Default, Transition, and Recovery: The U.S. Leveraged Loan Default Rate Is Set To Rise To 1.6% Through December 2025

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

... 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%....

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