Default, Transition, and Recovery: The U.S. Leveraged Loan Default Rate Is Set To Remain Near 1.5% Through June 2025

Leveraged loan issuers have been benefiting from tailwinds including the buildup to interest rate cuts, strong financing conditions, and a flurry of refinancings that have reduced near-term maturities. While these factors already contributed to a 0.5-percentage-point decline in the default rate from February to June, further declines could be hard to come by. There was at least one default from an issuer in the Morningstar/LSTA Leveraged Loan Index in each of the 19 consecutive months from January 2023 through July 2024. In the first half of 2024, the index averaged 1.67 defaults per month. To reach our baseline forecast of a 1.5% default rate, 16 issuers would need to default through June 2025, which would represent a decrease in the

...- We expect the U.S. leveraged loan default rate to remain near 1.50% through June 2025, from 1.55% as of June 2024. - Falling yields, expectations for rate cuts, and supportive financing conditions have already contributed to a modest drop in the Leveraged Loan Index default rate this year. - Although benchmark interest rates are beginning to subside, rate cuts won't translate instantly to lower borrowing costs for many borrowers who must wait for loan rates to reset. S&P Global Ratings' Private Markets Analytics and Credit Research & Insights expect the U.S. leveraged loan default rate to remain near 1.5% through June 2025. This would reflect a very modest decline from the 1.55% default rate in June 2024. Leveraged loan issuers have been benefiting from tailwinds including the buildup to interest rate cuts, strong financing conditions, and a flurry of refinancings that have reduced near-term maturities. While these factors already contributed to a 0.5-percentage-point decline in the default...

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