- Speculative-grade default rates are expected to fall to 2.6% in the U.S. and 2.7% in Europe by October 2025, down from 2024 levels of 5.6% and 3.3%.
- With $117B in CLOs exiting non-call periods in 2025, favorable conditions will likely encourage refinancing activity.
- A soft landing, interest rate cuts, and competition between broadly syndicated lenders and private credit are expected to bolster credit quality and loan transactions.
As reported by GlobeSt, collateralized loan obligations (CLOs) are entering 2025 with a promising outlook, fueled by an improving macroeconomic landscape.
According to Moody’s latest report, declining speculative-grade defaults, lower interest rates, and inflation stabilization all create a favorable environment for improved CLO performance and refinancing opportunities.
Falling Default Rates
Default rates in the U.S. and Europe should drop significantly in 2025. Moody’s projects U.S. speculative-grade defaults to fall to 2.6% by October 2025, compared to 5.6% in October 2024. Meanwhile, Europe’s rates are anticipated to drop from 3.3% to 2.7% over the same period.
This decline is attributed to a “soft landing” scenario, marked by inflation returning to the Federal Reserve’s 2% target, continued economic growth, and a stable labor market.
These conditions, coupled with interest rate cuts, are expected to reduce collateral defaults and encourage stronger refinancing activity.
New Refinancing Opportunities
The CLO market, which represented 74% of the staggering $1.4T institutional leveraged loan market in 2024, is poised for more activity in 2025.
Approximately $117B in CLOs are set to exit their non-call periods, with $94B of those offering attractive refinancing spreads above 140 bps.
While 2024 saw robust refinancing volumes—$213B through October—new loan formation was subdued. In 2025, the combination of declining defaults and a more favorable interest rate environment is expected to drive a shift toward new loan transactions.
Private Credit Dynamics
The interplay between broadly syndicated loans (BSLs) and private credit is also expected to evolve.
As competition intensifies, private credit lenders increasingly fund larger transactions, often for weaker borrowers. Meanwhile, BSL markets are seeing an uptick in credit quality, with more leveraged buyout (LBO) borrowers achieving B2 corporate ratings rather than lower B3 ratings.
This dynamic, along with greater covenant flexibility migrating from BSLs to private credit, will likely enhance overall market resilience in 2025.
What to Watch in 2025
As interest rates and inflation decline, CLO markets are poised for a significant rebound. Driven by improved credit conditions and refinancing potential, the focus will shift from stabilizing existing deals to pursuing new opportunities.
With declining speculative-grade defaults and robust refinancing activity, the CLO market will be pivotal in the broader recovery of institutional leveraged lending next year.
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