(Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible response--specifically with regard to tariffs--and the potential effects on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts, and reassess our guidance accordingly (see our research here: www. spglobal.com/ratings).)
Key Takeaways
- Macroeconomic headwinds, policy uncertainties, and the reduced likelihood of further Fed rate cuts this year support our cautious view that the U.S. leveraged loan default rate will rise to 1.6% through December 2025, up slightly from 1.5% as of December 2024.
- Mitigating some of this risk, robust financing conditions and strong investor demand have been supporting the loan market through strong issuance and tightening spreads.
- However, there are already signs of struggle among some corporate borrowers with a recent uptick of the speculative-grade defaults (led by selective defaults) and payment-in-kind as some borrowers' cash flows have been under pressure.
- While our baseline assumption is for a modest increase in the leveraged loan default rate, the prospect for retaliatory tariffs or related price increases heightens the uncertainty of our outlook, and in our pessimistic scenario, we project that the leveraged loan default rate could double to 3%.
S&P Global Ratings Private Markets Analytics and Credit Research & Insights expects the U.S. leveraged loan default rate to rise to 1.6% through December 2025. This default rate would imply the defaults of 18 issuers from the Morningstar LSTA Leveraged Loan Index and reflect a slight increase from the 1.5% default rate in December 2024.
Slowing economic growth and the potential for price increases that result from tariffs and counter-tariffs will likely provide headwinds for borrowers over the coming year. S&P Global Ratings economists recently lowered the forecast for 2025 U.S. GDP growth to 1.7% (from 2%) due to recently announced trade policies. A slowdown in economic growth, even if modest, will likely increase the pressure on leveraged loan issuers. Meanwhile, new tariffs are likely to boost consumer prices, and our economists no longer expect further rate cuts this year.
In contrast to the headwinds from the macro environment, favorable financing conditions over the past year provide some tailwinds that help to offset some of this risk. Supported by surging issuance and tightening spreads, borrowing costs are down from a year ago, and near-term debt maturities appear manageable.
In our pessimistic scenario, we forecast the leveraged loan default rate could rise to 3.0% (implying the defaults of 34 issuers). Should tariff increases and trade or immigration policies lead to more pronounced economic slowdown or higher-than-expected price increases, they could present a challenge to consumer spending as well as to affected subsectors.
In our optimistic scenario, we forecast the default rate could fall further to 1.0% (with 11 issuer defaults). This scenario reflects the possibility that economic growth may surprise to the upside. If changes to tax and trade policy were to stimulate domestic spending and investment, borrowers could experience an uplift. However, this improvement would walk a fine line, where increased growth and spending could also lead to higher funding costs.
Borrowers Have Improved Their Positions Amid Favorable Financing Conditions
While considerable uncertainty remains about the specifics of tariff policy and responses from the U.S. trading partners, S&P Global Ratings' economists have updated the baseline macroeconomic forecast to account for the 25% tariffs imposed on March 4 by the U.S. on nearly all goods imports from Canada (with some exceptions) and Mexico, and added an additional 10% tariff on imports from China (see: Growth Prospects Strained After The U.S. Takes The Tariff Plunge, published March 5, 2025). While the specifics of tariffs and responses by trading partners continue to evolve, this uncertainty can weigh on issuers.
However, the potential impact of slowing economic growth is softened somewhat by the very favorable financing conditions in 2024 that helped many leveraged borrowers onto firmer footing in 2025. Companies refinanced and repriced much of their debt as institutional loan issuance more than doubled to $500 billion in 2024 from $235 billion in 2023. This was the second-highest volume on record, second only to 2021, according to PitchBook LCD. In addition to loan volumes, speculative-grade bond issuance and private credit also provided avenues for debt funding.
With such strong issuance, borrowers slashed speculative-grade maturities in 2025 by half, while also making further reductions in maturities through 2028.
Leveraged loan issuers are benefitting from lower funding costs. Given strong demand for new issuance and last year's interest-rate cuts by the Federal Reserve, borrowers' funding costs had declined. The average yield on a new-issue loan rated 'B+' or 'B' dropped to 7.7% at the end of January from 9.5% at the start of 2024. Meanwhile, new issue 'B+/B' loan spreads have narrowed to 319 basis points (bps) at the end of 2024, reaching their tightest level in a decade.
Investor appetite for loans is running high, enabling financing conditions to remain favorable. One sign of investors' increased appetite for leveraged loans is the inflows into leveraged loan mutual funds and ETFs. From October 2024 through January 2025, net inflows to these leveraged loan funds exceeds $20 billion, more than 10x higher than over this period, year over year. Furthermore, inflows accelerated through the fourth quarter of 2024 and reached their highest level since the beginning of 2022 in January.
Confidence led to further incremental gains in loan pricing through the end of 2024 and into 2025. Average bids remained tight in the 97 range but have not broken the exuberant 98 levels visible during 2021 into the start of 2022.
Uncertainty Continues To Cloud The Picture
However, some of the benefit from stronger financing conditions may have already started to fade. Lately, default rates had already started to pick up. The leveraged loan default rate increased by nearly 20 bps in the fourth quarter, to 1.45% as of the end of 2024, while the U.S. trailing 12-month speculative-grade default rate experienced a 70-bps increase over the same period (to 5.1%).
This joint increase in both the leveraged loan and U.S. speculative-grade default rates in the fourth quarter marked a shift, as these default rates had been diverging during the year. While the U.S. speculative-grade default rate had risen by 60 bps for the entire 2024, the leveraged loan default rate had fallen by close to 60 bps. One key difference between these two rates is that the leveraged loan default rate excludes selective defaults, while the U.S. speculative-grade default rate includes them. Selective defaults have accounted for more than half of speculative-grade defaults in 2024. As financing conditions were favorable, and as benchmark interest rates were falling, the loan default rate came down during the first three quarters of the year, but the easy gains may have already been made. Of the conventional defaults, many reflected weakness of sectors that are reliant on consumer spending (particularly for consumer products, media and entertainment, and retail and restaurants), and each of these sectors are expected to be further challenged by tariffs.
However, the recent uptick in defaults has eased some of the near-term pressure, as the number of issuers most at risk of default has declined, and the markets' view of distress has moderated. We consider weakest links (issuers rated 'B-' and below with a negative outlook or on CreditWatch negative) to be the issuers most at risk of default. The number of weakest links in U.S. declined to 168 as of the end of 2024 (from 182 at the start of fourth quarter 2024), with many of the issuers removed from this list following a default.
Comparing the number of issuers at the lowest rating levels, just about 34% of the issuers in the Leveraged Loan Index are rated 'B-' or lower, which is somewhat higher than the 33% share of all speculative-grade issuers.
While the pool of weakest links has shrunk, the distress ratio also appears to show investors had been taking a more benign view of near-term risk. The Morningstar LSTA US LLI Distress Ratio fell to 4.44% in December from 4.79% in September. At the current level, the distress ratio stands modestly below its trailing four-year average of 4.9%.
While strong financing conditions continue to benefit leveraged loan issuers, the macroeconomic outlook is weaker than before, with GDP growth slowing and inflation poised to rise by more than previously expected. Even though the leveraged loan issuer default rate fell in 2024, many companies continued to struggle to meet cash flow demands, contributing to increases seen in payment-in-kind and selective defaults. Gathering macro pressures may further tip the scales toward an increase in defaults.
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Differences In Default Rate Measurements
The high proportion of selective defaults in the U.S. has kept the broader speculative-grade corporate default rate higher than the Leveraged Loan Index default rate. This is because the definition of default for the Leveraged Loan Index is much narrower (see table 1). There are important differences in the definitions of default for each default rate series and forecast we analyze in our reports:
- The S&P Global Ratings' definition of default determines the U.S. trailing-12-month speculative-grade corporate default rate.
- Within the Morningstar/LSTA US Leveraged Loan Index, we measure the trailing-12-month default rate by number of issuers. This default rate excludes selective defaults from distressed debt exchanges.
Table 1
| Summary of differences in default definitions | ||||
|---|---|---|---|---|
| S&P Global Ratings' definition | Morningstar/LSTA US Leveraged Loan Index's definition | |||
| --Issuer files for bankuptcy (results in a 'D' rating) | --Issuer files for bankruptcy | |||
| --Issuer missed principal/interest on a bond instrument (results in a 'D' or 'SD' rating) ¹ | --Issuer downgraded to 'D' by S&P Global Ratings | |||
| --Issuer missed principal/interest on a loan instrument (results in a 'D' or 'SD' rating)* | --Issuer missed principal/interest on a loan instrument without forbearance | |||
| --Distressed Exchange (results in a 'D' or 'SD' rating) | ||||
| --The baseline Dec 2025 forecast for the U.S. trailing-12-month speculative-grade corporate default rate is 3.5% | --The baseline Dec 2025 forecast for the Morningstar/ LSTA US Leveraged Loan Index default rate by number of issuers is 1.6% | |||
| *Under the S&P Global Ratings definition, an issuer is considered in default unless S&P Global Ratings believes payments will be made within five business days of the due date in the absence of a stated grace period, or within the earlier of the stated grace period or 30 calendar days. | ||||
Table 2
| Morningstar LSTA US Leveraged Loan Index issuers by rating category compared to all speculative-grade issuers | ||||||
|---|---|---|---|---|---|---|
| Rating category | All speculative-grade issuers | Morningstar LSTA US LL Index-rated issuers* | ||||
| BB | 32.92% | 23% | ||||
| B | 55.90% | 61% | ||||
| CCC/C | 11.18% | 10% | ||||
| BBB- or above | N/A | 5% | ||||
| B-' or lower | 33% | 34% | ||||
| Data as of Dec. 31, 2024. *The index includes some issuers rated in the 'BBB' category. N/A--Not applicable. Sources: PitchBook | LCD, S&P Global Market Intelligence's CreditPro® and S&P Global Ratings Private Markets Analytics. | ||||||
How We Determine Our Default Rate Forecasts
The Morningstar/LSTA US Leveraged Loan Index default rate forecasts are based on recent observations and expectations for the path of the U.S. economy and financial markets. We consider, among various factors, our proprietary analytical tool for the Morningstar LSTA US Leveraged Loan Index issuer base. The main components of the analytical tool are the U.S. trailing-12-month speculative-grade corporate default rate, the ratio of selective defaults to total defaults, a leveraged loan debt-to-EBITDA ratio, the Morningstar LSTA US Leveraged Loan Index distress ratio, changes in the distribution of rated loans toward higher or lower ratings, and the unemployment rate.
Related Research
- Growth Prospects Strained After The U.S. Takes The Tariff Plunge, March 5, 2025
- What Looming Tariffs Could Mean For U.S. Corporates, Feb. 27, 2025
- The U.S. Speculative-Grade Corporate Default Rate Could Fall To 3.5% By December 2025, Feb. 20, 2025
This report does not constitute a rating action.
| Private Markets Analytics: | Evan M Gunter, Private Markets Analytics, Montgomery + 1 212-438-6412; evan.gunter@spglobal.com |
| Dani M Herzberg, Raleigh 1 984-351-3996; dani.herzberg@spglobal.com | |
| Ruth Yang, New York (1) 212-438-2722; ruth.yang2@spglobal.com | |
| Credit Research & Insights: | Ekaterina Tolstova, Frankfurt +49 173 6591385; ekaterina.tolstova@spglobal.com |
| Research Assistants: | Claudette Averion, Manila |
| Charlie Cagampang, Manila | |
| Johnnie Muni, Manila |
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