Default, Transition, and Recovery: The U.S. Leveraged Loan Default Rate Is Set To Fall To 1% By September 2025

Supportive financing and macro conditions have contributed to this year's decline in the leveraged loan default rate while also positioning borrowers for further improvement over the next 12 months. With loan issuance more than doubling year over year through September, borrowers have refinanced many upcoming maturities--they have reduced U.S. speculative-grade maturities in 2025 by 50%. Furthermore, after cuts to the benchmark federal funds rate in September and November, funding costs on floating-rate loans will lessen as rates adjust. The trailing-12-month leveraged loan default rate has fallen by over three-quarters of a percentage point this year, to 1.27% in October; it was just over 2% at the beginning of the year. With the default rate already at such a low level,

...- We expect the U.S. leveraged loan default rate to fall to 1% by September 2025, from 1.26% in September 2024. Lower benchmark interest rates will mean lower funding costs, and this will benefit issuers' coverage ratios and free operating cash flows. - Favorable financing conditions this year have enabled borrowers to refinance most of next year's maturities, further reducing default risk. - While default risk over the next 12 months appears to be moderating, the prospect of policy shifts on tariffs, trade, and immigration heighten uncertainty. In our pessimistic scenario, we project that the leveraged loan default rate will nearly double (to 2.5%)....

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