(Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings).)
Key Takeaways
- We expect the U.S. leveraged loan default rate to rise to 1.75% by March 2026, from 1.23% in April 2025, as economic uncertainty and market volatility weigh on highly leveraged borrowers.
- Unpredictable policy and results broaden potential outcomes, from a 3.5% default rate in our pessimistic scenario to 1.0% in our optimistic scenario.
- Favorable conditions in the first quarter enabled many borrowers to refinance, putting them on more solid footing.
- However, diminished liquidity and slower issuance may weigh on some borrowers, especially those susceptible to tariffs and supply chain disruptions.
S&P Global Ratings Private Markets Analytics and Credit Research & Insights expect the U.S. leveraged loan default rate to rise to 1.75% through March 2026, from 1.23% as of April 2025. This would imply the defaults of 20 issuers from the Morningstar LSTA U.S. Leveraged Loan Index. Trade-related uncertainties are clouding the picture for the economy. S&P Global Ratings' economists currently expect growth to decline while unemployment and inflation rise. Meanwhile, market volatility is tightening financing conditions, potentially increasing pressure on cash flows.
In our pessimistic scenario, we forecast the leveraged loan default rate could rise to 3.50% (implying 40 issuer defaults). This recognizes the potential for an economic slowdown, trade disruptions, or a freeze in capital markets that weigh on consumer and business confidence, leading to a default rate double that of our base case.
In our optimistic scenario, we forecast the default rate could fall to 1.0% (with 11 issuer defaults). This reflects the possibility that macroeconomic disruption is less pronounced than expected, or trade tensions ease. Additionally, if financing conditions become as favorable as they were in the first quarter, borrowers could continue to improve their positions by reducing funding costs and addressing near-term maturities.
Volatility And Uncertainty Cloud The Forecast
We expect global trade uncertainty will continue to weigh on credit conditions, heightening the challenges for leveraged borrowers over the next 12 months.
While the overall effective U.S. tariff rate is now down to 14.2%, from a high of over 30% in early April, this remains more than 6x that in 2024. With tariffs and higher core inflation likely to increase input costs, companies' cash flows will come under pressure.
We expect the Federal Reserve to lower interest rates by 50 basis points (bps) in the fourth quarter, providing some relief to borrowers. But in the meantime, widening spreads are raising funding costs, and the April 2 tariff announcements appear to have dampened financing conditions for the second quarter.
Borrowers largely improved their footing in the first quarter. Broadly syndicated leveraged (BSL) loan issuance exceeded the volume from first-quarter 2024, and borrowers refinanced near-term maturities (see chart 1). However, following the tariff announcements and market reactions, BSL issuance ground to a halt during the first half of April.
While little debt remains due for 2025, maturities rise swiftly in 2026 and 2027, increasing the pressure on borrowers that need to refinance. Tight liquidity and higher borrowing costs may intensify credit strain for borrowers, increasing the likelihood of further defaults.
Chart 1
Investors have responded to recent heightened volatility by reducing exposure to leveraged loans. Outflows from leveraged loan mutual funds and exchange-traded funds surged to over $11 billion in April, marking the highest monthly outflow since 2022 (see chart 2).
Chart 2
This risk aversion is increasing borrowing costs for loans and lowering secondary market prices. The average yield on new-issue loans rated 'B+' or 'B' increased to 8.5% at the end of April, from 7.7% at the start of 2024, with the spreads on these loans increasing by 84 bps from the start of the year to 405 bps at the end of April (see chart 3).
In secondary markets, the average bid for a first-lien loan slid to 95.77 by the end of April, from 97.33 at the start of 2025. Prior to the recent market volatility, loans had not dipped below 96 since August 2024 (see chart 4).
Within the index, the Morningstar LSTA U.S. Leveraged Loan Index distress ratio rose almost a full percentage point in April to near 5.6%, above its trailing four-year average of 4.99%.
Chart 3
Chart 4
Chart 5
Despite economic uncertainty and market volatility, not all borrowers are equally exposed. Tariff and supply chain pressures vary by industry and among individual borrowers. The Leveraged Loan Index doesn't have a high concentration in sectors that have been or could be targeted by specific tariffs--such as steel and aluminum, autos, or pharmaceuticals--but exposures remain.
We expect tariff uncertainty and a weaker economy to weigh on technology spending--and the software sector is the largest within the index (accounting for 10%). Other major sectors within the index include several, such as chemicals and machinery, that could be hit by rising import or export costs.
So far this year, consumer-sensitive sectors have faced tepid demand and accounted for most defaults. More than 75% of defaults in the U.S. have been from the consumer products, media and entertainment, health care, and retail sectors, and we expect each to face continued pressure.
Within the Leveraged Loan Index, health care services, hotels/leisure, and media are among the 10 largest sectors. Although these service-based sectors may have little direct exposure to tariffs, they are affected by potentially weaker consumer spending, higher unemployment, and rising labor costs due to policy uncertainty.
Chart 6
Borrowers Took Advantage Of First-Quarter Easing
Despite continuing uncertainty, the first quarter showed some signs of improvement that may move borrowers onto firmer footing for the challenges ahead.
Default rates fell in the first quarter for U.S. speculative-grade (50 bps) and leveraged (22 bps) loans. Notably, the leveraged loan default rate excludes selective defaults, which accounted for 75% of U.S. speculative-grade defaults in the first quarter.
In addition, the number of issuers most at risk of default declined in the first quarter. Weakest links (issuers rated 'B-' and below with a negative outlook or on CreditWatch negative) dropped to 154, from 168 at the start of the year. This reduction owed to rating changes and defaults, whereas a quarter earlier, the reduction was mostly from defaults. Comparing the number of issuers at the lowest rating levels, we rate close to 11% of those in the Leveraged Loan Index 'CCC+' and below, which is close to the share of all U.S. speculative-grade issuers.
Despite a decline in the leveraged loan issuer default rate to 1.23% in first-quarter 2025, from 1.45% at the end of 2024, many companies continue to face cash flow challenges, as evidenced by the uptick in payment-in-kind loans and selective defaults. The prolonged uncertainty surrounding tariffs could exacerbate this pressure.
As a result, we see considerable range in potential outcomes for the U.S. trailing-12-month speculative-grade default rate. Our base case of a decline to 4.0% by March 2026, versus 4.6% as of March 31, 2025, compares with a pessimistic scenario of a rise to 5.5% and optimistic scenario of a fall to 3.0%. We expect the leveraged loan default rate to move closer to the U.S. speculative-grade default rate, even though it will remain considerably lower due to the exclusion of distressed exchanges. However, in both cases, the outcomes we expect vary widely depending on future policy.
Chart 7
Differences In Default Rate Measurements
The high proportion of selective defaults in the U.S. has kept the broader speculative-grade corporate default rate higher than the Leveraged Loan Index default rate. This is because the definition of default for the Leveraged Loan Index is much narrower (see table 1). There are important differences in the definitions of default for each default rate series and forecast we analyze in our reports:
- S&P Global Ratings' definition of default determines the U.S. trailing-12-month speculative-grade corporate default rate.
- Within the Morningstar/LSTA U.S. Leveraged Loan Index, we measure the trailing-12-month default rate by number of issuers. This default rate excludes selective defaults from distressed debt exchanges.
Table 1
| Summary of differences in default definitions | ||||
|---|---|---|---|---|
| S&P Global Ratings definition | Morningstar/LSTA U.S. Leveraged Loan Index definition | |||
| --Issuer files for bankuptcy (results in a 'D' rating) | --Issuer files for bankruptcy | |||
| --Issuer missed principal/interest on a bond instrument (results in a 'D' or 'SD' rating)* | --Issuer downgraded to 'D' by S&P Global Ratings | |||
| --Issuer missed principal/interest on a loan instrument (results in a 'D' or 'SD' rating)* | --Issuer missed principal/interest on a loan instrument without forbearance | |||
| --Distressed exchange (results in a 'D' or 'SD' rating) | ||||
| --The baseline March 2026 forecast for the U.S. trailing-12-month speculative-grade corporate default rate is 4.00% | --The baseline March 2026 forecast for the Morningstar/ LSTA US Leveraged Loan Index default rate by number of issuers is 1.75% | |||
| *Under the S&P Gobal Ratings definition, an issuer is considered in default unless S&P Global Ratings believes payments will be made within five business days of the due date in the absence of a stated grace period, or within the earlier of the stated grace period or 30 calendar days. | ||||
Table 2
| Morningstar LSTA U.S. Leveraged Loan Index issuers by rating category compared to all speculative-grade issuers | ||||||
|---|---|---|---|---|---|---|
| Rating category | All speculative-grade issuers | Morningstar LSTA U.S. LL Index rated issuers* | ||||
| BB | 33.27% | 23% | ||||
| B | 55.78% | 61% | ||||
| CCC/C | 10.95% | 10% | ||||
| BBB- or above | N/A | 5% | ||||
| B-' Or lower | 32% | 34% | ||||
| Data for all speculative-grade issuers is as of March 31, 2025. Data for Morningstar LSTA U.S. LL Index rated issuers is as of April 25, 2025.*The index includes some issuers rated in the 'BBB' category. N/A--Not applicable. Sources: PitchBook | LCD, S&P Global Market Intelligence's CreditPro®, and S&P Global Ratings Private Markets Analytics. | ||||||
How We Determine Our Default Rate Forecasts
The Morningstar/LSTA U.S. Leveraged Loan Index default rate forecasts are based on recent observations and expectations for the path of the U.S. economy and financial markets. We consider, among various factors, our proprietary analytical tool for the Morningstar LSTA U.S. Leveraged Loan Index issuer base. The main components of the analytical tool are the U.S. trailing-12-month speculative-grade corporate default rate, the ratio of selective defaults to total defaults, a leveraged loan debt-to-EBITDA ratio, the Morningstar LSTA U.S. Leveraged Loan Index distress ratio, changes in the distribution of rated loans toward higher or lower ratings, and the unemployment rate.
Related Research
- The U.S. Speculative-Grade Corporate Default Rate Could Reach 4% By March 2026, May 21, 2025
- CreditWeek: How Will The U.S.-China Trade De-Escalation Affect Macro-Credit Conditions?, May 15, 2025
- Credit Conditions North America Special Update: Tariff Turmoil, April 17, 2025
This report does not constitute a rating action.
| Private Markets Analytics: | Evan M Gunter, Montgomery + 1 (212) 438 6412; evan.gunter@spglobal.com |
| Dani Herzberg, Raleigh +1 609 426 7518; dani.herzberg@spglobal.com | |
| Ruth Yang, New York (1) 212-438-2722; ruth.yang2@spglobal.com | |
| Credit Research & Insights: | Ekaterina Tolstova, Frankfurt +49 173 6591385; ekaterina.tolstova@spglobal.com |
| Research Assistant: | Charlie Cagampang, Manila |
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