Type: GICP Expert View

North American Leveraged Finance Outlook 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.

Global Credit Outlook 2025

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.

Capex Questions for the European Real Estate Market.

The “Euro Real Estate Primer: Capex Questions” report from CreditSights provides insights for credit analysts and real estate market enthusiasts, highlighting significant trends and strategic considerations

This primer highlights a range of current real estate capex strategies from a broad range of real estate companies CreditSights cover, alongside key sustainability trends that are shaping the real estate landscape, offering valuable insights for those analyzing credit and market dynamics.

You can view the full report here. Note that a CreditSights account may be required to view the document.

Overall, the European real estate market is evolving towards more sustainable and economically viable practices, driven by a combination of regulatory frameworks, tenant demands, and broader economic conditions. The capex strategies also reflect the need for companies to maintain property quality while balancing cash flow needs.

Key findings:

  • Real estate capex strategies: Reducing capex to a minimum level is not a sustainable long-term strategy given the impact on portfolio quality, and a demand for improved energy efficiency of building stock.
  • Energy efficiency and sustainability: Energy efficiency upgrades are emphasized as crucial, driven by regulatory demands and added value. Energy efficiency and sustainability criteria are driving purchase prices, whilst sustainability is becoming a pivotal factor in tenant demand, particularly within the B2B sectors like offices, retail, and logistics.
  • Development approaches: The primer explores development strategies, identifying achieving a 150-200 bp yield on cost (YoC) over cap rates as a good rule of thumb to balance risk effectively, although this differs across different projects and companies.
  • Expensed maintenance costs: Within the companies covered, in 2023, expensed maintenance costs relative to standing portfolio value ratios varied significantly, ranging from 20 bp to 190 bp, with an average of 0.60 bp.

For more insight into the European property market, you can also view our webinar ‘Picking Apart the European Property Problem’ with Mary Pollock, Head of Real Estate at CreditSights.

AI hype vs reality

The report ‘Technology: AI hype versus the reality’ from CreditSights provides a comprehensive analysis of the current landscape of artificial intelligence, focusing on the gap between expectations and actual performance. You can read the full report here. Note that a CreditSights account may be required to access the report.

For credit analysts, understanding the financial and strategic implications of AI investments is crucial. Analyzing a company’s AI strategy can provide insights into its long-term viability and growth prospects. Credit analysts should assess the financial health, strategic focus, and potential risks associated with AI investments, including technological obsolescence and regulatory challenges. By doing so, analysts can better evaluate the creditworthiness and future stability of companies navigating the AI landscape.

Key findings:

  • Innovation and adoption of generative AI is high. However, the revenue opportunity does not seem to justify the near-term investments. Issues around AI to be addressed include hallucinations, guardrails to protect the user experience, copyright infringements, security and privacy concerns. Cost is another aspect – although that is expected to come down over time driven by improved GPU efficiency and availability, amongst other factors.
  • In the race to beat the competition, budgets have opened up indiscriminate spending towards gen-AI. For most companies, it will be hard to justify the ROIC, not least for those whose internal development efforts will not lead to mass adoption.
  • Tech companies are racing to have the most advanced LLMs (large language models), whilst other companies are racing to adopt AI to stay ahead of the competition – or through fear of falling behind the competition. Capex as a percentage of revenue was more than 20% for Microsoft and just shy of 20% for Meta in 1Q24, with the expectation for capex in the top hyperscalers (Amazon, Microsoft, Google and Meta) to surpass $200bn in 2024.
  • AI hype has translated in higher market caps for the big tech companies, since early 2023. Earnings growth (some driven by gen-AI) and multiple expansion has driven this, along with earnings growth from other, non-AI related factors. Nvidia, where earnings growth has been driven particularly by gen-AI, now has a market cap nearly as large as Microsoft and Apple.
  • Enterprise software has had limited success with monetization associated with gen-AI. Long term the preferred approach appears to be combining proprietary data with third party LLMs in order to create unique and differentiated services, although the article authors do not expect a step-function change in growth that justifies the infrastructure buildouts taking place in 2024.

If you are interested in learning more about AI, you may like the following webinars:

Staying competitive with the latest AI applications

Generative AI: Credit implications for the tech sector

Building a career in the age of AI

Private Debt is Here to Stay in European LevFin

Private debt has solidified its role as an alternative asset class, with providers offering benefits such as more leverage, privacy, and certainty of execution compared to traditional banking options.

The recent report ‘Private Debt Is Here to Stay in European LevFin, but Competition Intensifies’, from Fitch Ratings, highlights how increased competition means that private debt direct lending will need to adapt to normalized conditions. The report discusses a number of challenges and changes that will impact private debt in the future:

  • Scarcity of new buyout deals means that all credit providers will now compete for the same financing opportunities. This may force private debt funds to look to existing issuers, and cooperate with syndicated lenders, in providing first-lien unitranche co-existing with first-lien TLB and senior secured notes.
  • Fitch Ratings expects private debt providers to retain pricing power in the less competitive part of the European leveraged credit market that targets smaller issuers.
  • Fitch Ratings suggests collateralised loan obligations (CLOs) of private debt will arrive in Europe soon, as providers seek funding flexibility, allowing them to use more leverage to compete on lower coupons and meet return expectations.
  • In Europe, private debt funds are forming clubs of lenders among themselves and their limited partners (LPs) to underwrite large leveraged buyouts (LBOs).
  • As LPs increase their exposure to private debt, many will require credit ratings for regulatory purposes.
  • Central banks’ rate cuts may mean that debt providers need to add more leverage on assets with lower coupons, or move out the risk spectrum to garner higher yields, or to maintain excess returns as those achieved in 2022-2023, when rates were high.

For the full report, follow this link. Please note that a Fitch Ratings account may be necessary to access the report.

2024 Primer on the U.S. Leveraged Finance Market

The “2024 Primer on the U.S. Leveraged Finance Market”, published by Fitch Ratings, offers a deep-dive analysis into the complexities and nuances of the U.S. leveraged finance market.

This comprehensive overview focuses on key factors influencing risk and opportunity for market participants such as corporate bond and loan underwriters and investors, CLO investors, corporate debt issues, private equity sponsors and regulators.

The primer includes a detailed overview of leveraged loans – what they are, what are the different types, their characteristics and their components. The document is a valuable resource for navigating the complexities of the levfin arena, providing a comprehensive understanding of the current state and forward look of the market.

To read the full document follow this link. Please note that a Fitch Ratings account may be necessary to access the report.

Key Findings

  • Market dynamics: The report reveals a deteriorating outlook for the leveraged finance sector in 2024, attributed to restricted access to capital markets and higher for longer interest rates. Highly leveraged issuers are pinpointed as particularly vulnerable under these conditions. However there are signs of improvement in high yield issuance volume.
  • Default rates: The forecast is for an uptick in default rates across high yield (HY) and leveraged loan (LL) markets, underpinned by the dual pressures of escalated interest obligations and stunted economic growth.
  • Default rates: An anticipated rise in default rates for high yield and leveraged loans is forecasted, driven by an increased interest expense burden coupled with a projected economic slowdown. Default rates for leveraged loans are expected to exceed historical averages.
  • Sectoral analysis: A granular breakdown pinpoints healthcare, telecoms, leisure and entertainment, broadcasting and media, retail, and technology sectors as critical arenas contributing significantly to anticipated default volumes.
  • Market activity: A resurgence in refinancing and repricing activity marks a proactive response to impending maturity walls, while private credit markets have shown positive growth for issuers unable to access the public credit markets. Meanwhile, CLO issuance activity has remained steady despite market challenges.
  • Private credit and private equity: The report delves into the growth of direct lending in light of the heightened banking regulations in the aftermath of the financial crisis. In addition, there is commentary on the US private equity market, where fundraising volumes remain flat as market activity contracts due to inflationary pressures and increases in interest rates.

Fitch Ratings Global Outlook for 2024: An Overview

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.