Private credit quarterly roundup: Liberation Day market responses

Following President Trump’s ‘Liberation Day’ announcement for tariffs on April 2, 2025, global markets experienced significant increase market volatility across equity and debt sectors. Against these evolving market changes and investment uncertainty, we asked the experts from Invesco’s bank loan, direct lending and distressed credit teams to share their views for the second quarter of 2025.

Bank loans and CLO market: Market instability creates challenging growth potential 

Scott Baskind, Kevin Egan and Michael Craig

EMEA

The S&P UBS Western European Leveraged Loan Index (“S&P UBS WELLI” or “Index”) returned -0.28% in April, which brought year-to-date returns to 0.71%.3 The monthly return was comprised of interest returns of 0.57% and principal returns of -0.85%.3

April was a volatile month. On April 2, 2025 ‘Liberation Day’, US President Trump declared a new set of tariffs imposing a baseline 10% tariff on all imports and additional country-specific tariffs. The announcement sparked a global selloff. For example, the US S&P 500 fell by more than 10%.4 The European leveraged loan market was not immune and declined by several points.3 New issue/primary transactions were pulled (i.e., postponed) and CLO issuance came to a halt for approximately two weeks before reopening later during the month.

As the month progressed with (improved) tariff talks/headlines developing, markets rebounded; the S&P 500 at month-end was (only) about 1% below its “Liberation Day” close.4 European leveraged loans returned -0.28% over the month, with the Index declining to 96.37 from 96.94, recovering from its lows of around 95.3 Performing loans are generally trading back up around par, although the dispersion of performing versus weaker credits has widened.

Primary loan markets were quiet during the month. There was approximately €3.5 billion (bn) of new issuance, down sharply versus Q1 which saw average monthly new issuance volumes of circa €11.5bn.4 New issue volume was primarily centered around well-liked credits with limited direct exposure to tariffs, for instance, economy hotel operator Motel-One priced its €907 million Term Loan B (TLB) at EURIBOR + 425 basis points (bps) at 99.75 original issue discount (OID) (B3 /B-) from an initial guidance at EURIBOR + 450bps at 99.

We expect the new issue pipeline will improve somewhat in the short- to medium-term compared to April’s lows, as there is good market demand for new issue loans. Several Initial Public Offering (IPO) and sales processes have been postponed by sponsors and mergers and acquisitions (M&A) pipeline which is currently muted, so supply is likely to be below the first quarter’s run-rate for some time, while uncertainty around US economic policy and the impact of tariffs remains uncertain.

CLO new issuance – which had been on track to set new records so far in 2025 – experienced a similar slowdown. AAA new issue coupons, which reached approximately EURIBOR +116bps during Q1, have widened to about EURIBOR +140bps in April. Only three deals priced during the month (versus an average of more than 12 deals per month during Q1). Heading into May, we believe that liability spreads will begin to normalise in tune with the loan market rally. However, given wider liability levels and lower new loan supply, we also believe that the CLO primary market will remain slow in the current macroeconomic environment.

We believe that lower funding costs in conjunction with a stable economy should be positive for credit; however, tariffs introduce uncertainty in the near term. The asset class has produced high risk-adjusted returns (as shown below in Figure 1), which we expect to continue.

US

Loans fell -0.07% in April, bringing year-to-date returns to 0.55%.¹ The monthly return was comprised of 0.68% coupon income, with principal movements detracting -0.75%.¹

Following President Trump’s ‘Liberation Day’ announcement on April 2, 2025 that the US would enforce broad tariffs across the world, global equity and debt markets sharply pulled back in early April before gradually recovering over the course of the rest of the month following President Trump instituting a 90-day pause on most new tariffs. The loan markets were not immune to this volatility with secondary loan prices falling and new issue activity slowing dramatically.

High yield and investment grade returned -0.04% and -0.03% respectively in April, with both high yield and investment grade outperforming loans.² Within loans, “BBs” (0.09%) led the way in total return during the month, followed by “Bs” (-0.01%) and “CCCs” (-0.70%).¹ The average price in the loan market ended the month at 95.25, slightly lower than March's average price of 95.84.¹ At their current average price, senior secured loans provide an 8.42% yield inclusive of the forward curve, slightly lower than the 8.63% at the end of March.¹

Given softer loan market conditions, repricing activity dropped to zero in April (as shown in Figure 1). This represented a steep decline from record-setting repricing witnessed months earlier in 2025. As loans priced at par or above now sit below 4% (as depicted in Figure 2), representing a multi-year low, we expect lower repricing activity moving forward, which should bode well for investors.

Direct lending: Cautious optimism in a higher-for-longer environment

Ron Kantowitz

The U.S. economy demonstrated resilience in the fourth quarter. Economic growth continued with GDP rising more than 2.7%, while unemployment remained relatively low showing signs of reverting to more historic levels.  Benefitting from The Federal Reserve (the “Fed”) rate cuts of 50 basis points in the fourth quarter, following a similar cut in September, inflation remained seemingly manageable at roughly 3.0%, albeit still above the Fed’s target. 

Looking ahead, while we remain encouraged by the strength of the U.S. economy and the pro-business stance of the new administration, a more cautious and measured investment approach is warranted.  New policy measures, such as tariffs and stricter immigration enforcement, could prove inflationary and slow growth.  Additionally, efforts by the U.S. Department of Government Efficiency may reduce fiscal support and dampen momentum.

Although much anticipated M&A-related deal flow has yet to materialise for the Direct Lending market, pressure is building on Private Equity firms to transact and return capital to LPs.  As market volatility subsides, we are watching for signs of renewed M&A activity.  In the meantime, patient credit investors may continue to benefit from a favorable higher-for-longer rate environment.

Distressed credit & special situations: A new era of economic dislocation

Paul Triggiani

Tariff uncertainty and evolving trade policy have dominated headlines, contributing to heightened volatility across global markets. Although recent weeks have brought a brief period of relative stability compared to the turbulence of early April, the future direction of U.S. trade policy—and the corresponding responses from global economies—remains highly uncertain. This ambiguity, coupled with the lack of historical precedent for the current approach to trade negotiations, is already having tangible effects on economic sentiment. Both consumer confidence and business optimism have declined notably, suggesting a potential path toward slower growth in developed markets. Rising inflation and unemployment may also become more pronounced if these trends persist. The U.S. Federal Reserve’s recent opaque commentary on future monetary policy adds another layer of complexity to the outlook.

The most significant takeaway from recent volatility is the erosion of confidence, which is already manifesting in reduced capital expenditures and consumer spending. As a result, underwriting must now be approached with greater flexibility and patience, both for existing portfolios and new investments. Upcoming announcements on U.S. monetary and fiscal policy are likely to be more impactful than ever, making it essential to evaluate all investment decisions through this lens.

Despite the uncertainty, we believe this environment will generate compelling opportunities. Liability management transactions are becoming more attractive as sponsors seek to enhance liquidity and extend maturities. Capital solutions are also gaining traction, especially as M&A activity remains muted and growth becomes more constrained.

Additionally, distressed-for-control and special situations are expected to rise, offering strong potential for vintage fund performance. Historically, periods of dislocation—such as the 2008 financial crisis or the 2020 pandemic—have created attractive entry points. Today’s environment shares similar traits, demanding a disciplined, opportunistic, and policy-aware investment approach.