North American Leveraged Finance Outlook 2025
Expert view / 20 January, 2025
The North American Leveraged Finance Outlook for 2025 is ‘neutral’, according to Fitch Ratings, when considering sector outlooks, default expectations, economic conditions, and related market developments.
While most sectors maintain a ‘neutral’ outlook, aerospace and defense has an ‘improving’ outlook, and diversified media a ‘deteriorating’ outlook.
The par-based default rates for institutional loans is expected to fall to between 3.5% and 4.0%, and high-yield bonds to between 2.5% and 3.0%.
What to watch
- Progress on inflation abatement may be reversed depending on the new administration’s economic and immigration policies.
- Potential for fewer-than-expected Fed rate cuts, which will negatively impact levered issuers.
- Bond default rate set to increase, loan default rate to moderate.
- Performance of first-lien recoveries in the context of the prevalence of liability management transactions.
Reversing inflation control and slower GDP growth
If executed as currently outlined, Trump’s tariff plans could lead to higher inflation which could slow US economic growth by more than 1 percentage point, according to the report’s authors. Trump’s proposed deportation of undocumented workers will also likely tighten the labor market and increase wage inflation.
Sectors most likely to be affected by weaker growth are consumer goods, retail, and gaming and lodging.
First lien recoveries pressured by liability management
Issuers are expected to continue using liability management transactions (LMTs) to manage unsustainable capital structures and extend their default timelines. The prevalence of LMTs has increased steadily since 2021, with 50 occurrences in 2024, with most classified as distressed debt exchanges under Fitch’s criteria. The weighted average first-lien recovery was 39% through November 2024, down from 51% in 2023 and 76% in 2022, influenced by industry mix, the number of loan-only structures, and the presence of repeat bankruptcy filers.
Bond and loan default rates
In 2025 the telecom, technology, and healthcare and pharmaceuticals sectors are anticipated to be the leading contributors to default volumes. Healthcare and pharmaceuticals have faced challenges like labor inflation and adverse regulation, while telecoms have struggled with high capex needs and increased interest costs.
The leveraged loan default rate is expected to moderate to 3.5%-4.0% in 2025, down from the November 2024 LTM rate of 5.2%, as some of the larger issuers have already defaulted in 2024.
Private credit:
Private credit is supported by modest GDP growth of 2.1% in 2025, although uncertainties like tariffs and labor market pressures persist. Leverage in Fitch’s privately monitored rating (PMR) portfolio is expected to decline. While default rates remain elevated, they are projected to decrease with modest interest rate relief and economic growth. The private credit segment will continue to face challenges from elevated base rates and floating rate structures, though some relief is anticipated from credit market strength and declining base rates.
To read the full ‘North American Leveraged Finance Outlook 2025’ report, please visit the Fitch Ratings website. Note that a Fitch Ratings account may be required to access the document.