Topic: Outlooks and forecasts

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.

The global credit outlook for 2025 is generally stable but faces significant risks according to Fitch Ratings’ annual ‘Global Credit Outlook’ report.

The bulk of Fitch’s 2025 sector and asset performance outlooks are neutral, reflecting a broadly stable macroeconomic base case. However, this stable outlook masks a more complex picture characterized by significant potential volatility due to heightened geopolitical risks and the possibility of a global trade war. In particular, policy uncertainties in the US could rapidly alter inflation and interest rate expectations, potentially disrupting the strong capital markets environment seen in 2024.

What to watch

• Trump policy agenda: Key policy areas like tariffs, taxes, regulation, and immigration will be significant for credit.
• US inflation: A combination of higher tariffs, lower taxes, deregulation, and immigration cuts could slow rate cuts and strengthen the dollar.
• US consumer resilience: The ability of US consumers to manage pricing pressures will be vital for the global macro and credit outlook.
• European household spending: The eurozone recovery will hinge on household confidence and consumption, with increasing saving ratios in France and Germany indicating a potentially weaker recovery.
• China stimulus: A shift towards monetary and fiscal stimulus began in 2024, but its effectiveness and future scope remain uncertain.
• Geopolitics: Trade tensions and ongoing conflicts are major tail-risks, but conflict resolution could rapidly improve regional risk assessments.

United States: The US economy will slow but maintain growth above 2%. The US credit environment benefits from resilient economic conditions, falling rates, and a strong labor market. However, there are uncertainties due to the new administration’s policies, including higher tariffs and potential fiscal loosening, which could impact inflation and credit markets.

Europe: The region faces a slow recovery with challenges from US tariffs and geopolitical risks. The eurozone’s GDP growth is projected at 1.2%, with consumer caution and political uncertainties impacting the economic landscape.

China: Several of China’s large sectors face deteriorating outlooks due to external challenges and domestic issues in the property sector. Fiscal policies are expected to help stabilize the economy but at the cost of higher deficits and debt.

Emerging markets: Growth is mixed, with larger economies like Brazil and China slowing. However, smaller EMs show stronger performance, aided by lower interest rates and easing credit stress in regions like the Middle East.

Corporates: Most sectors have a neutral outlook, supported by stable fundamentals. However, risks include economic and geopolitical uncertainties, with China’s sectors related to housing facing challenges due to the weak housing market.

Financial institutions: The outlook is broadly stable, with improved conditions in certain developed European and emerging Asian banking sectors, driven by macroeconomic stability and easing rate pressures.

Public finance and infrastructure: US state and local governments are expected to experience a more normalized revenue environment in 2025 as the federal fiscal impulse and household consumption growth diminish. Although revenue conditions may weaken, the overall credit conditions remain neutral due to strong financial resilience, with a return to pre-pandemic fiscal conditions.

In China, liquidity improvements from the Ministry of Finance’s debt substitution plan support a neutral outlook for local government financing vehicles, despite weak capital expenditure flexibility and a high debt burden.

European local and regional governments benefit from central government support, moderate growth, lower inflation, and reduced borrowing costs

Global infrastructure shows steady demand and normalized revenue growth, although political, geopolitical, and economic uncertainties pose potential risks, with policy shifts notable in North American sectors associated with energy and transportation.

Sovereigns: The global outlook is neutral, but US political changes introduce uncertainties. Policies such as higher tariffs and deregulatory measures could impact global credit conditions, particularly in emerging markets. Developing markets will continue to face fiscal pressures from a range of cyclical and structural drivers. The geopolitical risk environment remains heightened.

Structured finance: Asset performance is mostly neutral globally, although North America faces deteriorating outlooks in CMBS and subprime sectors due to economic pressures and high rates for vulnerable borrowers.

You can view the full ‘Global Credit Outlook 2025 report’ here. The report includes further detailed insights into the global economy and commentary on each of outlooks highlighted above. Please note that a Fitch Ratings account may be necessary to access the document.

The Fitch Ratings’ Global Outlook for 2024 is driven by four key themes:

• sustained higher interest rates
• a sharp US slowdown
• global asset-quality deterioration
• a heightened macro-credit risk environment.

The effects of tighter borrowing conditions are yet to fully impact the global economy and credit, with lower-rated issuers and pro-cyclical sectors, particularly in emerging markets, at greater risk.

Outlooks are mixed, with North American and Middle East & North Africa sovereigns, US banks, and EMEA real estate deteriorating. On the other hand, global aerospace & defense, emerging market APAC banks, global reinsurance, and Latin American real estate show improvement.

Sovereigns are under pressure from weaker growth and persistent fiscal pressures, with growing spending, debt, and interest service burdens.

The US economy is predicted to slowdown significantly in 2024 due to a loosening labor market and weak credit and investment. China’s ongoing property crisis will continue to affect consumption and investment throughout 2024. Europe faces stagnation and weakening global trade.

Emerging markets, excluding Europe and Asia-Pacific, will face challenges from weak growth and tight external financing conditions. Latin America will struggle economically, while the Middle East and North Africa face geopolitical risks.

Global corporates are expected to have stable to improving credit metrics, with a divergence between investment-grade and sub-investment-grade ratings performance. Financial institutions will adjust to higher rates for longer, with banks facing challenges in their business models. The insurance sector remains resilient in the face of elevated rates.

Any trend significantly reducing growth, increasing inflation and interest rates beyond the base case in 2024 would negatively impact public finance and infrastructure sectors. US public finance sectors are expected to be mostly stable, while international public finance sectors have a balanced outlook. Global infrastructure sectors will have subdued performance amid softer economic conditions.

You can access the full 2024 Global Outlook report by visiting the Fitch Ratings website.