver after fiscal year end, pushing the balance above the 35% level that triggers a first lien net leverage covenant test of 5.8x, up from 5.17x at June 30. Management said the draw was to ensure an upcoming interest payment is fully funded and gave no quantitative guidance for fiscal first quarter revenue, while an ad hoc group of minority lenders has also retained Jefferies as investment banker.
 

The spread on Verra Mobility’s 5.5% unsecured notes due 2029 tightened significantly following the July 28 announcement that it had come to an agreement to retain its contract with one of its largest customers, Avis, albeit at weaker economics. Avis had previously announced that it would terminate its contract with Verra, causing the spread on the notes to widen significantly, though the two parties ended up reaching an agreement in a surprise reversal.

The company also announced along with its second-quarter earnings release that it had reached an agreement to extend its contract with another major customer, Hertz.
 

A calendar of material upcoming software credit maturities is shown below:
 

Software financing activity over the past three months is shown below:
 

Software M&A activity over the past three months is shown below:
 

(Click HERE to enlarge.)

Notable software credit rating downgrades and upgrades from the past three months are shown below: