2024 was a strong year for loan returns driven primarily by robust coupon, in line with our expectations.
The US economy showed strength in 2024, but persistent inflation and rising delinquency rates suggest a cautious yet promising outlook for direct lending in 2025.
The capital solutions opportunity set is growing exponentially due to historical private equity buyouts, pandemic impacts, and rising base rates, despite many underlying businesses being strategically and operationally sound.
Significant focus on the uncertainty of the US macroeconomic backdrop and its potential headwinds on the market remain top of mind for investment opportunities globally. Against this cautious outlook, we asked the experts from Invesco’s bank loan, direct lending and distressed credit teams to share their views as the first quarter of 2025 begins.Bank loans and CLO market: Stable returns in-line with expectations
In 2024, the US leveraged loan market achieved an 9.05% full year return, surpassing expectations. As shown in the below chart, this performance was driven by robust coupon income of 9.65%, despite a slight price detraction of -0.60%. The market benefited from resilient economic growth, stable loan spreads, and a benign credit environment. Base rates declined from 5.33% to 4.51%, while loan spreads compressed due to heightened repricing activity. The loan default rate remained low at 0.91%, with distressed exchanges helping to improve recoveries. Strong demand from CLO formations and retail investors supported the market, although new issuance was relatively muted due to limited M&A and LBO activity.
In 2025, the US leveraged loan market is expected to deliver total returns of 7.5-8.0%,1 powered by high carry and price stability, partly offset by mild erosion in spread and base rates. The market anticipates the US Federal Reserve (Fed) will continue easing rates, albeit slowly, influenced by moderating disinflation and the Trump Administration’s inflationary policy risks. US and global growth are expected to remain resilient, with a lower loan default rate of 3.25-3.75%.2 Despite limited price appreciation potential, strong fundamentals and supportive market technicals should maintain price stability, with repricing activity expected to moderate compared to 2024.
From a macroeconomic perspective, we expect US growth will remain resilient and global growth will accelerate in response to broadly easing monetary conditions. The Trump Administration does not materially alter our near-term growth expectations, but it does widen the band of plausible economic outcomes in the coming years. President Trump’s re-election heightens the odds of disruption to the status quo on numerous fronts - global trade, international alliances, immigration, the scope and efficiency of government agencies, as well as several other domains of American society and industry. Disruption of the status quo is inherently hazardous to incumbent loan issuers, particularly those whose revenues or competitive moats depend on the current regulatory edifice. We expect winners and losers will emerge from this impending shake up, so credit selection will be critical even in a scenario of accelerating growth.
In 2025, the US CLO market is expected to continue the strong trends from 2024, with gross issuance potentially reaching $200 billion (bn).3 Demand is driven by banks and insurers favoring CLO liabilities, international banks’ continued purchases, and the emergence of CLO ETFs. Private credit CLO issuance is also expected to remain high. Despite muted net issuance due to amortizations and called CLOs, refinance and reset activity will likely continue at a high pace. Tightening CLO spreads could further drive demand, with primary CLO spreads potentially tightening to SOFR + 110-120bps.4 The main risk to this forecast is the macroeconomic outlook.
For our complete analysis, read “US Senior Loans and CLO Market Outlook.”
The European leveraged loan market returned 8.53% for the full year 2024, aligning with expectations. Loan prices appreciated due to an improving macroeconomic landscape, with growth reflected in PMI and GDP metrics, despite Germany’s underperformance. Disinflation trends allowed the European Central Bank (ECB) to cut deposit rates, supporting a positive market environment. The Credit Suisse Western European Leveraged Loan Index posted consistent monthly returns,5with significant growth in CLO origination driven by tightening spreads. The market saw record institutional loan volume, primarily from repricing and extension transactions, mitigating maturity-wall risks. Overall, the market benefited from improving fundamentals and confidence, with expectations for continued positive dynamics in 2025.
The Euro area is expected to maintain a low-but-positive growth trajectory, despite uncertainties from the US election and potential tariffs. Increased domestic demand, driven by higher disposable incomes and a less restrictive ECB, along with disinflation and monetary stimulus, should support corporate fundamentals and reduce interest expense risks. The ECB’s rate cuts are anticipated to continue, providing further monetary stimulus and supporting GDP growth and EBITDA improvements. This environment is expected to keep idiosyncratic risks in check and create a relatively benign environment for corporate distress, with default rates likely to remain below non-recessionary averages.
CLO issuance is expected to remain strong, supported by experienced managers and robust investor demand. The market could see record levels of issuance if the weighted average cost of debt tightens alongside increased supply of assets. M&A and LBO activity are expected to increase in 2025, driven by lower financing costs and higher C-suite confidence as recessionary fears fade. Loan refinancing is expected to moderate, and the near-term maturity wall has significantly decreased, reducing refinancing pressures. Overall, the market is expected to benefit from positive dynamics, with a constructive outlook for loan spreads and continued strong demand for CLOs.
For our complete analysis, read “European Senior Loans and CLO Market Outlook.”
The US economy continued to demonstrate strength in 2024, although core PCE, the Fed’s preferred measure of inflation, has proven more stubborn than expected. Further, labor markets continued to exhibit volatility, pandemic savings have become largely depleted, delinquency rates on auto loans and credit cards have continued to trend higher, and credit card balances are at the highest level we have seen in a decade. All this to say, that while we believe 2025 should be a compelling opportunity for the Direct Lending asset class, we remain disciplined, focused and cautious.
With the new US government administration coming into office, we are anticipating continued strength in the economy, coupled with potential inflationary pressures from some of the anticipated government policy changes. Should we experience a more restrictive tone, or at least a slower easing of monetary policy, we believe the US economy is well positioned to weather any challenges given GDP growth is trending close to 3.0% currently.
Importantly, we continue to see a very favorable setup for direct lending in 2025. Private equity firms continue to face mounting pressures from investors to provide liquidity as well as deploy the significant amount of new capital that has been raised in recent years. A conclusion to the election process without incident has been well received by the equity markets, which in turn has fueled a meaningful pickup in M&A volumes. With expectations for a higher-for-longer rate environment, we expect the risk/return dynamics for Direct Lending to continue to offer a compelling value proposition in 2025.
We continue to see exponential growth in our capital solutions opportunity set which has been a function of two decades of private equity buyouts in an effectively zero interest rate environment, followed by a pandemic, massive cost structure inflation, and approximately 500 basis points of base rate increase. These opportunities remain unique historically in the special situations universe in that there is nothing inherently distressed about many of these underlying businesses. They are, in general, strategically and operationally sound with excellent management teams and private equity sponsors.
However, private equity owners have been constrained by their capital structures, unable to grow equity value during the past decade. New product development, geographic expansion, accretive acquisitions – all growth avenues typically pursued by sponsors – have been sacrificed to service leverage levels that were only sustainable prior to today’s more restrictive monetary policy. Many of these companies have capital structures with debt that is unimpaired (worth “par”) where substantial equity value remains. It is just a matter of math that equity accounts have not grown since these buyouts occurred, given the cost of capital for floating rate borrowings has essentially doubled over the course of the last three years.
There is no guarantee that the forecast will be realized.
PitchBook Data, Inc. as of November 30, 2024
Citibank as of November 26, 2024
Invesco as of November 30, 2024.
Source: PitchBook Data, Inc.; Bank of America Merrill Lynch; Bloomberg as of November 30, 2024. The Morningstar European Leveraged Loan Index represents European Loans, the Bloomberg Euro Aggregate Corporate Total Return Index represents European Investment Grade, and the Bloomberg Pan-European High Yield Total Return Index represents European High Yield. All Euro-based indices are hedged to EUR. An investment cannot be made directly in an index. All Euro-based indices are hedged to EUR. An investment cannot be made in an index. Past performance is not a guarantee of future results.
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Important information
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Information is provided as at December 31, 2024 sourced from Invesco Private Credit and Credit Suisse unless otherwise stated.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Views and opinions are based on current market conditions and are subject to change.
Investment risk
For complete information on risks, refer to the legal documents.
Many senior loans are illiquid, meaning that the investors may not be able to sell them quickly at a fair price and/or that the redemptions may be delayed due to illiquidity of the senior loans. The market for illiquid securities is more volatile than the market for liquid securities.
The market for senior loans could be disrupted in the event of an economic downturn or a substantial increase or decrease in interest rates. Senior loans, like most other debt obligations, are subject to the risk of default. The market for senior loans remains less developed in Europe than in the U.S. Accordingly, and despite the development of this market in Europe, the European Senior Loans secondary market is usually not considered as liquid as in the U.S.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
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