2025 Leveraged Finance Outlook

The leveraged finance market is poised for a promising 2025, with optimism stemming from strong investor demand and increased event-driven issuance. Wall Street estimates $550-600 billion of leveraged loan new issue volume (excluding repricing) and $350-400 billion high yield new issue volume, representing a 77% and 67% increase, respectively, YoY.

A rebound in M&A/LBO activity is projected after a three-year lull, potentially driving new money supply. While a return to the boom levels of 2021 may be unlikely, the market remains supported by more strength in the macroeconomic background, and a favorable regulatory environment should encourage private equity exits at a large scale for the first time since 2021. Lower rates and tighter spreads also continue to drive an increase in activity.

With 2024 the start of the Fed rate cuts, we expect 2025 to be another year with additional cuts, however, moderated. FOMC Dot Plot released in December forecasts 50 bps of cuts in 2025. The 10-year Treasury closed 2024 at 4.57% and BMO Economics expects a 2025 YE rate of 4.05%. BMO Economics also expects a 2025 YE 3m SOFR rate of 3.58% from 4.32% at the end of 2024.

CLOs and retail funds have built up significant dry powder after limited new issue supply over the past few years, providing deep capacity to support M&A/LBO activity. CLO issuance is set to remain robust, contributing to the markets strength with continued tightening of AAA tranches highlights persistent demand from institutional investors.

We anticipate a more balanced environment following a year of record-breaking issuance driven by a repricing surge.. Almost 60% of outstanding loans were repriced in 2024, signaling repricing activity will likely subside in 2025. With an elevated percentage of loans above par, we still expect the kick-off this year with repricings. Similarly, refinancing activity is projected to decline from 2024's peak levels due to the minimal maturity wall for 2025-2026, thanks to favorable conditions over the past year.

The competition between broadly syndicated loans and private credit will likely remain intense, though syndicated loan spreads are expected to remain more compelling than in private credit. 2024 saw $57 billion of broadly syndicated loan takeout from the private credit market, marking a stark increase from $9 billion in 2023.