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Tariffs will push up default rates for several years, say agencies and managers
by David Rollier
After an uptick in leveraged loan defaults culled weaker credits in 2024, many expected default rates to fall in 2025. But the uncertainty stemming from the Trump administration’s tariffs means those assumptions are now under threat.
Already, several ratings agencies have revised their outlooks, and asset managers are bracing for a rise in defaults.
“The current tariffs and trade turmoil will weaken credit conditions, and corporate defaults will not decrease as quickly as we had previously expected,” Moody’s said in its March 2025 Default Report, published on 16 April. Its global speculative grade default rate baseline rose to 3.1% by the end of 2025, up from 2.5%. Moody’s also included a “pessimistic scenario” with speculative-grade defaults rising to 7.1%.
“The risk to the downside, the potential for those defaults to be higher, has increased,” said Jeanine Arnold, who oversees Moody’s EMEA leveraged finance and co-ordinates leveraged finance globally. “That really depends on the further escalation in trade restrictions, reciprocal tariffs, [and] to what degree that affects supply chains.”
Declining corporate margins and higher-for-longer interest rates will pressure borrowers, according to a statement from Fitch on 25 April. Already, volatile conditions have led to a sharp pull-back in leveraged loan activity, reduced liquidity and wider spreads. Meanwhile, hopes for a resurgence in M&A and LBO activity have dwindled.
Fitch has raised its US leveraged loan default rate expectations for 2025. They are now at 5.5%–6% (up from 3.5%-4%). In Europe, Fitch now expects a 2025 leveraged loan default rate of 2.5%-3%, up from 2%-2.5%.
During an earnings call on 17 April, Blackstone president and COO Jon Gray said he was seeing 50 basis points of defaults across its non-investment grade portfolio. “I expect that’s definitely going to rise over time.”
BSL is the one that scares me most out of the three markets
Eric Rosenthal
Senior director
KBRA DLD
S&P Global projects a US leveraged loan default rate of 1.6% through December 2025, up just slightly from the 1.5% rate as of December 2024. That’s according to a report published on 10 March (before President Donald Trump’s ‘Liberation Day’), which came with an editor’s note stressing tariff unpredictability.
Threats from tariffs are greatest to borrowers facing near-term maturities — and these are likely to be the lowest-rated companies. In the US, most leveraged loan and high yield debt set to mature in the next 12-18 months is from issuers rated CCC+ or below, according to Fitch’s statement on 25 April.
Leveraged loan issuers are attempting to mitigate the effects of economic turbulence. “A lot of loans have been refinanced and repriced before March, with 1Q25 being the busiest quarter in a while,” said Pablo Mazzini, head of leveraged finance ratings at Fitch.
A report from KBRA Direct Lending Deals, published on 28 April, projected US BSL Loans defaults to decline to USD 58bn in 2025, versus USD 82bn for 2024.
“There’s been a lot of uncertainty about what’s going to happen with tariffs, but defaults do take time,” said Eric Rosenthal, senior director at KBRA DLD. “While BSL is the one that scares me most out of the three markets [BSL, high yield, and direct lending], I don’t see it being anywhere near what we saw last year in terms of defaults.”
If a name has been teetering, it may default this year. However, for those that are more borderline, the impact of the tariffs may not result in them defaulting until 2026 or even 2027, Rosenthal said.
He added that the size of the leveraged loan market means a great number of defaults must occur before the rate rises significantly. North American BSL defaults hit a record USD 82.3bn in 2024, outpacing 2009’s USD 77.5bn. However, due to the increased size of the market, the default rate of 5.6% was not even close to 2009’s 14.7%.
