Fitch Ratings has revised its 2025 outlook for the global leveraged finance market segment to Deteriorating from Neutral. This change reflects a weaker macroeconomic outlook, significant uncertainty from the ongoing trade war hamstringing managements’ efforts to devise appropriate defensive strategies, more risk-averse capital markets, and anticipated higher interest expense that disproportionately affects issuers at the lower end of the rating spectrum.
Fitch sharply lowered forecasts for world growth in response to the severe escalation in the global trade war. We now forecast U.S. annual growth to remain positive at 1.2% for 2025 but slow to just 0.4% in 4Q25. Eurozone growth will remain well below 1%.
With import prices set to rise sharply, Fitch expects the Federal Reserve to wait until 4Q25 before cutting rates, keeping base rates elevated for longer than we previously anticipated. Deteriorating market sentiment has reduced issuances in the leveraged loan and high-yield (HY) markets since early April. Risk premia has widened both in the U.S. and Europe, exacerbating financial strain.
We expect higher U.S. tariffs to challenge revenue growth and profitability for most corporate sectors globally. Fitch recently revised the outlooks for the global autos sector and the U.S. retail and consumer products sector to ‘deteriorating’ from ‘neutral’. We also view the U.S. technology, homebuilding, and gaming sectors as vulnerable to tariff hikes and potential trade partner retaliation.
In North America, Fitch now expects a 2025 par-based default rate between 5.5% and 6.0% for leveraged loans (LL) and between 4.0% and 4.5% for HY bonds. This implies that HY bond default rates will rise meaningfully from 2024 levels, while LL default rates will be slightly above 2024 levels, which were the highest since the Great Financial Crisis.
Interest expenses remain a substantial burden for highly leveraged issuers, particularly those with floating rate-heavy capital structures. Liquidity shortages from unsustainable capital structures primarily drove defaults in 2024. Some issuers extended their runway to default through sponsor support, liability management exercises, and asset sales, hoping to benefit from highly anticipated rate cuts, which are now delayed.
The private debt market will somewhat benefit from a more restrictive broadly syndicated loan market. Past periods of stress have propelled private credit. However, private credit will not be an option for all issuers, especially those in cyclical sectors or those struggling with deteriorating operating performance or secular obsolescence.
In Europe, the revised 2025 default rate forecast is between 2.5% and 3.0% for LL and between 5.0 and 5.5% for HY bonds. Default rates are expected to rise due to weaker overall demand and potential distressed debt exchanges from issuers with significant upcoming HY debt maturities. U.S. tariffs are expected to have a high or medium impact on one-third of Fitch’s European leveraged finance portfolio.
Source: Fitch Ratings
