That’s the whole pitch. People have to eat. Recession comes, they trade down to canned vegetables, the cash keeps flowing, the bonds pay like clockwork. Boring is the point. Boring is why the money is cheap.

B&G Foods just borrowed money at 11%.

Not a lot of companies issue debt with double digit coupons. The ones that do tend to be in trouble, or close enough that the market wants to be paid for the ambiguity.

Either the market got this one wrong, or the boring food company isn’t boring at all. Which is it?

Situation Overview

B&G Foods is one of those companies nobody has heard of but everyone has bought from. Green Giant, Crisco, Ortega, plus roughly 50 other brands of shelf-stable and frozen food across the US, Canada, and Puerto Rico. All of it parked in the middle of the grocery store, which is exactly the problem.

For two decades, the model was a debt-funded roll-up of orphan brands. Big food companies wanted mature, slow-growth names off their books. B&G took them, plugged them into a shared distribution backbone, spent nothing on innovation, and milked the cash. The cash went to the next deal and to one of the fattest dividends in the food group.

Green Giant came from General Mills in 2015 for $765mm at ~7.8x. Spice Islands and Tone’s came in 2016 for $365mm at ~9.4x. Crisco came from Smucker in 2020 for $550mm at ~8.1x. All of it levered.

The model needed flat categories and cheap debt. It got neither. Consumers drifted out of center-store and frozen toward fresh, private label, and better-for-you, and brands that had been starved of investment for years had nothing to fight back with. Then interest rates went up.

Now the roll-up runs in reverse. Green Giant US frozen went to Seneca in March for $63mm against roughly $200mm of revenue. Le Sueur US fetched $59mm from McCall Farms. Green Giant Canada closes this quarter. Brands bought at 8-9x EBITDA are walking out the door at a fraction of revenue.

When inflation hit in 2022, B&G pushed price hard, +11% for the year, peaking at +17% in Q4. Volume fell 6%, the classic elasticity trade. Then the pricing rolled off through 2023 and the volumes never came back.

By 2024-25, both levers were dead: price flat to slightly negative, volume still eroding 3-5% a year. That’s the signature of a portfolio losing relevance rather than riding a cycle. Shoppers who traded down to private label didn’t trade back up, and brands with no marketing budget have no way to win them back.

Meanwhile, GLP-1s are the newer risk factor. Roughly 1 in 8 US adults is now on the drug, and the data shows treated households cutting grocery spend MSD, with the cuts concentrated in calorie-dense categories. For BGS, the exposure is milder than for the snack and candy names, since most of the portfolio is cooking ingredients. But Crisco sits squarely in the crosshairs, fats and baking, the same SKU already carrying the soybean-oil problem.

What’s left splits four ways, and the segments have almost nothing in common.

Spices & Flavor Solutions is the crown jewel: ~30% EBITDA margins, +9% sales in Q1. The growth is real and it’s volume-led, which makes it the exception in this portfolio.

The rest of the portfolio is what it is. Meals (Ortega) is stable. Specialty, which holds Crisco, hot cereal, and baking staples, is mature and grinding lower. Frozen & Vegetables runs ~6% margins and is mostly sold. Blend it all and you get ~$1.75bn of revenue, ~$280mm of adjusted EBITDA, ~16% margins.

Then the cost problem. Soybean oil, Crisco’s main input, is up more than 50% year over year and sitting near 2022 highs on biofuel demand. Crisco runs a quarterly pass-through that protects gross profit dollars, but management has already said that if oil stays here, pricing goes portfolio-wide.

Which brings us to the balance sheet. Net debt is about $2.0bn, a touch over 7x, under an equity stub worth around $330mm. Cash interest runs ~$163mm. Capex is $30-35mm. After taxes and what’s left of the dividend, FCF for actual debt paydown is maybe $30-50mm a year. On $2bn of debt, that barely registers.

The company also just showed everyone its real cost of capital. Two weeks ago B&G priced $475mm of senior unsecured notes at 11%, issued at ~97, to retire the $509mm of 5.25% notes going current in September. The deal cleared and the 2027 wall is now gone.

The price was steep though. Cash interest on that tranche roughly doubled, from ~$27mm to ~$52mm a year, which consumed almost everything the dividend cut had freed up. The new notes broke below issue and sit in the mid-90s.

So the near-term cliff is handled, but the structure left behind is unforgiving. Three quarters of the debt is first lien, and the next maturity wall is bigger than the one they just paid 11% to clear.

The question now is what a perpetually levered, slowly declining roll-up is worth, with one genuinely good asset buried inside it and a commodity problem bolted to the side.

Here’s what it means for the existing capital structure.

Read more

Soft data prints, everyone reaches for the cut, credit grinds tighter. Bad payrolls meant the Fed was coming. Weak retail sales meant the Fed was coming. Every disappointment got bought because the disappointment was the catalyst for rescue. Good news was good news and bad news was good news too.

Friday broke that.

172,000 jobs against an 85,000 estimate. Roughly double, with the prior month revised up to 179k. The 10-year ripped to 4.53%. Equities had their worst week since October, ending a winning streak that had run essentially uninterrupted, on a payroll number that would have been celebrated in any normal cycle.

The pain trade for 2026 was never recession; it was reacceleration.

A labor market that inflects up instead of rolling over. An AI capex cycle that keeps getting supersized. Energy prices held firm by a conflict that won’t resolve. And a Fed that suddenly can’t ease into any of it. Strong growth stops being a comfort and becomes the risk.

We’re there now. The next move from the Fed may not be a cut anymore. It may be a hike. Maybe soon.

The macro people have been writing “more growth, more inflation” for weeks. The credit market spent those same weeks pricing the opposite. That gap closed on Friday, and it closed in the one way the leveraged credit complex is least equipped to handle: through rates, not through spreads.

Rates First, Spreads Second

The S&P fell 3%, snapping a nine-week win streak. The Nasdaq dropped nearly 5%, the Russell 3%. Crude closed higher on the week. And HY spreads?

They widened just seven basis points, to 265. But HY still returned -0.42% on the week, because the yield moved even if the spread didn’t.

The bigger point may be that the equity move was largely mechanical, not fundamental: a Google $80 billion-plus equity secondary, index providers keeping inclusion rules unchanged ahead of major IPOs, and tech concentration unwinding. A rotation, not a credit event, and spreads treated it as one.

Then look at the dispersion, because it confirms this was rates, not fear.

The worst total-return cohort on the week wasn’t the junk tail. It was BBB, down 0.57%, the longest-duration, lowest-spread paper in the stack, punished precisely because it has the most rate sensitivity and the least spread to absorb it. In a genuine credit panic you’d see the reverse, the CCC tail blowing out while quality holds and everyone hides in BBs. This was the opposite.

The forward curve spent the back half of last year pricing meaningful cuts. By Friday it was pricing a real chance of a hike by year-end. Seven FOMC participants already see zero cuts in 2026. Waller has gone from advocating cuts to arguing the Fed should drop the easing bias entirely; Logan has openly floated that rates may need to go higher.

The Two Economies, One Rate

None of this resolves, because the thing driving the reacceleration is structurally insensitive to the tool the Fed would use to slow it.

The US is running two economies on one policy rate.

Economy One is AI infrastructure, hyperscaler capex, and the power buildout underneath it. Commitments to spend north of $750 billion on capex in 2026 alone. The Dallas Fed’s high-frequency tracker has GDP running at 3.23%.

And critically, this is no longer a pure capex story. Dell’s AI server revenue is up more than 750% year over year. Enterprise adoption is translating into real, booked demand. This part of the economy does not care what Powell does with the funds rate. It is spending regardless.

And here’s the part the soft-landing crowd keeps getting wrong: this boom is stoking employment and inflation at the same time. There’s still no real evidence of AI-driven job losses in the data. It’s Jevons paradox playing out in real time, cheaper compute creating more demand, more buildout, more hiring. The capex that was supposed to be deflationary is, right now, inflationary. That’s why a 172k payroll print isn’t a fluke. It’s the mechanism.

Economy Two is everyone who borrowed at 6-8x assuming SOFR normalizes lower. Housing frozen. Building products cyclically impaired. Consumer-facing credits grinding. Every quarter rates stay higher than the LBO model assumed is another quarter of cash flow eaten by debt service instead of equity cushion.

The Fed has one rate for both. Too low for the first, too high for the second. Cut, and you pour fuel on an AI-driven nominal growth fire while energy is already firm. Hold or hike, and you keep grinding down the levered cohort. The “Fed put” that underwrote credit since 2008 is functionally suspended, and a lot of spreads still price it as active.

And the inflation side is getting stickier, not softer. Even if the Strait reopens tomorrow, the effects persist. Inventories drawn down during the conflict have to be rebuilt, which is incremental demand after the disruption ends. Firms and governments are rebuilding around energy security: bigger buffers, redundant supply chains, diversified sourcing. All of it embeds cost.

Layer the AI power-demand curve on top, with data-center bottlenecks bidding up transformers, grid connections, construction labor, and cooling, and the pressure spills well beyond a narrow set of sectors. Structurally firmer, not transitory.

The AI Narrative Is Turning Quietly

Here’s the part that complicates my own software thesis: Software credit bounced.

The loans had their best month in nearly a year in March, and the re-rating has continued. The market is revising down the speed of AI disruption while continuing to reward the infrastructure layer. Semiconductors and data-center beneficiaries keep getting paid. Software incumbents are clawing back.

I don’t think this is the resolution of the terminal value question. I think it’s the market repricing the adoption timeline, and there’s a real argument underneath it.

The whole infrastructure trade assumes more compute is unambiguously good. But more capable models also consume more compute, and unlike traditional software, AI carries a meaningful, ongoing cost to serve each user. The economics depend on whether productivity gains scale faster than the cost of generating them.

There are already tentative signs that cost is becoming the constraint: enterprises scrutinizing AI budgets, surprise token bills, agentic workflows that don’t always survive contact with the unit economics.

If AI proves more expensive to deploy than the bulls assume, adoption gets slower and more selective. That’s bad for the infrastructure credits financing buildings against shifting revenue timelines, and paradoxically good for the software incumbents everyone spent the winter selling, because the disruption clock extends too. Both sides of the trade are betting the buildout happens on schedule. It might not.

So my framing on software hasn’t changed, it’s just gotten more textured. The terminal value question isn’t resolved. It’s deferred. And a deferred problem on a 2027-2028 maturity wall is still a problem.

Two Markets, One Screen

New issue came roaring back. More than $13 billion in the first three days. On volume alone, a wide-open market.

The composition and the aftermarket explain the actual situation.

QXO tapped the market for its roughly $17 billion acquisition of TopBuild. The bond piece cleared as an evenly split $3 billion deal: 6.50% five-year and 6.875% eight-year, both at par, both at the tight end of talk. Both tranches held a ~101 handle after the break.

Now hold that against the rest of the sector. The names I’ve been tracking on the distressed side, Cornerstone Building Brands, Jeld-Wen, US LBM, Cabinetworks, are a different animal. PE-owned, financed in leveraged loans, levered for a rate environment that never showed up and earnings exposed to exactly the commodity inflation we’re now staring at. Fuel and input costs will pressure margins across that group into the second half.

Two building products markets, running in parallel. The well-capitalized acquirer prints at par. The over-levered 2021 vintage sits in the 70s waiting for a spring selling season the macro just made harder. The difference isn’t the sector. It’s the capital structure and who owns the equity.

If QXO is the market open and cheap for the right borrower, B&G Foods is the other side of it. The food company paid 11.625% to refinance a 2027 maturity and still watched the bonds fall to the mid-90s, and that coupon came after it had already halved its dividend. That’s the point. The market is open, but for the wrong borrower it’s open after the dividend cut, after the deleveraging promise, and still at an 11-handle.

What to Watch: CPI Wednesday

The verdict on all of this lands Wednesday.

The desks are penciling May CPI at +0.52% on the month, which pushes the year-over-year rate to roughly 4.2%, a three-year high. Energy goods, mostly gasoline, up around 8%. Core a more contained +0.23%, but airfares set to jump on the jet-fuel surge and the Spirit Airlines bankruptcy. Gas is back above $4 a gallon for the first time since 2022.

A 4.2% headline doesn’t give the Fed room to validate the cuts still half-embedded in the curve. It does the opposite. And it’s not just a US issue: the ECB looks set to start hiking, 25bp with a hawkish bias, and the Bank of Canada is holding at 2.25% with the path tilted to hikes. This is a Treasury-supply and term-premium story before it’s a credit story.

If CPI prints hot, the rates move that drove this week extends, and the BB complex takes the next leg of damage while the short-duration, high-carry tail keeps outperforming. If it surprises soft, you get a relief squeeze into a heavily short book. I lean to the hot side on the data, but I hold the squeeze risk in mind.

And the oil side just got worse, not better. Crude finished the week higher, and the comment that matters came from Trump: the blockade may not lift until Labor Day. That pushes any reopening of the Strait well past the point where it would help.

One thought I keep coming back to.

For two years, this market was conditioned to believe that weakness would always be rescued, because it always had been. The thing that breaks that conditioning isn’t a recession. It’s strength, the kind the Fed can’t lean against without making the inflation worse.

That’s the uncomfortable shape of this cycle. The economy is fine. That’s the problem. The good news is the bad news now.

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JunkBondInvestor is an independent financial research publication providing general market commentary, corporate credit analysis, and educational content. The information provided is for informational purposes only and does not constitute investment advice, financial planning, or personalized recommendations of any kind. Nothing published constitutes a solicitation, offer, or recommendation to buy, sell, or hold any securities, nor does it guarantee any financial outcome. Any credit opinions or outlooks expressed are solely the independent views of the authors and are intended to reflect general credit trends, not specific investment recommendations. Investing in high-yield bonds, distressed debt, and leveraged loans carries significant risk including potential loss of principal. JunkBondInvestor operates under the Publisher’s Exemption of the Investment Advisers Act of 1940 and applicable state laws. This issue includes sponsored content and partnership links. JunkBondInvestor receives compensation from sponsors for featured placements and may earn referral fees from partner programs.

Why can’t someone just vibe code this? Why would anyone pay for it?

And you’ve got the rebuttal ready. The switching costs. The integrations with a hundred counterparties nobody outside the company can see. The years of embedded process knowledge no language model reconstructs over a weekend. You’ve given that speech more than once.

Here’s the first test case.

Avis has been a Verra Mobility customer for twenty years. In late May, it terminated the contract, effective September, and decided to run its tolling itself. Vibe coded, insourced, partnered out, nobody’s confirmed which. Doesn’t really matter. The stock fell 70%. The bonds gave up a dozen points, near par into the mid-80s.

And the bigger question isn’t even Avis. It’s the two customers still in the building. Hertz and Enterprise renew in 2027. If Avis can walk and do this itself, why can’t they?

The equity has already picked a side. It’s pricing all three gone. The credit hasn’t moved nearly as far, which means the two markets are looking at the same company and disagreeing about how this ends.

So is the selloff overdone, and if there’s a trade here, where in the cap stack does it sit?

Situation Overview

Verra Mobility is one of those businesses most people have interacted with without realizing it.

If you rent a car, drive through a toll, and later see a toll-related charge on your rental bill, there is a decent chance Verra was somewhere in the middle. The company helps rental car companies and fleet operators manage tolls, violations, billing, payments, and the administrative mess that comes with moving millions of vehicles across different toll roads and jurisdictions.

That is Commercial Services, the crown jewel. Verra matches a toll event to the right vehicle, the vehicle to the rental agreement, and the agreement to the renter, then runs the billing, collections, and dispute handling behind it. Unglamorous work, and harder to run than it sounds.

Government Solutions is the other real business: automated traffic enforcement for municipalities, the red-light and speed cameras, school-zone and bus-lane programs, anchored by New York City. Lower margin than Commercial Services, more exposed to politics and regulation, but sticky once the cameras are in the ground. Parking Solutions is small and not why anyone owns the stock, so set it aside.

Before the recent drama, the Verra story was that this was a boring, high-margin, infrastructure-like business. Commercial Services was not the largest segment by revenue, but it was the profit engine. In FY’25, Commercial Services represented roughly 45% of revenue but nearly 70% of EBITDA. That margin profile is what made the company look decent.

The pitch was that Verra had built a platform too complex to replicate: a fragmented tolling landscape, consumer-level billing layered on top of fleet tolling, and years of plumbing into authorities nobody else had wired up. Investors treated that complexity as a moat.

Then Avis Budget terminated its contract.

In late May, Verra announced that Avis had sent a termination notice effective September 2026, ending a relationship of almost twenty years. Management put the hit at roughly $135mm to $145mm of annualized Commercial Services revenue and $120mm to $125mm of segment profit, before any cost reductions.

The problem was never just the lost revenue. It was what Avis was saying about the business. If one of the three largest rental car companies thinks it can insource this, the next question writes itself: why not Hertz, why not Enterprise, both up for renewal in 2027.

The reaction was brutal. The stock fell about 70%, the CEO stepped down a week later, and the credit stopped trading like a simple multiple reset.

The first-lien term loan dropped into the mid-80s. The 2029 notes sold off too. What the credit is pricing now is not the Avis earnings hit. It is the possibility that the highest-margin segment has been structurally impaired.

Two ways to read it. The bull read is that Avis is underestimating the work, hits billing errors and authority friction, and either crawls back or quietly proves the platform was worth paying for, in which case Hertz and Enterprise stay and the worst you get is harder pricing. The bear read is that Avis does not need a perfect clone, just a good-enough internal solution that keeps more of the economics for itself, and once that exists Hertz and Enterprise hold a much stronger hand and the old Commercial Services margin is gone for good.

Which one you believe is the whole call, and it is a credit question now, not an equity one. If the remaining customers stay, Verra is still a cash machine and the debt is money-good. If both eventually follow Avis, you are no longer valuing a premium tolling platform, you are valuing a lower-margin government enforcement business with a damaged commercial segment. That range of outcomes is wide enough that the equity and the credit have drifted apart, and that gap is where the trade lives.

Can Avis just vibe-code this?

This is the question the whole selloff hinges on, so it is worth being precise about what Verra actually does.

Read more

This week the sort broke, in both directions.

Verra, the kind of recurring-service credit everyone had in the safe bin, got bombed this week. Rackspace, a services name the market had left for dead, has spent the spring getting saved. Same force, opposite outcomes.

The bins do not hold. The mechanism underneath them does, and it is the better cut anyway.

The Safe Name That Broke

Until now, AI disruption in credit has been a slow story. Terminal value, net revenue retention, who loses pricing power over the next three years as the models improve. Erosion you could see coming.

Verra is something faster.

Avis terminated its tolling contract, a high-margin slice of Verra’s commercial services and more than a tenth of total revenue, effective September. The equity was cut in half on the day. The bonds had traded near par. They fell into the high 80s. Suddenly and violently.

The headline 2026 numbers barely moved, because the loss only lands for one quarter of the year. The real damage is a 2027 event, and 2027 is also when Verra’s other two big rental-car customers, Hertz and Enterprise, renew. The three contracts together are something like 80% of commercial services and a third of the company. So the market did not reprice this year’s print. It repriced whether Avis is one-off or the first of three, a year before the income statement will say.

The market’s shorthand for the fear is vibe coding. But nobody has confirmed Avis is even building this in-house rather than just switching to a competitor, and the real issue was never whether an AI tool can write the software. It is what one termination did to belief. A workflow the market had underwritten as mission-critical plumbing got re-underwritten, overnight, as something a determined customer might rebuild. The cause of the cancellation barely matters. The repricing of substitutability is the event.

Verra’s defense is that the moat was never the code. It is the plumbing. Millions of vehicles, hundreds of toll authorities, and the violations, billing, disputes and registration machinery that took years to wire together. AI writes code. It does not stand up that network over a summer.

The bulls will tell you the government and parking businesses carry the debt even if every rental-car dollar walks. Maybe. The point is not who wins that argument. It is that the market repriced the credit to stressed before anyone could have it.

The Doomed Name That Didn’t

The names that screen as most exposed did the opposite of Verra this week. The most-active paper in high yield was CoreWeave and the rest of the AI-infrastructure complex, which has printed oversubscribed in primary all year. For those credits AI is not a threat to the revenue line. It is the revenue line. The more AI there is, the more compute, memory and power the customer buys, and the better the credit gets.

That is the easy half of the pole. The harder half is the inversion, and Rackspace is the cleanest version of it I have seen in credit.

Rackspace ran an LME two years ago to cut debt and buy liquidity. Earlier this year the debt traded around 30 cents, and it fell further in February in the same AI selloff I was writing about then, priced as one more business about to be disrupted into the ground. The company used the weakness to buy back nearly 100 million of its own paper.

Then the story turned. A non-binding MOU with AMD in May to build an enterprise AI cloud, the companies explicit that talks were preliminary, on top of earlier tie-ups with Palantir and Uniphore. The secured debt ran from the 50s to north of 80. Look at what moved it. Not contracted revenue. A framework. The bonds repriced optionality, not cash flow, which is exactly the convexity you want in a name the market had buried.

The driver is the cleanest consumed mechanic there is. AI moving from training to inference broadens demand for exactly the GPU and CPU workload management Rackspace sells. Roughly 2.5 billion of 2028 maturities still hangs over it, so this is not finished. But it is a credit the disruption tape left for dead and the consumption tape brought back.

Two credits, opposite outcomes. The sector label called neither. The mechanism called both.

Consumed or Replaceable

Here is why the AI-exposed versus AI-safe binary fails. It sorts on sector. The thing that actually determines the credit outcome is mechanism.

The real axis is whether AI makes your product more consumed or more replaceable.

Consumed means your product is the surface the models run on, or the thing AI creates more demand for. Compute. Memory. The data layer. The fraud defense. The more AI there is, the more of you the customer needs.

Replaceable means your product is a workflow, an output, or a labor arbitrage that a motivated customer can now reconstruct. The proprietary report. The back-office process. The seat of a credit analyst ;)

This axis cuts straight across the old line. Rackspace sits on the consumed side. Verra is being accused of the replaceable one. NIQ, Kantar, Gartner, Accenture, the running joke about advisors replaced by Claude, none of them software, all of them priced as replaceable.

The diligence question is no longer how sticky is the revenue. It is which side of the axis the business sits on.

What the Week Said

The headline index did almost nothing. High yield returned about 0.55% on the week. Spreads ended flat around 257 bps, the ten-year hovered near 4.44%, and the all-in yield came in 16 bps to 6.96%, with effectively all of that move coming from rates rather than spread.

Underneath, the dispersion that the index always hides. Flight to quality within high yield, the B-versus-BB differential pushing toward the top of its historical range. The rating buckets are pulling apart while the headline sits still. The index is lying to you, again.

Equities went the other way and went hard. The Nasdaq 100 cleared 30,000, Micron crossed a trillion dollars for the first time with its high-bandwidth memory already sold out for the year, and May closed up double digits for a second straight month.

The two poles sat on the same leaderboard. Avis’s bonds were among the most-traded names in high yield this week, right next to the AI-infrastructure complex. The tape that bid compute to the top of the volume list took the name AI was used to threaten from near par into the high 80s.

Which is the problem with owning high yield as a number right now. You are being paid less than you have all cycle for a tail that is quietly getting fatter.

The Refi Tax

Four billion priced across five deals, bottom of the syndicate range, a holiday week pinched around the GS leveraged finance conference.

The theme was the cost of capital, and it cut both ways. The low-coupon maturities got repriced sharply higher. Navient paid 9.375% to take out 6.75s. PBF came 7.25% to refinance 6s. Avis printed its 8% add-on at 7.77% to chip at the 5.75% 2027s.

And the names refinancing down still landed expensive. Borr Drilling upsized to 2.035 billion of secured to retire 10% and 10.375% paper, and the best it could print was 8.75% and 9%.

Whichever direction the refi ran, everyone cleared at eight to nine and up. The maturity wall is not a wall. It is a repricing, and it lands hardest on exactly the levered names the feature says AI is already pressuring.

And before anyone reads consumed as safe. The most consumed credits alive, the AI-infrastructure names, are also the most capital-hungry, rolling enormous capex into this same eight-handle market. In the third quarter the largest tech firms spent more on capital investment than they earned from operations.

The revenue tailwind sits on top of a balance-sheet hole. Consumed protects the top line. It does nothing for the refi. It is a second tail, not the absence of one. And the rate relief that would close either tail may not be coming, for the reasons I laid out last week.

The Screen Worth Running

Stop sorting the book by AI-exposed and AI-safe. Re-sort it by consumed versus replaceable. The mislabeled names are where the edge lives: a credit whose real moat is operational plumbing, priced by the tape as if it were replaceable code.

The replacement-fear overshoot is a buy list, not a short. When a credit gaps on a replacement headline and the customer that pulled the contract is itself running negative EBITDA, that is convexity, not confirmation.

Fade nothing in AI infrastructure on valuation alone, but respect that the most-traded paper in high yield is now the most consensus. Crowded is not the same as wrong. It is just crowded, and it gets repriced faster when the story wobbles.

And do not confuse a melt-up with a healthy credit tape. The equity index is green because ten names are green. Underneath it the buckets are separating, and the headline is the last place you will see it.

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JunkBondInvestor is an independent financial research publication providing general market commentary, corporate credit analysis, and educational content. The information provided is for informational purposes only and does not constitute investment advice, financial planning, or personalized recommendations of any kind. Nothing published constitutes a solicitation, offer, or recommendation to buy, sell, or hold any securities, nor does it guarantee any financial outcome. Any credit opinions or outlooks expressed are solely the independent views of the authors and are intended to reflect general credit trends, not specific investment recommendations. Investing in high-yield bonds, distressed debt, and leveraged loans carries significant risk including potential loss of principal. JunkBondInvestor operates under the Publisher’s Exemption of the Investment Advisers Act of 1940 and applicable state laws. This issue includes sponsored content and partnership links. JunkBondInvestor receives compensation from sponsors for featured placements and may earn referral fees from partner programs. All sponsored content is clearly marked. Editorial views and recommendations are independent and not influenced by sponsor relationships.

The category has been a graveyard for a decade. E-commerce hollowed out anything you could buy without touching it, store leases turned into a fixed cost that crushes you the moment comps go negative, margins are thin enough that one bad season tips the model, and the list of names that went from investment grade to liquidation is long enough that the reflex to pass is rational.

So you skip it. You see a fragrance-and-candle retailer with declining sales and you move on.

Bath & Body Works gives you every reason to do exactly that. Comps have been negative for quarters. Body Care is bleeding share. The CFO is walking out mid-turnaround. On the surface, this is the same retail story you’ve passed on a hundred times.

But the debt might not need the turnaround to work. And it’s trading wide. So the question is whether that’s a mispricing or the market getting it right.

Situation Overview

Bath & Body Works (Ba2/BB+) is a specialty retailer of personal care and home fragrance. You know the brand: the body lotions and mists, the hand soaps and sanitizers, the candles and Wallflowers that anchor the Home Fragrance line.

came out of the old L Brands in the 2021 split that also created Victoria’s Secret. The result left a clean, pure-play operator with ~1,900 company-owned stores across the US and Canada, an e-commerce channel it calls Direct, a franchised international fleet that costs almost nothing to run, and, since February, wholesale distribution on Amazon.

Three categories carry the business.

• Body Care is the core, the franchise the brand is known for.

• Home Fragrance is the candle business, weighted to the holidays.

• Soaps and Sanitizers is smaller and steadier.

From a lender’s perspective, the credit appeal is these are consumable, replenishment categories, so the revenue base holds up better than apparel. Customers come back on a cadence, gross margins sit in the low-to-mid-40s%, and the business throws off $600-800mm of FCF in a normal year.

Fragrance is bought after sampling, which is why these stores never got hollowed out the way commodity apparel did. That cash flow profile, not the growth, is what keeps this retailer at BB-ratings instead of single-B.

What’s been happening

For most of the past year the story hasn’t changed: comps down, and getting worse. 1Q’26 kept the trend going. Net sales dropped 3.2% to $1.38bn, and Adj. EBITDA declined about 22% to $212mm. Gross margin gave up nearly 270bps, pressured by tariffs, inflation, and the deleverage of spreading a fixed cost base over a smaller top line.

The market actually read it as a relief print. Expectations were on the floor, guidance held, the 2Q’26 guide came in no worse than feared, and the equity rallied.

Taking a step back, nothing in the trajectory actually moved. Sales are still falling, and the recovery is still something management is describing rather than delivering. They have pointed to a second-half inflection for several quarters now, and the inflection has not arrived.

What’s actually broken

Almost all of the weakness sits in one place. Body Care, the heart of the brand, was down “mid-teens” and has now decelerated three quarters running while the rest of the business held roughly flat. The core is the part that is bleeding.

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That is the narrative investors want to believe. Software agents replace back-office labor. Models automate workflows. Productivity rises. Services inflation eventually rolls over because expensive humans get swapped for cheaper code.

Maybe. But before AI becomes deflationary, it has to become extremely capital intensive.

It needs data centers. Data centers need land, power, transmission, substations, transformers, cooling, backup generation, fiber, gas turbines, construction labor, and years of utility planning. The model may live in the cloud, but the cloud still needs a grid connection.

That is the part the Fed cannot solve.

Rates do not fix transformer lead times. They do not clear transmission queues or build gas turbines faster. They do not unwind hyperscaler capex commitments. The Fed can slow demand at the margin, but it cannot print power infrastructure.

That is why the AI trade is starting to become a credit one.

Equity Sees Growth. Credit Should See Capex

Equity investors have treated the AI buildout as a clean growth story. Nvidia gets the multiple. Hyperscalers get the strategic narrative. Power assets get re-rated. Data center landlords get the secular demand story. The entire complex has moved from “infrastructure” to “AI infrastructure,” which is the kind of label that usually makes capital cheaper until everyone remembers capital still has to be repaid.

Credit should be less comfortable with this.

The first stage of the AI buildout is not software margin expansion. It is an industrial capex boom running into a constrained physical system. Power is scarce. Equipment is scarce. Interconnection is slow. Permitting is political. Utility bills are already a cost-of-living issue.

The numbers back this up. Consensus 2026 AI capex estimates are around $750 billion (I’ll take the over on this). Power demand is rising materially for the first time in decades. Grid operators in Texas, Virginia, Georgia, Arizona, and parts of the Midwest are warning that hyperscaler buildouts are reshaping capacity forecasts. Utilities are filing rate cases citing data center demand. Transmission investment requirements are accelerating.

This is not some abstract long-term problem. It is the exact type of supply-side constraint that keeps inflation sticky and makes the Fed’s job harder.

I wrote about this a couple weeks ago through the 1990s telecom analog. Supply doesn’t widen spreads mechanically. It builds the vulnerability. The cracks show up in the marginal cohort first.

Credit Is Still Behaving Like the Rate Environment Doesn’t Matter

You have seen the front-end repricing.

Front-end pricing for 2026 has flipped from cuts to hikes in a matter of weeks. The move in the implied policy path is on the order of 80 bps. The rates market has done most of the work. Credit has barely moved. High yield spreads are actually tighter over the same period.

Those two things do not sit comfortably next to each other. The rates market is saying the Fed may not have room to cut. Credit spreads are still behaving like the Fed path does not matter much.

The incoming data is easier to square with the rates move than the spread move. April PPI ran hot at 1.4% m/m and 6.0% y/y, and the pressure was not isolated to energy. Goods passthrough showed up across transportation, metals, building materials, and industrial chemicals. ISM prices indices stayed elevated on both the manufacturing and services side, with services prices back near the highs of the current cycle. The ADP weekly pulse firmed into a monthly run-rate well above what the Fed itself characterizes as breakeven payroll growth.

None of these are individually decisive. Together they do not describe an economy giving the Fed cover to cut. None of this is obvious, especially in BB spreads at 152 bps.

HY index spreads now sit 10bps wide of their 52 week lows. Meanwhile, the 10-year Treasury is up nearly 50 bps YTD at 4.56% vs. the HY index yield at 7.12%. The attribution is not flattering: returns have been carried by coupon, while rates have been a drag and spread compression has done very little.

Carry is still printing. That part is true. The issue is whether the conditions that made carry easy survive another quarter where AI capex keeps pulling on the same physical inputs the Fed cannot conjure.

The Market Is Open, But the Price Discrimination Is Real

A Fed stuck between sticky inflation and political pressure does not shut the new issue market. It splits it.

RR Donnelley priced an upsized $900 million five-year senior PIK note. 11% coupon, 95 OID. Fitch moved the outlook negative on higher pro forma leverage in the low-5x area.

Same week, Granite Construction priced $600 million of 6.375% eight-year senior notes at par to refinance old converts.

Granite at 6.4%. RRD at 12.4% PIK. Same week. Roughly 600 bps apart on clearing yield.

The market is not closed. Strong credits refinance. Quality borrowers extend maturities. HY spreads stay tight. Weaker borrowers can still get deals done, but the price starts to look like punishment.

The interesting part is that AI is now on the other side of that triage. The market has infinite imagination for the capital needs of the AI buildout. It has much less patience for old-economy borrowers trying to refinance levered balance sheets at the wrong point in the rate cycle.

AI gets the growth multiple. Legacy refi risk gets the coupon.

Power Is Where the Politics Starts

Certain credits have treated the AI power complex as a clean tailwind.

Talen, Vistra, NRG, and Constellation traded as utility or power names two years ago and now trade as AI infrastructure plays. CoreWeave moved from novelty borrower to somewhat accepted institutional credit. Bitcoin miners, electrical equipment names, power generators, utilities, and cooling assets all sit somewhere on the same narrative map.

The demand story is real. The supply response is slow. That is why the trade worked. The next phase is harder.

US electricity demand is rising for the first time in decades and ratepayers are being asked to absorb more of the bill. Iran has pushed gas prices higher. Power bills are climbing too, partly because hyperscaler buildouts are driving demand growth that utilities pass through to customers.

The cleaner AI story gets harder when the power bill leaves the data center and lands in the regulated rate base. A hyperscaler PPA may be contracted. The household bill is political.

The cost-of-living backdrop is already strained. Real incomes have not kept pace with prices for most households, inflation approval is in the high 20s for the administration, and energy is back in the headlines as a household-budget item rather than a macro abstraction. Higher power bills hit the same working-class base through a different channel than the pump.

The political coalition that has tolerated the AI buildout starts to look less stable when the buildout shows up as utility bills, transmission fights, land-use battles, and local permitting pressure.

The issue is whether the local cost allocation case becomes politically intolerable before the productivity gains show up in household incomes. That is a credit problem before it is a macro problem, because the names exposed to local cost allocation fights are levered, regulated, and trading like the tailwind is one-directional.

That is not an anti-AI argument. It is the politics of who pays.

The PUC Is Where the AI Trade Meets the Customer Bill

State Public Utility Commissions (“PUCs”) are political animals. They feel pressure faster than federal regulators.

In states like Virginia, Georgia, and Ohio, data center cost allocation is already becoming a live regulatory issue. The direction of travel is toward less socialization, more scrutiny of large-load tariff structures, and higher customer contributions to interconnection costs. Virginia rate cases over the next two quarters are worth watching closely.

If the politics turns, the IPPs and utilities are probably easier pressure points than the hyperscalers. Hyperscalers bring jobs, capex, lobbying capacity, and federal influence. Utilities and IPPs sit closer to the customer bill, which makes them easier to drag into the state-level fight over who pays for the grid.

That does not mean the demand story is fake. It means the easy “AI infrastructure is a one-way tailwind” phase is probably over. The next phase has more regulators, more politics, and more attention to who absorbs the cost.

The question is whether these AI-credits should trade like a clean infrastructure credit, or whether the market eventually demands a larger concession once power, permitting, and regulatory risk are priced more explicitly. Same question across the IPPs, data center names, and power-linked credits. Some have contracted demand. Some have merchant exposure. Some have regulatory protection. Some have regulatory risk.

The market is still learning the difference.

What This Means for Credit

The first AI trade was Nvidia and the direct GPU ecosystem. The second was power. The third may be higher funding costs for everyone not attached to the buildout, and a political ceiling on some of the names that are.

That matters for broader credit because the AI capex cycle is not happening in a vacuum. It is happening while inflation is sticky, the Fed path has repriced hawkishly, and spreads are still trading like carry is the only thing that matters.

There are three implications:

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Most are pretending the question doesn’t exist. Wix decided to do something about it. Went out and spent on the answer. Bought Base44. Built Harmony on a proprietary LLM. Pushed distribution into ChatGPT and Claude. Ran a Super Bowl ad.

You can see the spending in the numbers. You can also see it in the share price. Down 48% this year alone.

The convert has moved but not to the same degree. Busted and trading on yield. High-70s, ~6% YTM, priced like IG-adjacent software paper. The question now: is 6% enough?

Situation Overview

Wix sells subscription software that lets SMBs, freelancers, and agencies build and run websites without writing code, plus a layer of business apps on top (payments, commerce, bookings, domains, email, paid ads). Mostly recurring, paid upfront, low capex. Until recently it ran at low-to-mid 20s% FCF margins with a clean balance sheet.

Three things changed that.

The first is AI. The customer question shifted from “I need a website but can’t code” to “I should be able to describe what I want and have software build it.” Wix’s attempt to answer that is two products:

• Wix Harmony is an AI site builder integrated into the core platform that launched in late Jan’26.

• Base44 is a “vibe coding” tool that lets non-technical users describe an app or workflow in plain English and have software build it. Wix acquired Base44 in mid-2025.

Base44 has scaled fast: $59mm at YE’25, $100mm by early Mar’26, $150mm by mid-May’26. Harmony now runs on a proprietary in-house LLM, which management has described on the Q1’26 call as meaningfully lower cost than 3P alternatives. Wix is also pushing distribution into AI platforms, including Base44 inside ChatGPT and MCP integrations with tools like Claude and Cursor.

The pitch is that these products move Wix out of website builder land and into a bigger AI-powered web, app, and workflow market.

The second change is that the cost of all this showed up in Q1’26.

Revenue grew 14% y/y to $541mm. Bookings grew 15% to $585mm. New user cohort bookings up ~46%, with the Q1’26 cohort adding ~6mm new users. Headline looked fine. Go down the P&L. Adj. EBITDA was $34mm (6% margin) vs. $106mm (22% margin) in Q1’25, well below consensus.

S&M nearly doubled y/y to $191mm, or 35% of revenue vs. 21% a year ago. That includes $20mm+ of Super Bowl spend. Per management commentary, the other ~$90mm went to acquisition marketing across core Wix and Base44, with blended TROI extended to 7-9 months. FCF was $75mm, $112mm ex-acquisition costs, against $142mm in Q1’25.

The stock fell 27% on the print.

Guidance moved with the print. FY’26 revenue and bookings stayed at mid-teens, but FCF margin guidance (ex-acquisition costs) was cut from low-to-mid 20s% to high-teens. Management attributed ~$100mm of that to foregone interest income and new interest expense from the tender, plus a ~$64mm FX headwind from a stronger Israeli shekel weighted to 2H’26. None of those explanations are wrong. But taken together, they describe a business that now requires more marketing spend and more capital.

The third change is the balance sheet.

In Apr’26, Wix completed a modified Dutch auction tender, buying back ~17.5mm shares at $92 for ~$1.6bn. Almost 30% of shares outstanding. Funding came from cash on hand and a new $500mm credit facility from Bank Hapoalim. The transaction left Wix with roughly $1.65bn of gross debt, including the new $500mm bank facility and $1.15bn of 2030 converts, against the net cash position the company carried for years. Two months later the stock is at $55.

The facility terms are more interesting than the headline borrowing capacity. Hapoalim got liquid assets sitting with the lender, contractual and statutory lien and setoff rights, a negative pledge against a general floating charge, and a financial covenant. Specifically, Wix has to maintain ~1bn NIS of Israeli Treasury Bills (Makam) at the bank and keep its existing $120mm cash deposit there, with a Bank Debt / FCF covenant capped at 2.0x.

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The answer often matters more than leverage, price, or all-in yield, and almost nobody focuses on it.

Credit markets have always worked this way. Different cohorts hold paper under different rules. Different rules mean different prices when paper has to move between them. The handoff between buyer bases has always been where price discovery happens on stressed names.

What’s different right now is the degree. The buyer base is more fragmented than it used to be. Private credit and HY ETFs are both meaningfully larger than they were five years ago. Active managers are smaller. CLO reinvestment cohorts have shifted. The crossover IG bid has gotten more conditional. Several absorbers in the chain thinned at the same time, and the price gaps at each handoff have widened as a result.

The credit may have changed, but the degree to which that price discrimination gets expressed is much wider now. Dispersion grows the smaller and shallower the next buyer universe is.

Most market commentary works off the spread because that’s what’s visible. The headline gives you the index, the rating bucket, the sector. It doesn’t give you who actually owns the paper and what would happen if they had to sell. Spread levels are an output. The buyer base is the input.

Today, HY spreads remain inside 300bps. The headline gives you nothing. What’s actually happening sits below it.

Where the price gap opens

Take a single-B loan trading in the mid-90s, owned mostly by CLOs in their reinvestment period. The CLO can hold it, add to it, reprice it. Spread reflects the underlying credit risk plus a modest liquidity premium. The buyer base is deep and sticky.

Downgrade it one notch. The company is still the business it was yesterday. Inside the CLO, the math changes. OC tests start mattering more. If the loan slips below par triggers or migrates closer to the CCC bucket, it begins to weigh on the structure rather than support it. Managers tight on their tests cannot easily add to it. Some need to trim. The largest natural buyer just got smaller.

The next bid is no longer the CLO at the same intensity. It is a credit hedge fund, a multi-strategy book, or a newer-vintage CLO with cushion to spare. Each requires a different price. The loan slips several points. The catalyst was the downgrade. The price gap was created by the owner base changing.

Downgrade it again. The CLO universe is largely out of the conversation. The natural buyers are distressed funds, opportunity funds, and the small set of credit hedge funds that specialize in this part of the market. The loan slips again. The business hasn’t always changed. The mandate that holds the paper has.

A handoff can produce significant price gaps that underlying fundamentals don’t dictate. The new owner base requires a different price to clear, and the gap between those prices is the dislocation. Sometimes that creates opportunity for buyers who can underwrite the next mandate before the old one fully exits. Sometimes it produces lumpy, choppy price action because there isn’t a natural buyer base at all.

Take broken converts for example. Once a convertible breaks, the equity option is too far out of the money for convert funds and the credit isn’t clean enough for HY managers. Neither side has a real reason to own it. Each fund type that might pick it up operates under its own restrictions, and many of the more flexible vehicles are too small to absorb size.

The depth of each buyer matters as much as whether one exists. A broken convert that nobody is forced to own and nobody is structurally set up to buy will trade where the most opportunistic capital wants it to trade, which is can be below where fundamentals would suggest. I wrote about this dynamic at over the weekend:

The same logic runs in bonds. A BB owned by crossover IG buyers, total return funds, and indexed ETFs has a deep bid. Downgrade it and the crossover bid weakens. Total return funds may still hold it but the marginal buyer is a dedicated HY fund with different concentration limits. Another downgrade and dedicated HY funds become the only natural holders.

Each step is a handoff. Each handoff has a price.

Why the handoffs are harder now

The slack in the system has gotten thinner at every step.

CLOs in reinvestment used to absorb deteriorating paper as a matter of course. Active HY funds had inflows to deploy. Crossover IG could lean in when yields were attractive. Insurance had room. Private credit was growing fast enough to absorb risk the BSL market wasn’t pricing.

Most of that slack is gone.

The class of 2020 to 2022 CLOs has been rolling out of reinvestment. Once a CLO exits reinvestment, it stops being a buyer at the margin. It can sell discretionarily but it cannot grow into deteriorating risk the way it could before. The cohort that absorbed the last wave is no longer the cohort that can absorb the next one.

Active HY fund flows have been one-directional for months. The asset class has seen consecutive weekly inflows, but the composition matters. The incremental capital is heavily ETF-driven. Active loan funds continued the pattern of sustained outflows that has defined the year. ETFs buy the index in proportion to the index and don’t differentiate between credits that should be owned at current prices and credits that shouldn’t be. Active managers do, and active managers are losing capital. A growing share of the incremental HY bid is a passive vehicle that doesn’t care about handoffs.

The crossover IG bid is more conditional than it was a year ago. Conditional on rate cuts arriving, on the curve flattening, on IG yields staying low enough that reaching into BBs makes sense. With the curve now pricing more hike risk than cut risk, that condition is breaking.

Insurance demand for CLO senior tranches remains solid, but spread compression has limited how much new equity formation it can support. CLO equity returns have come down. New CLO issuance ex-refi has been running below last year’s pace. The supply of new CLO vehicles to absorb deteriorating loan paper has slowed.

Most large private credit platforms have hit their quarterly redemption caps this year. The platforms managing through it are doing so by selling their most liquid paper, often the BSL exposure held alongside the private loans. That selling lands back in the loan market as incremental supply at the wrong moment.

Every absorber in the chain has gotten thinner. The depth of each remaining buyer matters more in that setup, not less.

The rates story is the trigger

I’ve been saying for weeks that the macro setup is quietly building its own vulnerability and that the long duration universe is the wrong place to be sitting. Financial conditions easier than pre-conflict despite oil 50% higher. One year inflation swaps trading 75bps higher. The market pricing more growth and more inflation simultaneously and treating it as benign. Labor stabilizing into the same impulse. The Fed not pushing back. The reflation trade leaking into credit while most accounts hadn't repositioned for it.

This week the leak became visible.

CPI came in hot midweek. A global bond selloff hit Friday on UK gilt concerns and renewed inflation worries. OIS forwards now price 60% odds the Fed delivers a hike rather than a cut by December, a complete reversal from where the curve sat two months ago. Even with spreads flat, high yield returned -0.49% for the week driven by the move in base rates.

Crossover IG buyers are the most rate-sensitive cohort in the HY bid and have been a structural absorber for BBs through this cycle. Their willingness to reach into HY for yield depends on a forward curve that suggests rates are coming down. When the curve flips, the math changes. Crossover allocations get pulled back. The deep bid behind BBs gets thinner.

BBs at current spreads do not compensate for the crossover bid stepping back. The credit doesn’t have to deteriorate for BB spreads to widen. The owner base just has to change.

The same logic works down the stack. Higher base rates compress interest coverage on floating-rate borrowers. Loans that were comfortably in CLO portfolios start consuming OC test cushion. The structures that absorbed the original financing become marginal sellers. The handoff cascade starts at the top of the rating stack and works lower.

A higher-for-longer regime functions as a buyer base thesis. The cohorts that absorbed the last cycle were built around an assumption that rates would come down. They didn’t. They aren’t. The owner base will have to reorganize around that reality, and the price will reset at each step.

What this looks like in real names

ZoomInfo is the cleanest example from last week. The company reported Q1, beat on both revenue and earnings, and cut full-year guidance. The bonds went from the mid-80s to a 78 context. Roughly 7 points lower on a quarter that beat. The existing holder base reassessed the terminal value and the next buyer required a different price. The handoff happened in one print. The 3.875% 2029s now yield close to 14%. The loans repriced to the mid-80s in parallel.

The same pattern shows up across building products, consumer cyclicals, business services, and the longer tail of sponsor-backed LBOs from the peak vintage. The single-B paper financed into the BSL market in 2020 to 2022 has been drifting lower for two years. Companies still current. Maturities still in the future. The loans trade where they trade because the buyer base that absorbed the original financing is no longer the buyer base that has to clear the secondary market.

The primary market reinforces the divide. Clean deals for clean issuers cleared without trouble this week. DIRECTV priced $1.4 billion of secured notes at par to yield 9.25%. Wayfair priced $400 million of eight-year secured notes at 7.125%, tight to talk, and the deal triggered a Fitch upgrade on both the secured debt and corporate rating. Kennedy-Wilson placed $1.8 billion across two tranches to fund a take-private. Travel + Leisure cleared $900 million of secured notes at 6.25%.

Every one of those deals priced inside guidance or at the tight end. The natural buyer base for clean BB and strong single-B paper is intact. The handoff problem isn’t in primary. It’s in the names already outstanding where the existing holder base is being asked to keep holding through a setup it didn’t underwrite.

Things to be mindful of

A few questions worth running on the names you already own.

Who owns this paper today, and what are their constraints. What would have to happen for them to step back. Who is the next buyer if they do. What price does that buyer require to show up. How wide is the gap between the current holder and the next one. How deep is each successive buyer.

Work on the company itself still matters. Cash flow, leverage, maturity profile, business model, all of it. The marginal source of return increasingly sits in the handoffs between buyer bases. A credit priced for stability where the current holder is one bad print away from leaning back is the more dangerous setup than one already priced for a handoff.

The harder question is when the handoff happens without a rating change. A CLO manager looking at a weakening loan can choose to trim before the downgrade arrives. The buyer is another holder who hasn’t done the work yet. The price moves before the rating moves. By the time the agencies catch up, the loan has already changed hands and the price already reflects it.

The valuable work is spotting credits where the market will reorganize the ownership before the agencies do, where the current holder is fragile, and where the next mandate has different math than the current one.

A growing share of the incremental HY bid is ETF-driven, which means the bid in the index is firmer than the bid in any individual name. The index holds up while specific credits get punished. Dispersion keeps widening regardless of where the index trades.

The single-B handoff inside the loan market is where the largest price gaps live right now, and the post-reinvestment CLO cohort is worth watching as a driver of softer secondary bids in the back half of this year. The same credit can have a different secondary price depending on which CLOs own it.

JBI Bulletin Board

1) Now Hiring: Credit Analyst

I’m looking to bring on an experienced full-time credit analyst (ideally distressed background). At least a couple of years covering the space, buy-side experience strongly preferred. Software or building products coverage. You should know the names, know the docs, and the playbooks. If you’re interested or know someone who fits, reach out with a brief note on your background.

If you liked this, you might also like:

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Usually, something broken. A building products loan to a company missing numbers. A software credit where the equity cushion disappeared years ago. A capital structure where everyone knows the next negotiation is going to be unpleasant.

Not usually a secured convertible note with a par put six months away where the current president is the largest shareholder.

has a $1bn zero-coupon convertible bond trading at 93, with roughly $2.4 billion of market cap beneath it. The stock is at $8.82, the conversion price is $34.72, so the equity option is dead. That part barely matters.

The notes are senior secured. The collateral package includes cash, bitcoin, and equity securities. Holders can put the notes back to the company at par on November 30, 2026. The trade is seven points to par in six months, roughly 13% annualized, on paper that looks secured and short-dated.

So why is it not trading at 98 or 99?

Because the pledged collateral does not cover the claim. The liquid balance sheet can cover the put, but only if management chooses to monetize it. The indenture leaves room for a negotiated refinancing. And the largest economic owner on the other side of the table is the sitting President of the United States.

The Setup

Trump Media and Technology Group is the parent of Truth Social and Truth+. It came public through a SPAC merger in March 2024. The operating business is barely a business: 1Q’26 revenue of $871,200, FY’25 revenue under $4mm, segment EBITDA negative. The operating business is irrelevant to the recovery analysis.

DJT is better understood as a capital markets vehicle wrapped around a brand. In May 2025, the company raised $2.4bn in a single private placement: $1.4bn of common at $25.72 and $1bn of 0.00% convertible senior secured notes due 2028. Proceeds went into a bitcoin treasury, a digital-asset-linked equity securities book, and strategic bets including a $200mm convertible note to TAE ahead of the pending fusion merger.

The indenture uses a loan-to-collateral ratio to govern how much collateral has to remain in the box and when releases occur: cash gets full credit, bitcoin gets only 52.6% credit, and collateral releases mechanically as principal pays down (first at $500mm outstanding, then at $250mm, then at payoff).

This is not normal convert paper. It is zero-coupon, secured paper with no current income, a dead equity option, and a first-priority claim on a volatile but real pile of liquid assets. The closest analog is not other converts. It is short-dated secured paper trading on collateral coverage, liquidity, and event timing.

The put is what makes it interesting. Stated maturity is May 29, 2028, but every holder has a one-time individual right to require DJT to repurchase its notes for cash on November 30, 2026, at par plus accrued. No consent threshold. No majority vote. Each holder decides on its own. If a holder validly puts, the company owes par in cash.

That put should cap the bond near par into November, absent a revived equity option or technical dislocation. The only question is whether DJT pays in cash, refinances the notes, or pushes holders into a negotiated exchange due to doc flexibility.

What Assets Does the Company Own?

DJT closed 1Q’26 with ~$2.1bn of financial assets. Headline coverage looks comfortable but there are important nuances.

Cash and short-term investments together are $487mm. That is what DJT can write a check from on November 30 without selling anything illiquid or waiting on a transaction. Less than half the amount.

The $554mm equity securities book is the next piece, but it is not clean cash. DJT discloses $269mm of equity securities serving as collateral for the converts, and separately discloses $439mm of equity securities held as collateral for outstanding call options at 3/31/26. The overlap between those two figures is not entirely clear from the filing, but the conclusion is straightforward: the equity book is marketable, but not freely available dollar-for-dollar. Monetizing it ahead of the put may require unwinding, substituting, or restructuring collateral tied to the derivative overlay and the note collateral package.

The $200mm TAE convertible note receivable (and corresponding interest receivable) is unsecured paper on a private fusion company tied to a merger that has not closed. This may not be a source of cash on November 30 even though the merger is supposed to close mid-26.

Bitcoin is where it gets interesting. DJT held 9,542 BTC at quarter-end against a $1.13bn cost basis, so the digital asset book is sitting on ~$480mm of unrealized losses. Of those coins, 4,261 are pledged to the converts. Another 2,000 are posted with the covered call counterparty to hedge 4,000 BTC of exposure. The covered call piece is not permanent: those options expire in June 2026, well before the put. Unless rolled, 2,000 BTC frees up before November and becomes available.

In terms of cash burn, the reported 1Q’26 net loss of $406mm sounds alarming until you back out non-cash items. $369mm was unrealized marks on digital assets and equity securities. Underlying operating burn is small. Operating cash flow was actually positive at $18mm for the quarter, mainly due to working capital.

Assuming there is no refinancing event, to cover the full $1bn in cash, DJT would need some combination of liquidating the equity book (after unwinding the option overlay), selling BTC and crystallizing the loss, monetizing the TAE note, or refinancing into new debt or equity.

What Does The Bond Indenture Allow?

The bond is at 93 for two reasons working together. The collateral securing the claim is bitcoin, equity securities, and a slice of cash, which is to say roughly 3/4ths of the pledged package marks to market on a single risk factor.

The market is pricing some non-trivial chance the company tries to push holders into a deal rather than write the $1bn check. Whichever piece is weighted more heavily, both run through what the indenture allows.

Three pieces matter: what the document protects, what’s actually behind the secured claim today, and what the company can do with majority consent.

Let’s run through each one by one.

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KKR is trying to do something about that with .

The four-part package they announced this week is an attempt at confidence repair in a stranded public BDC.

Tender, preferred, buyback, fee waiver, all in one press release.

Whether it becomes a template for other discounted BDCs depends entirely on whether it has any impact. If FSK can improve the discount, expect imitators. If the discount holds or widens, expect sponsors to follow Apollo’s MFIC approach instead and exit through a sale or portfolio wind-down rather than try to repair the wrapper.

The structural nuances in how this one was built are worth attention either way, because they tell you what a sponsor will and won’t do when faced with a stranded vehicle, and they reveal which parts of the package are genuine and which are optics.

I wrote about FSK's bonds at the end of April, when the credit was already telling a different story than the equity narrative. This week the equity side got an answer.

What KKR just announced

For background, FSK is managed by FS/KKR Advisor, a joint venture between KKR Credit and Future Standard (formerly FS Investments), with both parties sharing management and incentive fees. Here’s the simplified org chart:

KKR Alternative Assets LP, a KKR subsidiary will tender for up to $150 million of FSK common at $11. The tender opens May 12 and runs 20 business days. Once it closes, KKR buys $150 million of cumulative convertible perpetual preferred from FSK at a 5% cash coupon (or 7% PIK), convertible to common at $18.83, which is the current NAV.

FSK’s board separately authorized a $300 million stock repurchase program through June 2027, funded from FSK’s own balance sheet including the preferred proceeds. KKR also waived its share of the subordinated income incentive fee for four quarters.

The backdrop to this explains the move. A 9.9% NAV decline, Adj. NII at $0.41 vs. $0.52 the prior quarter, $2.00 per share of realized/unrealized losses, non-accruals at 8.1% of cost, and a Q2 dividend reset from $0.48 to $0.42. Moody’s cut FSK to junk in March. The senior secured revolver was amended May 8 to shrink commitments and reset the minimum equity covenant lower.

The quarter forced the action. The structure is the more interesting part.

The stranded BDC problem

The modern public BDC model depends on growth. Trade at or above NAV. Issue equity at a premium. Deploy proceeds into senior secured loans. Earn the spread. Distribute the income. Repeat. Read this if you’re new to BDCs:

When the stock trades at ~60% of NAV, that loop breaks. Equity issuance would be massively dilutive. The vehicle can no longer grow. The sponsor still earns management fees on a fixed asset base but loses the ability to compound the platform. The market is essentially telling the sponsor that the franchise is worth less alive than the underlying portfolio is worth on paper.

The sponsor has three plausible responses. Sell the vehicle and exit. Run the vehicle in slow-motion runoff and harvest fees. Or try to fix the discount and reopen the equity issuance window.

Apollo picked option one with MFIC. KKR is testing option three with FSK. Whether other sponsors with discounted BDCs follow KKR or Apollo depends on whether the FSK trade actually moves the stock. Right now, neither option has been validated, and most BDCs trading at meaningful discounts are running variations of option two by default.

The $300 million headline obscures whose downside is whose

The package puts $300 million of KKR capital into FSK across two pieces. $150 million tenders for common at $11. Another $150 million buys preferred convertible to common at NAV.

The number that matters most is $11.

KKR is publicly defending an $18.83 NAV. The stock trades at $10.84. A sponsor that believed the NAV was real and the discount was irrational would tender at a meaningful premium to market, somewhere between $14 and $16, capturing upside to NAV for itself while delivering a real bid to exiting shareholders. That tender would be a credible signal of conviction.

KKR didn’t do that. The $11 tender is 2% above the market clearing price and 42% below the NAV the company is defending. The premium to market is so thin that it barely counts as a bid. KKR is offering to buy common at almost exactly the price the market is already clearing at, then accumulating the maximum possible discount on every share tendered.

The preferred reinforces the same posture. KKR is putting $150 million into a senior security with a coupon, conversion optionality, and redemption rights, rather than putting that capital directly into common. The preferred sits ahead of common in every scenario. A sponsor confident in the NAV would put at least some of the capital into common at or near market. KKR put none.

Together the structure says: KKR wants to support the vehicle, but on terms that protect KKR from the common-equity outcome the company is publicly defending. The tender accumulates common at the market price. The preferred sits senior. The buyback gets funded partly by FSK’s own balance sheet. KKR captures the discount in the tender, the seniority in the preferred, and the conversion upside if the NAV thesis works. Existing common shareholders are stuck at their original cost basis with none of those protections.

This isn’t bad. It’s a rational way to deploy sponsor capital into a stranded vehicle while limiting the sponsor’s downside. But it isn’t the structure a sponsor builds when it genuinely believes the marks. A sponsor that believed $18.83 was the real number would have tendered at $14 and put more of the support into common. KKR did neither.

For any future template, the tender price is the cleanest test. A tender at a meaningful premium to market signals genuine conviction in the NAV. A tender at or near the market clearing price tells you the sponsor wants to accumulate common cheaply while talking about alignment. The press release will frame either version as confidence. The number tells you which one it is.

The conversion strike also means nothing

The preferred converts at $18.83, exactly reported Q1 NAV.

Nobody at KKR thinks FSK’s NAV is worth $18.83. The stock trades at ~$11 because the market is pricing further deterioration, not par recovery. The strike isn’t a forecast.

It’s the symbolic anchor of the package. Setting the strike at reported NAV lets KKR and FSK tell shareholders that sponsor capital is locked in at the same valuation the company defends publicly. The strike signals alignment with reported NAV without requiring KKR to express any actual view on intrinsic value.

There’s also a sneaky part. The strike also ratchets down for special dividends. With Q4 spillover income near $1.66 per share, FSK may need to declare special distributions in late 2026 to maintain RIC status. Each one mechanically lowers the effective conversion price. The headline strike sits at NAV. The effective strike drifts lower through distributions and likely settles closer to the prevailing market range.

If this template gets copied, the conversion strike will sit at reported NAV every time. It’s the only number that lets the sponsor sell alignment. Read it as cosmetic, not predictive.

The fee waiver exposes the JV problem

The fee waiver is the most revealing part of the package.

FS/KKR Advisor, LLC is a joint venture between KKR Credit and Future Standard. Both entities earn management and incentive fees from FSK. The “alignment” announcement waives KKR’s portion of the subordinated income incentive fee for four quarters, covering 50% of the total.

Future Standard waived nothing.

The other half of the manager, the same entity earning fees on the same vehicle through the same JV, is taking the same economics it took last quarter. After a 10% NAV decline, higher non-accruals, weaker earnings, and a dividend cut, Future Standard is collecting full freight.

This matters for any future template. A single-manager BDC doing a similar package would have the sponsor waiving the full incentive fee, not half. FSK’s JV structure means KKR cannot deliver the cleaner version of alignment without Future Standard cooperating, and Future Standard didn’t. The result is a fee waiver that gets reported as alignment but functions as a partial concession from one of two parties responsible. The press release doesn’t acknowledge the asymmetry. The footnotes do.

The lesson for reading the next package: check who controls the manager. Single-sponsor BDCs can deliver real fee alignment. JV-managed BDCs deliver partial alignment dressed up as the real thing.

The buyback is the part that actually has to work

If NAV is credible, repurchasing stock at 60 cents on the dollar is one of the most accretive uses of capital available to FSK. The math is straightforward. Every share retired at $11 against $18.83 of NAV adds NAV per share for the holders that stay.

That’s also the if.

If the marks keep moving down, FSK is spending capital retiring stock at $11 while the underlying portfolio is worth less than that price implies. The buyback then becomes a transfer of value from the company’s balance sheet to the shareholders who tendered or sold during the program, at the expense of remaining shareholders bearing continued markdowns.

The package is making a bet that the marks are roughly correct and the discount is irrational. Management itself disclosed that 19% of the portfolio sits in a higher-risk bucket including all legacy investments and first-lien loans marked below 90. The buyback is being funded against a book where management has already publicly identified roughly one-fifth as problem paper.

If the bet works, the buyback is genuinely accretive, the stock re-rates closer to NAV, and the equity issuance window reopens. If the bet doesn’t work, the buyback is sponsor-financed share retirement at prices the underlying portfolio doesn’t support.

The market will vote on this over the next several quarters. But the marks problem isn’t separable from the confidence problem. The market trading FSK at $11 isn’t doing so because it’s irrational. It’s discounting the reported NAV because it doesn’t trust the portfolio is worth $18.83. Sponsor capital signaling confidence in the NAV doesn’t change whether the NAV is actually right.

Medallia is one of the cleaner near-term data points

Medallia stopped paying interest to FSK in Q1. Marked at 54 cents, on non-accrual. Thoma Bravo signaling it will hand the keys to lenders. A group including Blackstone is putting in $100 million to fund the workout.

Eight other BDCs hold the same first-lien paper. Each will have to defend its own mark against the 54-cent comp in Q2.

The relevance for the FSK trade is direct. KKR is committing $300 million of headline capital to a fund whose biggest single-name NAV driver this quarter is marked at 54 cents, with the workout being run by a different sponsor. If Medallia recovers materially above 54 cents, the FSK trade looks smart. If it settles at or below 54 cents, the FSK trade is spending capital validating marks that are still moving.

The Medallia outcome also contributes to a broader test. Direct lenders argued for most of the post-2020 cycle that first-lien paper in a software business with recurring revenue recovers at or near par because the lender controls the asset. The 54-cent mark is one of the cleaner near-term challenges to that thesis. It isn’t the whole referendum, but it’s an actionable data point for institutional readers trying to calibrate where recovery values actually settle in this cycle.

What to watch in the next package, if there is one

FSK may end up being the only public BDC that tries this version of the trade. If the stock doesn’t move toward NAV by the end of 2026, other sponsors will look at the result and conclude that sponsor capital can’t fix a marks problem, and they’ll head toward Apollo’s MFIC exit route or simply run their vehicles in quiet runoff.

If FSK does work and the template gets copied, three dimensions are worth watching.

How much new common-equity risk does the sponsor actually take? FSK’s package put $150 million of new capital into the stack through senior preferred, not common. A more aggressive package would put sponsor money directly into common at or near market. The form of the capital tells you how much confidence the sponsor has in the marks.

Does the sponsor control the manager? FSK’s JV structure produced a half-aligned fee waiver. A single-sponsor BDC can deliver cleaner concessions. Watch whether manager economics actually move or whether the optics get reported as alignment without the substance.

Is the buyback funded by new proceeds or by retiring the balance sheet? FSK’s $300 million authorization is partly funded by KKR’s preferred proceeds and partly by the fund’s own runoff. A buyback funded by current portfolio cash flow is a different statement than one funded by drawing down the balance sheet.

The honest version

The press release calls it strategic value enhancement. The structure is a stranded vehicle trying to repair its own equity story with sponsor capital, while the sponsor protects itself against the possibility that the marks are still moving.

The trade works if FSK’s portfolio is worth roughly what management says it’s worth. If that’s true, the buyback is accretive, the stock re-rates, and the playbook becomes available to other discounted BDCs. If the marks are wrong, the playbook reduces to sponsor-financed share retirement at prices the underlying portfolio doesn’t support, and other sponsors will draw the obvious conclusion.

Judging by the market’s reaction, the verdict is clear. Confidence repair can’t solve a marks problem, and the marks problem is what’s actually driving the discount. But the next few quarters of FSK trading and the eventual Medallia recovery will tell us more than I can.

For now, the structural nuances are what travel. The headline number isn’t the headline. The conversion strike is theater. The fee waiver only goes halfway because the JV partner didn’t cooperate. The buyback math depends entirely on whether the marks hold.

That’s what a stranded BDC trade looks like when a sponsor decides to fight rather than exit. Whether other sponsors choose the fight is the open question.

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JunkBondInvestor is an independent financial research publication providing general market commentary, corporate credit analysis, and educational content. The information provided is for informational purposes only and does not constitute investment advice, financial planning, or personalized recommendations of any kind. Nothing published constitutes a solicitation, offer, or recommendation to buy, sell, or hold any securities, nor does it guarantee any financial outcome. Any credit opinions or outlooks expressed are solely the independent views of the authors and are intended to reflect general credit trends, not specific investment recommendations. Investing in high-yield bonds, distressed debt, and leveraged loans carries significant risk including potential loss of principal. JunkBondInvestor operates under the Publisher’s Exemption of the Investment Advisers Act of 1940 and applicable state laws. This issue includes sponsored content and partnership links.

AI related issuance specifically is on pace for $400 billion. Last year it was $150 billion. Hyperscalers alone account for $250 to $300 billion of that. Then the data center REITs. First time issuers getting pulled in. Industrials and utilities that have to spend more because the hyperscalers are spending more.

This isn’t a one year thing. Hyperscaler capex is tracking above $700 billion this year and projected above $900 billion next. Three trillion cumulative through 2028, and that’s not a terminal number. The models need continuous training. The infrastructure needs continuous build out.

A multi year supply event. And the way its implications on credit markets are being framed is wrong.

The Emerging View

Start with what’s not in dispute. Hyperscaler credit quality is fine. These are companies generating hundreds of billions in annual free cash flow, sitting on massive cash balances, and operating at investment grade ratings that would survive even a substantial increase in debt. $400 to $500 billion of issuance without a downgrade is well inside their capacity. The bull case is fine on its own terms.

The spread-widening case is more mechanical. IG bond supply overwhelms demand. The sheer volume of new paper hitting the market forces spreads wider regardless of fundamentals. Concessions widen at the margin. Crossover buyers pull back. The marginal buyer needs a better entry point. IG resets wider and the technical clears. HY follows through the curve.

It sounds clean. The 1990s data doesn’t support the mechanical version of it.

The 90s Were Not a Supply Story

The last comparable capex super cycle was telecom and fiber buildout in the mid to late 1990s. Different technology, same structural dynamic. Massive infrastructure investment, credit writing the check, equity markets rewarding the spending. Telecom capex peaked at $220 billion in real terms in 2000. AI capex passed that level last year and the curve is still steepening. Bigger version of the same shape. Faster too.

Corporate bond issuance grew through the prior cycle. Fed Greenbook data has it at a $59.9 billion monthly rate in 1997 and $75.4 billion in 1998. November 1998 alone printed $97.2 billion, the biggest supply month of the cycle landing in the middle of the post-LTCM repricing.

Spreads widened modestly in 1997 and meaningfully in 1998. The macro otherwise looked constructive. GDP growth was fine. Earnings were fine. M&A was active. The stock market was working.

When the Fed wrote its 1999 Monetary Policy Report to Congress documenting what actually drove those moves, supply absorption from the capex cycle wasn’t on the list. The Fed cited three drivers: liquidity concerns, Y2K, expected Fed tightening. The proximate triggers were Asia in 1997, Russia and LTCM in 1998.

Supply was not the proximate cause. But the capex-funded issuance wave wasn’t irrelevant either. It changed the market’s starting condition. It left credit markets carrying more leverage, more issuer concentration, and less absorption capacity for when the shocks did arrive.

That’s the distinction worth holding onto. Supply doesn’t widen spreads mechanically. It builds the vulnerability that determines what happens when something else does the widening.

How Supply Pressure Actually Moves Through the System

The fragility moved through specific channels. The bank channel was the big one.

By January 1999, the Fed’s Senior Loan Officer Survey was reporting that conditions in the syndicated loan market still hadn’t recovered from the previous fall. Banks tightening terms. Spreads on loan rates over banks’ cost of funds went from negative 40 percent net respondents to positive 40 percent in a single quarter. Largest move on the chart in nearly a decade.

The Fed staff documented the mechanism in real time:

Concessions widened to clear deals. Same dynamic the emerging view is flagging today on AI deals. Wider pricing to clear paper that used to clear flat. Happening in early 1999 in the syndicated loan market.

This is where the supply story has real bite. Not at the index level, where the proximate catalysts dominate. At the absorption layer, where the channels doing the absorbing get stressed. Capex supply doesn’t widen index spreads. It strains the plumbing.

What Was Tightening While Everything Else Repriced

Here’s what cuts against the simple supply-widens-spreads thesis even more directly.

Wider IG spreads. Tighter bank standards. Deteriorated syndicated loan market. And the Fed staff observed that lower quality HY was actually tightening in December 1998:

More supply. Lower quality. Tighter spreads. The bid showed up at the lowest quality cohort right when the rest of the market was repricing. Composition shifted away from telecom toward broader B-/below issuance.

The Fed saw it. The market kept buying.

That’s late 1998. The real HY damage came later, after the fragility had already been built. The 1999 default rate hit levels not seen since the 1990-91 recession. GDP growing above 4 percent. Unemployment at 30 year lows. The macro looked fine.

Default cycle was already underway in HY two years before the broader spread peak in 2001-02. The fragility wasn’t sitting dormant waiting for an external catalyst. It was manifesting in the lowest quality cohort first. Capex supply didn’t cause those defaults directly. But the issuance wave had brought a lot of marginal credits to market with thin margin for error. When the cycle turned, that’s where it turned first.

Catalysts arrived later and generalized the cracks. The cracks were visible early if you were looking at the right cohort.

The 1990s gets pulled out as the analog for what supply does to spreads. The mechanism is more complicated than that. Supply mattered, but not as the single mechanical cause. It built the vulnerability. The catalysts did the damage.

Where the Analog Lives Today

AI infra paper is increasingly finding its way into HY. CoreWeave issuing across the curve. Crypto miners starting to tap the market. HPC operators that aren’t IG ending up here. Pace has accelerated meaningfully over the last six months.

Not yet a dominant share. Data center exposure is under 2% of the index. The supply pressure accumulating in IG hyperscaler issuance hasn’t reached HY at the same scale.

HY isn’t insulated from what happens in IG either way. HY prices off the IG curve plus a risk premium. When IG widens for any reason, the all-in yield on IG goes up, crossover buyers reaching into HY for yield pull back into higher quality, and HY loses its marginal buyer. Beta is the other channel. HY has more spread duration. Any market wide repricing of credit risk hits HY harder in absolute terms even when the catalyst sat in IG.

That’s transmission one. Transmission two is more specific to the cohort itself.

The AI infrastructure paper in HY is being priced as if hyperscaler capex is a structural feature of the economy rather than a cyclical bet on a specific technology paradigm. Bonds clear inside guidance. Spreads compress. Issuance accelerates. The underlying demand assumption, that Microsoft and Meta and Amazon and Google will honor multi year power and capacity contracts at current pricing, gets treated as a given rather than a probability.

It’s not a given. It’s a probability. The cohort is pricing it like the former.

The cohort that defaulted first in 1999 wasn’t AT&T and Sprint. It was the CLECs, the fiber builders, the marginal issuers being priced as if the demand story was resolved. Headline indices stayed range bound while the lowest quality cohort cracked.

Small cohort relative to the index. Also exactly where the analog says to look first.

What the Cohort Looks Like Up Close

The cohort isn’t a hypothetical. The cleanest example is sitting on the tape right now.

CoreWeave is one of the most actively traded HY bonds. The 9.25% 2030s rose more than a point last week on news of another funding round, this time in the loan market.

Equity, HY bonds, levered loans, GPU backed financings, private debt. The capital stack is complex enough that recovery analysis in any stress scenario depends on which collateral package gets which GPUs at which utilization rates.

The simple version is a neocloud renting GPUs to enterprises. The actual underwriting is more layered. You’re long the assumption that

• GPU depreciation schedules reflect economic reality.

• Hyperscaler capex stays directional and doesn’t shift toward insourcing.

• New chip generations don’t compress the useful economic life of existing fleets faster than the bond term.

• Demand for neocloud capacity persists at margins that service the debt.

Each of those is debatable. None of them is being debated in the spread. The bonds continue to trade tighter implying the credit story is getting resolved.

That’s the pattern the late 1990s analog points to. Marginal infrastructure issuers being priced as if the demand story is resolved, in capital structures that depend on assumptions the spread isn’t testing. The shape is familiar even where the specifics differ.

The Inflation Tail Not Being Discussed

The capex cycle isn’t happening in a vacuum. It’s happening in a macro setup that’s been quietly building its own vulnerability.

Financial conditions are easier than they were pre-conflict despite oil 50 percent higher and one year inflation swaps trading 75 bps higher, implying headline around 3.2%. The market is pricing more growth and more inflation simultaneously and treating it as benign.

Labor stabilizing into the same impulse. NFP printed 115k after 185k. Initial claims four week average at 203k. JOLTS quits at 2%. None of this looks like an economy rolling over.

Reduced immigration on top of a tightening labor market raises the odds of second round core inflation from the headline oil shock. Wages are the transmission channel. The Fed isn’t pushing back.

If the inflation impulse from the war translates into stickier core through wages, the long duration universe is the wrong place to be sitting. Sector tape was already telling you this last week. Basic Industry, Other Industrial, and Consumer Cyclical led for the month. Communications and Transportation lagged.

The reflation trade is starting to leak through into credit. Most accounts haven’t repositioned for it.

What the Week Said

HY finished up 0.05%. Equities at all time highs. OAS on the index closed at 266 bps, tightest since January. Yields tightened five basis points to 6.94%. Iran de-escalation, a strong NFP print, and another wave of corporate beats did the heavy lifting.

The primary market did the rest. The busiest week by deal count since May 2024. YTD volume tracking 50%+ ahead of last year. Eight deals cleared on Thursday alone for more than $5 billion. Yahoo brought a $900 million deal at par to yield 11%. Hilton priced $1 billion of 5.5 year notes. Level 3 Financing took down $1 billion to fund a tender.

Secondary was orderly. Solaris broke at 101 plus. Sabre gained 4 points on a beat. CoreWeave rose more than a point on news of another funding effort. Forward Air dropped after disclosing it found no viable buyers. Idiosyncratic. Worth flagging because everything else in the tape ran the other direction.

Where This Leaves You

The point isn’t that AI is a bubble. Might be. Might not be. The capex cycle might justify itself with productivity gains that make the depreciation schedules look conservative. Or it might not.

The point is the credit market is now structurally exposed to that question being answered correctly. $400 billion of AI related issuance in IG, growing volumes in HY, trillions more coming over the next three years.

The supply isn’t widening spreads today. It’s not supposed to. It’s building the vulnerability that determines what happens when the catalyst arrives.

Spreads grind tighter while the capex builds. The marginal buyer keeps showing up. The new issue calendar clears. Then something cracks the demand assumption underneath it. A hyperscaler cuts capex. A chip cycle obsoletes existing fleets faster than depreciation. A contract gets renegotiated. The catalyst is usually external. The vulnerability is always the supply that came before it.

The Fed’s contemporaneous data showed junk default rates in 1999 hitting recession era levels with GDP growing above 4 percent. The cracks were visible early. The catalysts came later.

Watch the cohort, not the index. That fragility is being built right now.

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If you liked this, you might also like:

JunkBondInvestor is an independent financial research publication providing general market commentary, corporate credit analysis, and educational content. The information provided is for informational purposes only and does not constitute investment advice, financial planning, or personalized recommendations of any kind. Nothing published constitutes a solicitation, offer, or recommendation to buy, sell, or hold any securities, nor does it guarantee any financial outcome. Any credit opinions or outlooks expressed are solely the independent views of the authors and are intended to reflect general credit trends, not specific investment recommendations. Investing in high-yield bonds, distressed debt, and leveraged loans carries significant risk including potential loss of principal. JunkBondInvestor operates under the Publisher’s Exemption of the Investment Advisers Act of 1940 and applicable state laws. This issue includes sponsored content and partnership links. JunkBondInvestor receives compensation from sponsors for featured placements and may earn referral fees from partner programs. All sponsored content is clearly marked. Editorial views and recommendations are independent and not influenced by sponsor relationships.

You saw the interview. Everybody saw the interview.

Sorkin asked the question three times. How does the math work? Eleven billion market cap, nine billion of cash, twenty billion highly confident letter from TD.

The deal is fifty-five.

Cohen’s answer: “I don’t understand your question.”

He understood the question. The deck answers the question. Sorkin walked through the math himself on air before he asked it the second time. Cohen still wouldn’t say it.

But while the financial press argues about how and whether the deal closes, they aren’t asking the question that decides everything else. Will the leveraged finance market clear this paper? At what yield? With what structure? Not whether Cohen wants to do the deal. Whether credit investors will absorb the deal he’s proposing.

And perhaps the more important question: is it enough?

The Proposal

Start with what’s actually on the table. GameStop’s offer values eBay at $125.00 per share, structured as 50% cash and 50% GameStop common stock with full election rights and pro-rata allocation. At eBay’s share count, that works out to a ~$55.5 billion equity purchase price. It’s literally laid out in his 1-page memo:

The offer represents a 27% premium to the 30-day VWAP and a 46% premium to the unaffected closing price on February 4, 2026, the day GameStop began accumulating its position. That position now stands at ~5% of eBay’s economic ownership, built through a combination of common stock and derivatives.

The cash half of the consideration, around $27.8 billion, would be funded from $9.4 billion of GameStop cash and the $20 billion TD highly confident letter. A highly confident letter is not a commitment, which we’ll return to.

Ryan Cohen would serve as CEO of the combined company following close. His compensation structure carries no salary, no cash bonus, and no golden parachute. He owns ~9% of GameStop and would be compensated solely on the performance of the combined entity. GameStop’s board has unanimously supported the proposal. eBay’s board acknowledged receipt and is reviewing.

GameStop has signaled willingness to pursue a proxy contest if the board is unreceptive. That is the offer.

GameStop’s Capital Structure

GameStop’s balance sheet is the constraint here, not the strategic logic.

The company has ~$9.4 billion of cash and marketable securities as of January 31, 2026. That cash got there in fiscal 2025 through a combination of ATM equity raises and $4.2 billion of zero-coupon convertible notes across two tranches: $1.5 billion due 2030 with a $29.85 conversion price, and $2.25 billion due 2032 with a $28.91 conversion price.

GameStop trades around $24 today. Both tranches are out of the money, but volatility is high enough that both trade around 107. I wrote about the setup late last year.

The notes are senior unsecured. There are no covenants restricting additional debt. The notes include a Fundamental Change repurchase right, but the indenture’s public-stock exception means a GameStop-as-survivor structure doesn’t trigger it. The $4.2 billion stays in place.

What Will Actually Clear Credit Markets

GameStop is proposing to raise up to $20 billion of new acquisition debt against a pro forma cash flow base that depends on $2 billion of cost synergies. I’ll work through the synergies first, because they determine pro forma EBITDA, which determines leverage, which determines pricing, which determines whether the debt syndicates at all.

Synergies: What Credit Markets Will Actually Underwrite

Credit markets do not typically underwrite 100% of a sponsor’s synergy plan. They often underwrite a haircut version of it.

Cost takeouts that eliminate duplicative headcount and overhead get most of the credit, sometimes with a 12 to 18 month phase-in. Cost takeouts that reduce investment in the customer or the product get heavily discounted, because credit committees have seen too many deals where revenue follows the spending cuts down. Synergies framed as run-rate within 12 months almost always get pushed to 24 or 36 months in the underwriting case.

Apply that lens to the $2 billion GameStop is claiming.

• G&A ($500M claimed) is the most defensible. Two public companies merging into one means duplicative finance, HR, legal, IT, real estate, and professional services. Eliminating one CFO, one general counsel, and consolidating audit and compliance is straightforward. Credit investors will probably underwrite $300-400M within 24 months; the full $500M is plausible by year three.

• Product development ($300M claimed) is harder. eBay’s product development spend grew 11% in fiscal 2025 against revenue growth of 8%, which GameStop frames as overspending. The counterargument is that the AI-driven listing and search improvements driving the recent acceleration in GMV growth are exactly what that spending is buying. The new “Magical Listing” experience drove a 50% increase in new listing creation rates and double-digit increases in sold items per seller. Cutting $300M here means cutting into what is currently working. Credit underwrites maybe $100-150M, and only with a multi-year phase-in.

• S&M ($1.2B claimed) is the most aggressive line. GameStop’s framing is that eBay spent $2.4B on S&M in fiscal 2025 and only added one million net active buyers. That ignores that eBay is in the middle of its strongest GMV growth in years, with US GMV up 27% year over year and focus categories up 24%. The marketing spend is correlated with the growth. Cutting it in half assumes the growth holds without it. Credit markets will not underwrite that. This amount is haircut by 2/3rds to $400M.

Under this logic, credit markets will give the deal credit for roughly half of the claimed synergies, phased over 18 to 36 months. Year-one synergies in the underwriting case are closer to $300-500M. I’m not saying this is necessarily what is achievable or will happen but this is what creditors, who are conservative by nature, will likely be willing to underwrite day 1.

That is enough to keep the financing conversation alive. But once the synergy case is haircut, the question now becomes how much leverage can this company actually carry?

Read more

Software for car dealerships. Brookfield bought it in 2022 for ~$8 billion. $5.5 billion of debt. The type of credit under AI crosshairs.

The 1st lien term loan trades at three different prices right now. SteerCo around 61. Initial party around 58. Non-coop paper around 48. Three tiers on identical paper, decided by which email you got and what time you signed it. Top to bottom, that’s roughly 13 points of spread on the same claim.

Ten years ago an LME (liability management exercise) meant creditors vs. the company. Adversarial but symmetric. Both sides had counsel, both sides had leverage, everyone went home with something.

Five years ago the fight became creditor on creditor through document changes. Serta, Envision, PetSmart. The sponsor and a subset of creditors would amend the docs to subordinate everyone else. Drop down the IP. Issue super-priority new money that primes the existing first lien. The lenders who got cut out ended up holding paper that had been legally subordinated by document amendments they couldn’t stop.

Now the fight has moved one level deeper. No drop-downs or priming. Same instrument, same indenture, same claim. The differential recovery comes from a private cooperation agreement that the participating lenders sign with each other. The paper is identical. The economics are not.

The Friday Email

Here’s how the three tiers got built.

A group of CDK’s largest 1st lien lenders signed a cooperation agreement earlier this year. The pact bound them to negotiate as a bloc against any sponsor-led restructuring. Standard playbook for the early stage of an LME setup. That group became the SteerCo.

A few days later, a separate group of holders who hadn’t been included in the original coalition started organizing their own pact. Different economics. Different terms. A genuine attempt to fragment the lockup before the sponsor showed up to negotiate.

That’s when the Friday email arrived. That afternoon, the existing creditor coalition emailed a select list of holders. The initial cohort would close at 13.5%. The offering would close shortly. Hours, not days.

A competing creditor faction had been organizing a rival pact. The Friday email killed it inside 72 hours.

The coop itself is a legitimate legal contract. What’s changed is how it gets built. Advisors aren’t waiting for creditors to find each other and coordinate. They’re running the formation as an outreach process, identifying preferred participants, and using time pressure to drive lockup before anyone else has a chance to organize.

There is no statute that produces 13.5%. The artificial cap was set high enough to give the SteerCo the lockup they needed and low enough to leave a meaningful slug of creditors outside, where the second tier could be sold to them on worse terms. Manufactured scarcity creates the bloc.

The Friday timing did the rest. Advisors had spent days knowing the cap was coming. The recipients had hours. Nobody had time to coordinate with anyone else before the offering closed.

This wasn’t sloppy. The advisors knew exactly what they were doing.

The Advisor Tax

A large, heavily negotiated coop can run through multiple advisor seats. Company counsel. Company financial advisor. SteerCo counsel. SteerCo financial advisor. Sometimes separate counsel for excluded or late-joining creditor groups. That can mean $10+ million of professional fees before the company has solved anything. In the ugliest situations, with litigation, multiple creditor factions, and serial amendments, the number runs higher.

The exact number matters less than the structure. The advisors are the only constituency with guaranteed recovery.

The creditor economics are less certain. The 13 point spread between SteerCo and non-coop paper is the full waterfall. What the SteerCo actually captures vs. the next tier down is closer to 3 points, the marginal economics of being in the top group rather than the second. Add a coop fee, potential backstop economics, and whatever priority or exchange consideration the participating group receives, and the headline can look like high-single-digit points. But that value is paper value until the structure survives the next fight. And on the empirical track record, 75%+ of these deals end up filing anyway within 24 months. The LME is just a toll road to the eventual filing.

This Is Not Lending Anymore

Think about what’s happening. Some of the brightest people are spending months game-theorizing how to extract a few points of recovery from each other on a software company that runs car dealership paperwork. That’s the activity.

Lending used to mean something. You looked at a business. Decided whether it could service the debt. Priced the risk. Bought the bond. The borrower paid you back or they didn’t. If they didn’t, you took the keys and ran the workout.

That isn’t what is happening at CDK. The credit decision was made years ago, by people who in many cases don’t even work at the funds that hold the paper anymore. The activity now is structural extraction. Analysts at the largest credit shops are spending weekends on calls about which 13.5% of which sub-tier gets which fee on which tranche. Law firm partners are billing hundreds of thousands a month to design the structure they’re extracting from. Junior bankers and associates are pulling all-nighters on cap tables and inter-creditor agreements that exist solely to determine who gets better economics on the same loan.

None of this makes CDK better. The company still has the same software, the same dealer customers, the same competitive pressures, the same management team. Not a dollar of the advisor activity flows into the operating business. Not a single car gets sold faster because of these activities.

We’ve built an entire industry that produces no goods, generates no growth, and exists to redistribute existing claims among professional creditors after netting out an enormous advisor tax.

You can call that a lot of things. Lending is not one of them.

People on the buyside don’t openly publicize this because every fund reading this either paid those fees last quarter or wants to be in the SteerCo next quarter. Saying any of this in public means burning a relationship with whoever runs your next deal. The other dynamic is uglier. Credit analysts are on the phone with advisors every week. Advisors are the source of deal flow, color, and process information. A fund that publicly criticizes the model loses access to the flow. The flow is worth more to the fund than the criticism is to the asset class.

The Trap Captures You Twice

Once a SteerCo exists, every other creditor has to choose between joining a tier with worse economics or staying out and accepting worse subordination. Bad versus worse. Advisors built the room. Creditors get to pick a corner.

The CDK price split makes it visible. Importantly, the 48 cent paper isn’t just subordinated economically. It’s illiquid. Price discovery has fractured across three tiers. A holder trying to sell at 48 finds a thin bid because nobody knows how to value paper whose recovery depends on which tier the next buyer would land in. Captured twice. Once on recovery. Again on the exit.

In a world without coops, every creditor has the same legal entitlement under the indenture, and the sponsor has to negotiate with the class as a whole. With coops, the sponsor negotiates with the SteerCo. The indenture gets bypassed by a private contract that the non-signers never agreed to but are bound by economically.

Where This Goes

The structure repeats. Some version of what happened at CDK is going to play out at every distressed software credit hitting its maturity wall over the next 18 months. The advisors are running the playbook. The buyside knows it and signs anyway, because the alternative is being the holdout in a fragmented class with no leverage.

But the holdout case is real in the right setup. Where coop participation is concentrated in a small SteerCo and the maturity is near-term, holding out can produce a better outcome than signing. CDK probably isn’t that setup. Others will be. I wrote about the holdout trade last month.

This is the game now. The structure didn’t exist five years ago. It exists now. Every distressed software credit is going to be priced through it. Pricing it correctly is the work.

Market Performance

HY total return finished flat on the week at +0.05%. CCC led at +0.37% and are outperforming YTD at +1.77%. HY spreads tightened to 264bps. Index yield at 6.94%, sitting in the 36th percentile of the 52-week range. CCC spreads at 672bps, at the 60th percentile of the range. The dispersion is real even as the headline tightens.

Primary Market

HY printed $7.6 billion this week bringing YTD issuance over 50% vs. last year. A&K Travel debuted at 7.50%. FirstCash and Oxford Finance both upsized. The bid for paper outside the AI blast radius is intact.

Secondary Market

JBI Bulletin Board

1) Octus

Octus recently published a whitepaper, The Matured Private Credit Mandate, that gets into the private credit maturity wall I’ve been talking about, what restructurings actually look like when they get resolved, secondary market growth, and the $800 billion AI infrastructure gap keeping deployment alive.

Definitely worth a download if you cover the space.

2) Endex Partnership

I’ve been using Endex for a few months now. It’s an AI agent tool built specifically for excel. It’s my go-to tool for putting together charts and spreading financials (with sourceable citations). Worth checking out.

3) Wharton Online Partnership

Wharton Online and Wall Street Prep have an upcoming Restructuring and Distressed Investing Certificate Program. Starts June 8th. The program covers capital structure, bankruptcy mechanics, and distressed investing, led by practitioners at firms like Silver Point and Ropes & Gray. Code JUNKBOND gets you $300 off, with another $200 off if you enroll by May 11.

4) Now Hiring: Technology/Software Credit Analyst

I’m looking to bring on a dedicated technology/software credit analyst. At least a couple of years covering the sector, buy-side experience strongly preferred. You should know the names, know the docs, and the playbooks. If you’re interested or know someone who fits, reach out with a brief note on your background.

If you liked this, you might also like:

JunkBondInvestor is an independent financial research publication providing general market commentary, corporate credit analysis, and educational content. The information provided is for informational purposes only and does not constitute investment advice, financial planning, or personalized recommendations of any kind. Nothing published constitutes a solicitation, offer, or recommendation to buy, sell, or hold any securities, nor does it guarantee any financial outcome. Any credit opinions or outlooks expressed are solely the independent views of the authors and are intended to reflect general credit trends, not specific investment recommendations. Investing in high-yield bonds, distressed debt, and leveraged loans carries significant risk including potential loss of principal. JunkBondInvestor operates under the Publisher’s Exemption of the Investment Advisers Act of 1940 and applicable state laws. This issue includes sponsored content and partnership links. JunkBondInvestor receives compensation from sponsors for featured placements and may earn referral fees from partner programs. All sponsored content is clearly marked. Editorial views and recommendations are independent and not influenced by sponsor relationships.

The realized losses keep coming, quarter after quarter. The equity market has decided NAV is severely overstated and priced it accordingly.

What about the bonds?

They got downgraded to junk earlier this year. $3.75 billion outstanding across seven tranches, Ba1, sitting above the equity. The 2030 notes yield 6.8% to maturity. That’s 291 bps against a BB index at 164. FSK is trading 120 bps wide of BBs with a portfolio that’s been bleeding realized losses for over a year.

Is that enough?

What’s in the Portfolio

The quick headline numbers:

• Weighted average yield on accruing debt of 10.0%

• 3.4% non-accrual rate at fair value, 5.5% at cost

• 88% floating rate, top 10 concentration is 19%

• Median portfolio company EBITDA is $132 million at 5.8x leverage

First lien senior secured loans are only 58% of the portfolio. Asset-based finance is 13%. Credit Opportunities Partners JV is 15%. Preferred/common equity is ~9%.

The combination of ABF, COPJV, preferred equity, and equity adds up to 37% of the book. That’s the part of the portfolio where management has more discretion on marks and where the underlying risk is harder to assess from the outside. We’ll come back to COPJV.

The realized loss run rate is pretty atrocious. Five quarters in a row of negative realized losses. That’s $517 million of cash losses on the portfolio over fifteen months, or about $414 million annualized.

These are not mark-to-market write-downs that bounce back. These are loans being exited at less than par. For context, the entire portfolio is $13 billion, so we’re running at roughly 3.2% of the book in realized losses per year. Elevated compared to the broader BDC peer group and remarkably consistent.

Twenty one positions are on non-accrual. That’s the 3.4% number management quotes at fair value. The biggest are 48forty Solutions ($190 million marked in the 47 cent range), Lionbridge Technologies ($79 million at 85 cents), and Kellermeyer Bergensons ($40 million at 40 cents on the 2L while the 1L sits at par).

PIK income is running at $55 million per quarter, or about 34% of net investment income. Elevated. PIK accrues but doesn’t generate cash, and a non-trivial percentage historically gets impaired before it converts.

The credit stats on the underlying portfolio companies have been stable to slightly improving. Median EBITDA at $132 million is the highest it’s been since the merger. Median leverage at 5.8x and interest coverage at 1.9x are both fine. The typical loan in the book sits on top of a real business with real cash flow. The problem is the tail, not the median credit.

The Capital Structure

FSK runs ~$7.6 billion of debt against a $13 billion portfolio. Asset coverage is 180% against a regulatory floor of 150%. Net debt to equity is 1.22x, comfortably inside the 2x BDC statutory limit. On the surface, the balance sheet looks fine.

The big piece is the senior secured revolver due July 2030 with $2.53 billion drawn (I assume the ‘26 maturity was paid with a RCF draw) against $4.7 billion committed, priced at S+188bps. There are three smaller bilateral facilities totaling $594 million. Then two CLO tranches totaling $743 million at SOFR+148 to 215. The revolver has $2.2 billion undrawn, which is the company’s emergency liquidity if the bond market closes.

Unsecured bonds are $3.75 billion across seven tranches, all rated Ba1 by Moody’s. Two tranches mature in 2027, $400 million and $500 million, with coupons of 2.625% and 3.250%. Issued during the ZIRP era. They mature in January and July 2027, and they likely have to refinance into the high yield market.

Outside of that, maturities are spread across 2028, 2029, 2030, and 2031, with the secured CLOs running out to 2037 and 2038. There’s no single year where more than a billion of unsecured comes due after 2027. The company has time.

The weighted average effective rate across the entire debt stack is 5.1% as of Q4 2025. That’s down from 5.4% a year earlier, mostly because SOFR has come off and the floating exposure benefits. Annual interest expense is running around $440 million. Against $588 million of adjusted NII annualized, interest is roughly 75% of pre-interest earnings. There’s leverage here, and the leverage works against the company if either NIM compresses further or refinancing costs rise.

Is the Portfolio Worth What They Say?

Reported fair value of the investment portfolio is $13 billion. Reported NAV is $5.85 billion, or $20.89 per share. The market values the equity at $10.51, a 50% discount.

Two questions to separate before going further. First, is the portfolio actually worth what management says it’s worth? Second, even if it is, what should the stock trade at?

Most analysis of BDC equity discounts conflates these. They’re different questions with different answers, and both are doing work in getting from $20.89 of reported NAV to $10.51 of market price. I’ll work through both.

I’ll get to the bond implications at the end. The work matters because it drives where the bond cushion really sits.

Read more

Thoma Bravo eats five billion. Lenders take the keys. AI breaks software. Private credit can’t underwrite risk. Fine, we get it.

But the people writing about it have no idea what they’re looking at.

Medallia is actually a win for private credit. And that’s coming from me. Here’s what I mean.

Take the Keys Now

When a software borrower can’t refinance, the lender has two choices.

1. Amend and extend. Collect a fee. Push the maturity 18 to 24 months. Hope the AI question gets less scary or the business stabilizes. This is what most situations get.

2. Or take the keys. Cut the debt to a serviceable level, take the equity, run the business for cash.

A&E is rational when the business has terminal value. Borrower stabilizes, growth resumes, the credit refinances in 2029 or 2030.

When it doesn’t, A&E is just “kicking the can.” The interest is still going out the door. The business is still shrinking. The equity below you is impaired. You’ve delayed the inevitable for 2 years in exchange for an amendment fee that hits NII this quarter and a sponsor who’s playing for optionality with your principal.

You should always take the keys when terminal value is gone. Cut interest. Run the business for whatever cash flow it produces. Harvest the recurring revenue book until all the remaining customers churn. Distribute the cash up to LPs as the asset winds down.

The runoff math at Medallia is directionally workable, even if it’s ugly. To be clear, what follows is illustrative. I have no real visibility into Medallia’s financials beyond the $200M EBITDA figure reported in the press. The numbers are meant to show order of magnitude, not precision.

Start with the $200M of EBITDA. Assume the business declines 8% a year as enterprise customers move to AI-native alternatives and Qualtrics continues taking share. EBITDA margin compresses 100 bps a year from operating deleverage. Capex at 3% of revenue. Cash taxes near zero with LBO NOLs.

Cumulative unlevered FCF over the 10-year hold: ~$1.0 billion. Plus residual sale value at year 10 on a $355M revenue business doing $64M of EBITDA, call it 3-4x trailing for $200-250M.

Nominal recovery on a $3 billion loan: $1.25-1.35 billion, or 40-45 cents.

The PV is a different number. Discount those cash flows at 10% and you’re looking closer to 25-30 cents on a present value basis, plus the discounted residual. Still real money. Better than zero. But the nominal recovery and the PV recovery aren’t the same thing, and anyone modeling this should run both.

A 5% revenue decline gets nominal recovery to 55-60 cents. 12% drops it to 30-35 cents. Margin compression assumptions move the answer further. The point is the order of magnitude. To be clear however, a 55-60 cent nominal loss on a workable runoff isn’t a defense of the investment.

The actual disaster on Medallia is the PE side. Thoma Bravo loses essentially all of the $5 billion of equity. PE economics need multiple expansion or EBITDA growth. You can’t run a SaaS business in managed decline when your LPs hired you to compound capital.

Why Private Credit Beats BSL Here

Picture the same loan in the syndicated market. $3 billion of debt, software business, 2021 vintage, AI disruption baked in. Run the workout.

50+ lenders. CLOs whose indentures don’t permit holding equity. Hedge funds who bought at 60 demanding fast equitization while the original lenders at par need to defer recognition because their fund mark depends on it. Distressed funds running the same creditor-on-creditor violence playbook they perfected in Envision and Serta. Everyone in the credit with a different cost basis, fund structure, and book to defend.

That coordination problem is why BSL software workouts in this cycle are probably going to recover 10-20 cents below the equivalent private credit outcome, all else being equal1. Not a function of weaker businesses. The lender group can’t act coherently. Slow value destruction through process.

Trey Parker at Sycamore Tree said something useful on the Credit Edge podcast last week. He flagged a slowdown in LME volume because sponsors are starting to figure out that creating enemies in the lender base has consequences when you need to come back to the same market two years later. Boomerang LMEs and repeat defaulters are the evidence that the BSL LME process doesn’t actually rehabilitate the borrower. We shall see if sponsors actually mean it.

The Medallia process looks nothing like that. Five lenders, give or take. Blackstone in the lead with KKR, Apollo, and Antares around it. Same vintage, similar fund vehicles, all carrying lofty marks until the recent moves. They hired A&M and started negotiating among themselves. Debt comes down. Equity goes to creditors. Business runs for cash.

No priming because the lenders are already first lien. No uptier because the lenders are aligned by structure rather than fighting each other for residual value.

Ninety days, outside of court, no litigation, with the same lenders who’ll be writing the next loan to the next sponsor next quarter.

This is where private credit pulls ahead, and it shows up exactly when the cycle turns. When everything is fine, BSL and private credit look interchangeable. When things break, BSL is litigation and value destruction. Private credit can be a quick handover. In theory.

The Business Was Already Broken

The AI narrative is doing too much work for people who don’t want to look closely at what actually happened.

I actually caught Medallia in the wild last week. “Please take our 1-minute survey to help us enhance your airport experience.” Powered by Medallia. Begin Survey button.

I did not begin the survey. Nobody did.

This is the asset. $200 million of EBITDA. A survey button at a boarding gate that nobody presses. Terminal value already in question before AI showed up.

On top of that, Medallia’s interest expense shot up in 2022 when the Fed raised rates. Sales suffered from competition with Qualtrics, itself another PE-owned software business with its own debt issues.

Cap stack sized in 2021 for a 0% rate world and a growth path that didn’t materialize. Rates went up. Growth slowed. The interest burden ate the cash flow. AI is the accelerant. The fire was already lit.

Diameter’s Lewinsohn used the right framework on Bloomberg TV last week. Vulnerable software businesses are the “call the weather” phone services that died with the internet. He gave data visualization as his example. Customer feedback survey software fits the same description. The terminal value is in serious doubt before you start adjusting for the operating issues that already existed.

The Refi Window Is Shut

The BDC unsecured bond market was effectively closed for six weeks until PIMCO took down the entire Blue Owl deal at 270 over. That market is open again, at the BDC level, for the largest names and increasingly others.

The market for refinancing single-name software LBOs is not. New direct lending spreads are 100 bps wider than 18 months ago. Capital is flowing into opportunistic and special situations vehicles, not into refinancing 2021-vintage sponsor-owned software at the same multiples and terms that originally got them done.

Roughly 40% of software debt maturing in 2028-2029. Capital markets shut at the borrower level. The take-the-keys vs. A&E choice is going to play out hundreds of times over the next 24 months.

But not the same way every time. The market has finally started pricing dispersion within software. Software engineering loans are down 16 cents since January. Horizontal SaaS down 10. Cybersecurity barely moved. Vertical SaaS held up the best. 11 cents of spread between the best and worst software sub-sectors, where there was almost none three months ago.

The dispersion matters for what comes next. Not every software credit is headed to a take-the-keys outcome. Some are vertical SaaS businesses with sticky enterprise contracts, deep workflow integration, and limited AI substitution risk in the near term. Those might get refinanced or A&E’d through the maturity wall and maybe come out fine on the other side.

Others sit closer to Medallia. Horizontal tools that solve a generic problem AI can also solve. Customer feedback. Survey. Document automation. Basic analytics. Those credits don’t get to A&E their way out. The terminal value isn’t there to support the pretense.

The lender’s job over the next 24 months is figuring out which credit is which. The marks are starting to tell the story. The PIK insertion rate will tell more of it. By 2027 the dispersion will be obvious. Right now it’s still emerging, and the managers who get this triage right will own the next vintage.

PIK Was the Leading Indicator

Affordable Care is the other story to pay attention to. Blackstone and KKR are restructuring a $1.4 billion private credit loan made in 2021 for Harvest Partners’ buyout of the dental services platform. They marked it at 69.8 cents this quarter and moved it to non-accrual.

Read what Blackstone said about it. “We first marked down the loan 18 months ago and continue to be proactive in addressing underperformers.”

The mark moved 18 months ago. The non-accrual classification came this quarter.

Medallia tells the same thing on a faster timeline. 80 cents in December. 60 cents this month. Now non-accrual. Three quarters of mark deterioration before the official credit metric moved.

Credit deterioration in private credit runs through a long sequence. PIK toggle activation, covenant amendments, watchlist additions, fair value markdowns, non-accrual designation, restructuring, realized loss. The full sequence takes 18-36 months from first stress to final loss recognition.

just reported 1Q’26 non-accruals at 2.1% on amortized cost and noted the figure is “still below long-term averages.” That’s a backwards-looking statistic. Realized losses being reported in Q1 2026 are the resolution of credits that first stressed in 2023 and 2024, before AI fears reshaped the conversation. They tell you nothing about the current cycle.

Moody’s said it explicitly in last week’s sector report. Liquidity is declining among middle-market borrowers. PIK usage remains elevated. In Europe, Moody’s flagged “growing use of PIK and amend-and-extend transactions” as signs of emerging weakness.

The two PIK signals are different animals.

1. Original-issue PIK, where the loan was structured with a PIK toggle from day one, is benign. The lender priced it in. The borrower used it as expected.

2. Mid-deal PIK is the leading indicator. A loan that started cash-pay and got amended to allow PIK is a credit officer’s admission that the borrower can’t service the original debt service. The official non-accrual stat doesn’t move because the loan is technically performing. The economic reality is a borrower in trouble.

That’s the number to track. Not non-accruals. Not realized losses. The mid-deal PIK toggle insertion rate.

What to Ask This Earnings Season

ARCC just reported. The other large BDCs follow over the next two weeks.

Every manager will tell roughly the same story.

“Non-accruals stayed low. Realized losses were minimal. Spreads on new originations are wider. Deployment pipeline is strong.”

Two of those four describe a different cycle.

Skip the realized loss line on the calls. It describes the last cycle.

Better questions. The percentage of the portfolio with marks that have moved more than 5% over the last three quarters. The count of names marked between 80 and 90 cents. The Medallia bucket, where most move to non-accrual within 12 months. Watchlist additions, where the acceleration matters more than the absolute level. The percentage of loans where PIK has been added through an amendment. The number of A&E transactions in the quarter and the average extension term.

The harder question nobody asks: what share of the non-accrual book is operationally cash-generative vs. structurally impaired? Medallia is the first version, and it’s a workable runoff. Plenty of names headed for non-accrual aren’t. The first analyst to ask that on a call gets a quotable answer.

Remember, none of these numbers will be volunteered. They have to be asked.

Medallia is the first big software keys handover. Most of what’s coming after it won’t go this cleanly. That’s the part to watch.

JBI Bulletin Board

1) Octus

Most BDC research covers about 19 names. Octus tracks 170+ public and private BDCs across the universe.

Their new whitepaper, The Matured Private Credit Mandate, gets into the maturity wall, what restructurings actually look like when they resolve, secondary market growth, and the $800 billion AI infrastructure gap keeping deployment alive.

Worth a download if you cover the space.

2) Endex Partnership

I’ve been using Endex for a few months now. It’s an AI tool built specifically for credit and equity research, with deep integration into excel. Saves me time when I’m spreading financials natively in excel, pulling data sets, or putting together charts. Worth a look if your job involves any kind of credit diligence work.

2) Wharton Online Partnership

I also recently partnered with Wharton Online and Wall Street Prep on their Restructuring and Distressed Investing Certificate Program. Relevant timing given the current market backdrop in software. The program covers capital structure, bankruptcy mechanics, and distressed investing, led by practitioners at firms like Silver Point and Ropes & Gray. Code JUNKBOND gets you $300 off, with another $200 off if you enroll by May 11. Starts June 8.

3) Job opening: Arena Investors

Arena Investors is hiring a Director / Managing Director, Senior Analyst on their high-yield corporate credit team. NYC-based, hybrid. Sole coverage of companies in specified sectors across their CLO platform and opportunistic credit funds, with flexibility to invest across the capital structure.

Check out the full details on LevFinJobs.

If you liked this, you might also like:

JunkBondInvestor is an independent financial research publication providing general market commentary, corporate credit analysis, and educational content. The information provided is for informational purposes only and does not constitute investment advice, financial planning, or personalized recommendations of any kind. Nothing published constitutes a solicitation, offer, or recommendation to buy, sell, or hold any securities, nor does it guarantee any financial outcome. Any credit opinions or outlooks expressed are solely the independent views of the authors and are intended to reflect general credit trends, not specific investment recommendations. Investing in high-yield bonds, distressed debt, and leveraged loans carries significant risk including potential loss of principal. JunkBondInvestor operates under the Publisher’s Exemption of the Investment Advisers Act of 1940 and applicable state laws. This issue includes sponsored content and partnership links. JunkBondInvestor receives compensation from sponsors for featured placements and may earn referral fees from partner programs. All sponsored content is clearly marked. Editorial views and recommendations are independent and not influenced by sponsor relationships.

The implication every time is the same. The Fed was slow. Read the signal late. Waited for the smooth middle of the distribution to confirm what the tails were already screaming.

Tuesday at the Senate hearing he asked for the job. Called for “regime change in the way the Fed conducts policy.”

Then he told you what regime change looked like to him.

Trimmed means. Look through tariffs. AI productivity to carry the disinflation forecast.

Every item bends the same direction. Smoother read. Slower reaction. Lower bar to cut.

Request Access

What the Dallas Fed actually says

First, the setup.

Trimmed mean PCE is an inflation measure that ranks every item in the consumer basket each month, throws out a fixed percentage from the top and the bottom, and averages what is left. The idea is to filter outliers and reveal the underlying trend. Core PCE, on the other side, is the Fed’s main inflation gauge. It strips out food and energy because those bounce around. Both filters. Different numbers in different regimes.

The Dallas Fed published a paper on April 16 whose conclusion creates an immediate problem for Warsh’s preferred framework.

Trimmed mean PCE lagged core and headline in 1974. Lagged again in 2021. The trimmed mean cuts the top and bottom of the price change distribution. When that distribution skews positive, the measure strips more signal off the top than the bottom. What comes out is a downwardly biased read on the underlying trend.

The Dallas Fed says it in plain language. When skewness flips from negative to positive, the trimmed mean can mislead.

The distribution is skewing positive right now. Tariffs in core goods are doing the work. Non-housing core services have shown some acceleration in early 2026 and are becoming a larger source of upside outliers. The Dallas Fed flagged the combination explicitly. They added a second problem on top. Gradual price increases from tariffs may not register as outliers at all. The trimmed mean does not strip them out. It absorbs them slowly into the trend.

The institution that builds the index is warning that the index can understate inflation risk in this regime. Warsh is leaning on it anyway.

Look at the gap

Trimmed mean PCE is running at 2.3% through February. Core PCE is at 3.0%.

That is a 70 basis point gap that did not exist before September of last year. The two measures tracked each other tightly from 2023 through September 2025. Then they diverged. Core kept rising. Trimmed mean kept falling.

The gap is not noise. It is the asymmetric trimming the Dallas Fed warned about, showing up in real time. Tariff pass-through in core goods is creating positive skew. Abrupt moves get trimmed out. Gradual moves bleed in slowly. The measure is weak as an early-warning signal in this regime.

Bessent already moved

Scott Bessent was publicly calling for rate cuts not long ago. He recently acknowledged near-term cuts are inappropriate.

The question is whether Warsh pivots before or after he is confirmed. The Banking Committee votes April 29. Powell’s term ends May 15. That is the window.

The front end is not pricing this asymmetry. The base case for next week’s FOMC is hold, soften forward guidance, two 25 basis point cuts later this year. That same consensus also concedes core PCE is stuck at 3 percent.

The market is pricing both. That path requires energy fading, labor softening, and core rolling toward 2 percent on schedule. Without those, one side gives. Whichever way Warsh leans tells you which side gives.

The AI productivity argument is showing up in credit as inflation

Warsh has leaned on AI productivity as part of the case for a lower-rate path, even though he tempered the claim at the hearing.

Look at the leveraged finance pipeline.

Roughly $13 billion of data center high yield issuance hit in April alone. That is around 40% of total April high yield supply. Core Scientific brought a $3.3 billion deal at 99.25 OID. Edged Compute brought $1.3 billion. The BB-quality HY bid and IG crossover demand absorbed all of it without a hiccup.

The capex that promises disinflation is inflationary on the way in. The capex is happening now. The power demand is here. The labor competition for the workers building the infrastructure is too. The productivity gains are years out.

Warsh is using a multi-year disinflation narrative to justify a near-term rate cut framework. That timing mismatch is the problem.

The case for dovish-Warsh, and why it fails

For the dovish Warsh trade to work, most of these have to break the right way within twelve months.

AI productivity hits in six to twelve months, not three to five years. Tariffs prove one-off rather than persistent. Energy normalizes by Q3 with the Strait reopening cleanly. Non-housing core services rolls over rather than accelerating further.

That is a parlay, not a base case. Several require resolutions that are not in motion. The front-end base case requires the parlay to hit. That is a favorable path through several unresolved shocks, not a clean base case. The market is pricing it as if it were.

What this means for credit

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That’s the only question worth asking and management keeps answering a different one. DOGE. Tariffs. Budget pressures. Blame it on the cycle and offer a $2bn buyback program to make shareholders happy.

The equity market isn’t buying it and for good reason. Here’s Gartner’s Magic Quadrant, the product that built the brand. November 2025, generative AI model providers. IBM ahead of Anthropic. That’s all you probably need to know.

The stock is down more than 70% from its highs including 38% this year alone. Roughly $20bn of market cap vaporized. All due to multiple re-rating. Two separate single-day moves north of 20% after earnings.

Meanwhile, the bonds have barely budged. The 2028s at 140 over, the 2031s at 150, the 2035s at 195 bps. Held by sleepy long-only IG investors running a screen that still shows sub-1x net leverage, 70%+ FCF conversion, and an IG rating. A healthy business on the spreadsheet.

But is it really?

The Business Model

Gartner (NYSE: IT) is a ~$6.5bn revenue enterprise technology research and advisory firm, headquartered in Stamford, CT, with ~21,000 employees globally.

The business model works like this: pay an annual fee per seat, somewhere between $20,000 for basic research access and $80,000-plus for senior advisory, and whoever holds that seat can read Gartner reports, call a Gartner analyst, tap into peer networks, and attend Gartner conferences.

You know the magic quadrants every company references? That’s them.

The product is basically credentialed human expertise on technology decisions, originally aimed at IT leaders and, since the 2017 CEB acquisition, extended into HR, finance, legal, procurement, marketing, and supply chain.

The company operates under three segments, each with different economics.

• Insights: the subscription research engine. ~77% gross margins, ~90% of gross profit. ~14,000 enterprise clients across GTS (tech vendors) and GBS (functional leaders outside IT).

• Conferences: ~50 events a year, anchored by Symposium/Xpo. Blended ~45% gross margins. Revenue from attendee tickets plus sponsor fees from vendors paying to reach the audience.

• Consulting: small, project-based, contracting. ~27% gross margins. Contract optimization, sourcing, and benchmarking work sold into existing Insights accounts.

Contract Value (CV), the annualized book of active subscriptions, closed FY’25 at roughly $5.2bn. Clients pay annually and upfront, which coupled with minimal capex (<2% of sales), translates into robust FCF generation (70%+ FCF conversion).

What's Been Happening

The last 18 months at Gartner have been rough. CV growth, the metric the whole business ladders up to, has decelerated every quarter for four straight quarters. FY’24 exited at 8%. Q1’25 printed 5%. Q2 came in at 3%. Q4 at 1%, well below what consensus had modeled. Four consecutive misses against a progressively lower bar.

The equity has repriced accordingly. IT is down more than 70% from its FY’24 high of ~$584, with most of the damage concentrated in two single-day drops of 20%-plus following Q2’25 and Q4’25 earnings.

The multiple expansion that drove the stock through 2022-2024 has fully unwound and now hovers around ~7x NTM EBITDA.

Management’s explanation has been consistent and cyclical:

• DOGE: federal contract cancellations running at dollar retention near 50%, with the bulk of the renewal cohort concentrated in FY’25.

• Tariffs: 35-40% of the client base sits in tariff-exposed industries where capex cycles have stalled.

• Macro: cost-cutting across the enterprise base has stretched sales cycles and pushed existing accounts to trim seats at renewal.

The numbers beneath the CV headline are worse than the headline. GTS wallet retention, which measures how much existing clients spend at renewal versus the prior year, has fallen from 108.8% in FY’21 to 97.5% in FY’25. A book that used to quietly expand inside every account is now, in aggregate, shrinking inside them.

Inside that number, the small tech vendor cohort is the single largest drag. Gartner has called out small tech vendors as the primary driver of client count decline for multiple quarters in a row, with retention in that cohort running in the low-to-mid 70s.The deterioration started in FY’22 and has been uninterrupted since. DOGE and tariffs are FY’25 problems.

Management’s response has been to double down on capital return rather than change the business. FY’25 buybacks hit nearly $2bn against ~$1.2bn of FCF, the largest annual repurchase in company history, funded partly by drawing down cash and using incremental debt capacity. Another $1.2bn of authorization remains.

On recent calls, management has pointed to AskGartner adoption and analyst productivity gains as evidence the product transformation is working and CV will reaccelerate through FY’26-27.

The salesforce situation makes the setup worse. Quota-bearing headcount (QBH, the seat-selling reps that carry the renewal and new-logo targets) was reduced through FY’25, which pulled down average rep tenure at the same time the book turned.

Gartner reps take three to four years to ramp. Even assuming a cyclical recovery in FY’26, the salesforce that would need to capitalize on it is less tenured than the one that navigated prior cycle troughs. Any rebound will be shallower than historical comparisons suggest. Unsurprisingly, salesperson productivity has declined in lock-step.

Here’s what the bond market is saying.

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This one is very clean. Non-traded BDCs are facing the biggest redemption wave of their existence. They’re also sitting on $140 billion of broadly syndicated loans. BSLs are liquid, marked to observable prices, and can be sold in days. So that’s where the BDCs go to meet redemptions. Forced selling hits the tape, BSL prices dislocate in specific names for technical reasons, and public credit takes the hit.

Indiscriminate selling. The kind of thesis that reads well in a strategist note and gets repeated at every credit roundtable for six months running.

The question is whether it’s actually showing up in prices.

So I pulled the data.

The Mechanics Are Worth Walking Through

The entire thesis rests on BDCs being forced sellers of BSLs, and before getting to whether they are, it’s worth laying out what a non-traded BDC actually does when a tender window opens. Most commentary skips the part where a BDC’s funding hierarchy absorbs redemption pressure long before it ever reaches the Level 2 bucket, and that’s where the thesis tends to overreach.

A non-traded BDC facing a tender window has to meet redemption requests within 90 days, capped at 5% of NAV under standard repurchase policies. The cash comes from six places, roughly in order of cost.

The first source is organic portfolio cash flow. Interest payments, loan maturities, and prepayments generate meaningful liquidity every quarter.

OTIC disclosed $1.3bn in liquidity against a $6bn book. OCIC reported $11.3bn. Industry-wide portfolio cash flow has historically run around 8% per quarter, comfortably above the 5% redemption cap. That historical average may understate current conditions though, given rising PIK, slower prepayments, and extension activity.

Cash on hand comes next, generally 2-5% of NAV at most vehicles.

After that, revolver capacity. Most BDCs carry significant undrawn capacity on their credit facilities, but each draw pushes leverage toward the 1.0-1.25x internal cap these vehicles operate under. Breaching the cap carries real consequences: ratings pressure, tighter covenants on the next refinancing, reduced NII as interest expense climbs.

New debt issuance sits fourth in the hierarchy and it’s still functioning for the larger names. GSCRED and OBDC both printed notes this week at spreads 30-50 bps wider than where they would have cleared six months ago, but the window is open for BDCs with scale and rated paper.

CLO warehousing is the fifth lever. Private credit CLO issuance is running near record pace this year, roughly $9.5bn YTD, with BDCs retaining meaningful portions of junior tranches across the industry. That extends leverage one level deeper inside the securitization in a way that doesn’t surface cleanly in the headline debt-to-equity ratio, but it generates cash.

Level 2 BSL sales come sixth. This is where the contagion thesis lives.

Beneath that sit Level 3 sales, which is the ugly option because secondary bids for private credit paper sit below par and selling at 85 or 90 cents means booking losses that flow into NAV. Suspending redemptions is the break-glass last resort.

Nobody’s forecfully selling yet. At least not meaningfully below par.

The implication of the hierarchy is that BSL selling only begins once the upstream levers are substantially exhausted. If portfolio cash flow, revolvers, debt issuance, and CLO warehousing are still absorbing the redemption pressure, the transmission into public markets simply doesn’t activate. The question of whether the mechanism is live becomes, more precisely, a question of whether Q1 pushed those upstream levers far enough.

Q1 Put Real Pressure On Those Levers

The entire non-traded BDC industry either capped or stretched at the 5% redemption limit in the same quarter, which is a different situation from the episodic pressure individual vehicles have faced in prior cycles.

Back-leverage terms have tightened meaningfully across the major banks, with spreads widening 50-150 bps over the past six months. JPMorgan, Goldman, and Barclays are exercising markdown rights on collateral that most sponsors assumed would never actually be used in practice.

Fundraising has stalled alongside all of this. Direct lending raised $10.7bn in Q1 against $27.7bn in Q4, which removes the flywheel dynamic where new AUM historically funded distributions in the background while the portfolio matured.

None of the top four levers have exhausted. But they’re all under real pressure simultaneously, and the pressure is compounding rather than dissipating. If redemption requests persist through this year and next at anywhere near the Q1 pace, the buffers thin out and the marginal cost of each successive draw rises.

Which shifts the question from whether BSL selling could eventually happen to what it would look like when the relief valve opens. That turns on what BDCs are actually holding in the Level 2 bucket.

The Level 2 Bucket Isn’t A Random Slice Of The BSL Market

BDCs don’t accumulate Level 2 positions randomly. They hold BSLs that overlap with their private origination footprint, which skews the bucket toward the same sectors where those BDCs lend privately. Software, business services, and healthcare services are disproportionately represented in the Level 2 book relative to their weight in the Leveraged Loan Index, and the concentration is meaningful enough to matter when the selling starts.

The problem with that concentration is that it’s already adverse. These are the sectors where CLO managers have been pulling back on new exposure for several quarters, for all the AI-disruption reasons the market has been working through since the fall. Which means the marginal BSL seller (a BDC meeting redemptions) meets the marginal BSL buyer (a CLO that’s already trying to reduce exposure to the same sectors) in precisely the credits where both sides are most stressed.

Prices gap rather than drift when the buy and sell sides are concentrated in the same names, and a BDC balance sheet problem becomes a BSL market problem at that point. From there the situation compounds, because the BSL market doesn’t absorb concentrated selling passively. It has a buyer base with hard structural constraints that can shift from absorber to amplifier faster than most of the contagion commentary has acknowledged.

Why CLOs Can Flip From Absorber To Amplifier

CLOs hold roughly 70% of the BSL market, which makes them the structural buyer, but the extent to which they absorb forced selling or amplify it depends heavily on how constrained their balance sheets are when the selling starts. CLO managers don’t buy unlimited quantities at any price. Overcollateralization (“OC”) tests require the collateral pool to maintain minimum par value relative to the debt tranches, CCC baskets cap exposure to distressed credits, and weighted average price tests constrain overall portfolio composition.

A CLO that buys a stressed loan at 85 cents and holds to maturity is generally fine on expected P&L. But if that loan gets downgraded or other loans in the portfolio get marked down, the OC test can fail, which triggers cash diversion away from equity holders and toward paying down senior debt. Managers running tight OC cushions can’t absorb forced selling even when they’d like to, and when the selling concentrates in specific sectors where CLO exposure is already elevated, the constraint binds faster than it would in a more diversified selling wave.

The cascade from there is fairly predictable.

Imagine BDCs sell BSLs into weakening CLO demand. Prices widen in the concentrated sectors. OC tests tighten. CLO managers stop adding and start rebalancing out of the weakest names. BSL widens further. New CLO issuance slows because the arbitrage math breaks at wider spreads, and CLO warehouses that were loaded in Q4 2025 at tighter levels get stuck holding paper that can’t price cleanly into a deal.

The knock-on effect reaches past secondary prices. Private credit borrowers who were planning to refinance their PC debt into BSL, which could be a natural release valve for stressed PC loans throughout this cycle, find the venue either closed or too expensive. They get pushed back into PC-internal solutions: amend-and-extend transactions, PIK toggles, liability management exercises. Which increases PC stress, which increases BDC redemption pressure, which forces more BSL selling.

Private credit stress transmits to public credit through the BDC BSL sleeve, and public credit weakness reflects back into private credit by closing the BSL refinancing channel. The loop feeds itself once it starts, which is why the question of whether it’s started matters more than the question of whether the mechanism could exist in principle.

The Thesis Is Clean. The Question Is Whether The Data Agrees.

The argument above sounds good on paper. The mechanism is coherent. The funding hierarchy is real. The redemption pressure is real. The sector concentration is real. The CLO feedback dynamics are real.

If the mechanism is live, the evidence should show up in BSL prices for the specific credits that BDCs are most likely to be selling. The concentrated sectors should be widening faster than the aggregate index. Names that appear across multiple BDC Level 2 books should be underperforming otherwise-comparable names that don’t.

That’s testable.

So I picked a non-traded BDC with meaningful BSL exposure, pulled up its BSLs, and priced each one at three specific points: December 31, 2025 as year-end, March 3, 2026 as the leveraged loan market low, and April 20, 2026 as current. Then I compared the movement of those names against the aggregate leveraged loan index and the technology subindex, to see whether the BDC-held names were moving with the broader market or showing concentrated selling pressure beyond what the index reflected.

Here’s what I found.

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Going into March, Avis was a deteriorating but not yet broken credit. Net leverage around 7.5x. Negative FCF in 2025 of ~$700mm. Bonds widening but not distressed. A 2027 maturity and a management team in the middle of a turnaround that hadn’t yet shown results.

The 4Q print made it worse. EBITDA missed by $100mm+. DPU blew out to $338 against a sub-$300 guide. A $518mm impairment on the EV fleet. The 2026 guide came in $150mm below where anyone was modeling. The business had not stabilized and the credit trajectory was clearly lower, not higher.

That was the setup 8 weeks ago. Coming out of that print, the consensus framing was straightforward. Avis would be in trouble if things didn’t turn, and the turn wasn’t visible in the numbers.

The stock is now up 300%+ from the March lows. The bonds have tightened materially. Management has filed an ATM shelf that’s about to take out most of the 2027 maturity wall through an equity raise. None of that was in the consensus credit model 8 weeks ago.

Worth walking through how we got here, because the answer isn’t a fundamental improvement.

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What actually happened

In late February, Pentwater Capital disclosed a 10% stake in Avis. An April Form 4 showed the direct stake had grown to 22%, plus synthetic exposure through cash-settled total return swaps. Combined with SRS Investment Management’s 49% position, two holders controlled over 70% of the shares directly, and more than 100% once the synthetics were layered in.

Short interest at 54% of the float. Section 16(b) kept the sellers on the sidelines. The squeeze math was visible in the filings by late March.

The stock roughly doubled from late February through early April on the ownership math alone, moving from around $97 to $190 before Iran escalated on April 7. Everything Avis did beyond the rental car tailwind was the squeeze.

A few things about the Iran conflict worth unpacking.

First, the domestic travel substitution. Americans who had planned European trips are expected to start rebooking domestically, which is supportive for airport rental car demand. Avis’s US business captures that directly. Not enormous in dollar terms, but directionally positive for 2Q and 3Q rental days and RPD.

Second, the used car price channel. Crude up meaningfully pushes input costs higher on new vehicles, which supports used vehicle residuals and therefore Manheim. The March Manheim rental risk index was already up 6.2% y/y, the best since July 2023. Iran escalated that trend. For Avis, higher residuals flow through DPU, which is the single biggest line item on the rental car P&L. A sustained Manheim tailwind matters more than the rental day volume.

Third, the macro backdrop. The Iran ceasefire last week opened the HY primary market to its biggest week since September 2020. Stressed paper got bid aggressively. The window for a stressed issuer to execute an opportunistic equity raise is as open right now as it’s ever been.

Add it up and Iran is unambiguously good for Avis on the fundamentals. Rental days up modestly, DPU down modestly, risk appetite up meaningfully. But the fundamental improvement is maybe $100-200mm of EBITDA if the ceasefire holds, against 2026 guidance of $800mm-$1bn. Useful but not enough to fix a credit with 7.5x leverage and a 2027 wall.

The pattern is mechanical. Shorted company with concentrated ownership sees a technical squeeze. Iran adds a geopolitical tailwind that makes the equity move more durable. Retail attention compounds it. Market cap expands faster than fundamentals justify.

Management, paying attention and not being stupid, files an ATM shelf and drips equity into strength. A $500mm raise at current prices deleverages the company by 0.5-0.7x and takes out most of the 2027 wall. The recap happens quietly while the bonds follow along. From signal to potential recap, about 60 days.

What the credit profession actually misses

For credit investors, focusing on the left tail is absolutely a rational mindset. You’re buying something with capped upside, so most of the work is figuring out what can go wrong. Recovery math, covenant protection, refinancing risk. That’s the job, and for most credits it’s the right job.

Where the bias shows up is the right-tail probability, and it gets ignored more systematically the closer a bond trades to par. At 40 or 50, distressed investors are already running right-tail scenarios. They have to. That’s the job at that dollar price. At 85 and above, with the credit stressed but not yet distressed, the analyst is still running the near-par playbook. Downside scenarios get modeled. The right tail gets underweighted.

The mechanism isn’t new. AMC, Carvana, and Hertz each went through a version of it. Stressed public company sees an equity catalyst, management issues into strength through an ATM or follow-on, and the proceeds deleverage the balance sheet. The bondholders benefit directly. By the time these outcomes got priced, the bonds were already distressed. Nobody wrote the recap up as a scenario when those names were still stressed but not broken. The framework didn’t include “management opportunistically issues equity into a squeeze” as a path worth weighting until the bonds had already cratered.

Not theoretical zero weight. Actual zero weight. Sell-side recovery work on AMC unsecured in mid-2020 clustered well below par. Avis is different because the recap is happening while the bonds are still near par. Nobody wrote the ATM recap up as a scenario going into the 4Q print. Eight weeks later the bonds are pricing differently, and they never had to go through distress first.

Equity leads, bonds follow

There’s a broader observation sitting underneath the Avis case.

Credit used to be the smart money. The discipline was built on doing careful work on the cap structure, the docs, and the recovery waterfall, and getting paid for that work because equity people weren’t doing it. Bonds moved first. Equity followed.

For many public credits, that has inverted. Equity moves first. Bonds follow. The variables determining the outcome are often equity-market variables. Float, short interest, insider lockups, retail flows, management willingness to issue into strength. The credit analyst modeling DPU and leverage is doing real work, but the work isn’t sufficient when the outcome is being set in equity markets.

AI datacenters are the cleanest current example outside the Avis pattern. The subsector of HY is massively outperforming the broader index YTD. CoreWeave’s 9% ‘31s are up almost 4 points in two weeks on no meaningful change in credit fundamentals. What changed is the equity narrative around AI capex and hyperscaler counterparties. The credit followed the equity.

That inversion doesn’t typically apply to IG or most of performing HY credit. But for a subset of public credits, equity is the leading indicator and credit is the price-taker. That’s a meaningful change in how information moves between markets, and it has consequences for where analytical effort actually produces edge.

The market this week

The same split shows up in this week’s tape. A primary market running hot for risk-on paper, left-tail names still grinding lower, and the biggest single-name moves sitting in distressed credits that got repriced on non-fundamental catalysts.

HY primary printed $16.5bn across 16 tranches. Biggest week in the last 2 years. Meridian Arc’s $5.7bn AI data center deal was the largest AI-driven HY print on record. CCCs led gains. 2026 supply on pace to be up 25% year-over-year. The Iran ceasefire opened a window and stressed paper got bid aggressively.

The primary pipe is telling you risk appetite is back. Meridian Arc clearing at 6.25% secured. CoreWeave printing a $1bn add-on on top of last week’s deal. SoftBank tapping for OpenAI funding. Sealed Air pricing $1.85bn in 8.25% ‘33s. LifePoint Health upsizing to $1.5bn at 7%. These are issuers accessing a market that was half-shut a month ago.

Meanwhile, high yield rallied 66bps last week with B spreads tightening through the week. At 266bps, HY spreads are at their 10th percentile over the last year. Inflows also totaled ~$3bn into HY funds, the largest since June.

Underneath the rally, the 3-month bifurcation shows the entire picture. The top movers are stressed names getting repriced higher on technical or strategic catalysts. NFE up 20 points. Radiate up 13. Community Health up 9. Organon up almost 9 on the Sun Pharma bid.

The bottom movers are different stories entirely. US LBM down 24 on housing-market stress. CNR down 16. ION down 21 on AI displacement fears. CDK down 18 on the same. Software and housing, two sectors with the most distressed paper. See below for a few articles I’ve written on these topics.

What to do with this

You don’t need a dedicated right-tail strategy. Most of you running liquid credit books already have exposure to these types of situations, whether you’ve thought about them this way or not. The point is narrower.

When you’re looking at liquid bonds in a stressed public name, stop systematically underweighting the right tail, especially when the bonds are still closer to par than to distressed. That’s where the framework defaults to downside-only and the right tail quietly falls out.

And if it wasn’t obvious by now, equity-price moves can be a real driver of bond volatility regardless of fundamentals, both on the way up and the way down.

On the way up, that looks like what’s happening at Avis. A squeeze, an ATM, a recap that wasn’t in anyone’s model. On the way down, it’s the mirror: an equity narrative cracking before the credit metrics do, bonds repricing lower because the story changed rather than because the business did.

The AI datacenter names running on hyperscaler momentum are exposed to the same dynamic in reverse if the AI capex narrative shifts. Same mechanism, just a different direction. The credit analyst modeling Avis’s DPU and leverage going into the 4Q print was doing the right work. The analysis wasn’t wrong. It just wasn’t complete for a name where the equity-market variables were going to decide the outcome.

Being confidently short on the back of it was the mistake. The same kind of mistake is available on the long side in names where the equity is doing the lifting and the credit is along for the ride.

Weekly Bulletin Board

1) Wharton Online partnership

I recently partnered with Wharton Online and Wall Street Prep on their Restructuring and Distressed Investing Certificate Program. Relevant timing given the current market backdrop in software and building products. The program covers capital structure, bankruptcy mechanics, and distressed investing, led by practitioners at firms like Silver Point and Ropes & Gray. Code JUNKBOND gets you $300 off, with another $200 off if you enroll by May 11. Starts June 8.

If you liked this, you might also like:

JunkBondInvestor is an independent financial research publication providing general market commentary, corporate credit analysis, and educational content. The information provided is for informational purposes only and does not constitute investment advice, financial planning, or personalized recommendations of any kind. Nothing published constitutes a solicitation, offer, or recommendation to buy, sell, or hold any securities, nor does it guarantee any financial outcome. Any credit opinions or outlooks expressed are solely the independent views of the authors and are intended to reflect general credit trends, not specific investment recommendations. Investing in high-yield bonds, distressed debt, and leveraged loans carries significant risk including potential loss of principal. JunkBondInvestor operates under the Publisher’s Exemption of the Investment Advisers Act of 1940 and applicable state laws. This issue includes sponsored content and partnership links. JunkBondInvestor receives compensation from sponsors for featured placements and may earn referral fees from partner programs. All sponsored content is clearly marked. Editorial views and recommendations are independent and not influenced by sponsor relationships.

Amazon signed the deal on Monday. $11.6 billion. A 117% premium to where the stock traded before the rumors started. A 5x+ bagger from its 2-year lows.

So the trade worked. Now what? Who’s next?

That’s the only question that matters when a deal like this prints. Globalstar has spectrum, a functioning D2D network with Apple, and an independent corporate structure. Amazon wanted all three badly enough to pay 88x EBITDA.

So you run down the list. Viasat. AST. Iridium. NextNav. They’ve all rallied. Everybody with a Bloomberg terminal figured out the same thing at the same time. Satellite spectrum is an asset that can’t just be printed, and the buyers are lining up.

One name kept coming back. Iridium. Global L-band operator. Spectrum block sitting adjacent to the one Amazon just bought. Independent. Publicly traded. The only other player in the world who can claim globally harmonized L-band authorized for safety-of-life services.

I started writing this two days ago. IRDM was at $36. The stock is $43 as I’m writing this. Up 14% yesterday. Up 20% over two sessions. A 52-week high. Every investor who saw the headline ran the same math and the easy entry is gone.

So here’s the real question. Is this a buy? Or is this post 3 days too late?

What Amazon Actually Paid For

Before getting to Iridium, a quick decomposition of the Globalstar deal, because the comp is what the math hinges on.

At ~$12 billion of enterprise value, Globalstar was acquired at roughly 88x current EBITDA. Nobody pays 88x for this operating business. Amazon paid for spectrum and the Apple relationship. The question is how to allocate the $12 billion across the assets in the package.

Globalstar holds three distinct spectrum assets:

• 8.725 MHz of L-band for satellite uplink;

• 16.5 MHz of S-band for satellite downlink; and

• A 11.5 MHz subset of the S-band that’s been authorized for terrestrial use and standardized by 3GPP as Band 53 for LTE and 5G.

Band 53 is the most strategically interesting piece. It’s a rare block of carrier-grade mid-band spectrum not owned by any wireless operator, deployable in 12 countries, with Qualcomm chipset support, Nokia and Airspan radios, and a proprietary 5G RAN platform targeting industrial and defense applications.

Globalstar’s own Analyst Day framed Band 53 against U.S. terrestrial spectrum precedents of $0.21 to $3.16 per MHz-POP, with management pointing to a valuation range of $0.50 to $2.00 per MHz-POP on 10 billion-plus global MHz-POPs. That math implies $5 billion on the low end, $10 billion-plus on the high end.

Worth being honest that these numbers are aspirational. Band 53 has one commercial deployment today (a retailer’s micro-fulfillment center). Anchoring to global MHz-POPs treats footprints that aren’t generating revenue as if they were.

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