U.S. Special Situations: 2025 Outlook & 2024 Review

We observed at the end of 2023 that the era of “easy money” had ended, with the five-year treasury yield nearly tripling since 2021. Monetary policy tightening and the subsequent rise in rates was particularly burdensome for distressed borrowers with 2023-2024 maturities or other liquidity needs. In late 2023, the Fed provided solace to the market by shifting its messaging to policy normalization, alleviating the upward pressure on rates and, more importantly, creating a seemingly insatiable bid for risk on growing confidence in a soft landing. With this, demand for High Yield and Loans accelerated, reversing three years of outflows for bonds and two for loans.

Robust demand drove a wave of leveraged finance issuance in 2024, including exceptionally strong repricing/extension activity in the broadly syndicated loan market that helped alleviate prior concerns around near-term maturity walls. Lower-rated and distressed borrowers benefitted from the reduction in borrowing costs, making a significant dent in near-term maturities and allowing for BSL take outs of expensive private credit tranches from 2022 and 2023. In 2025 and 2026, we estimate $133 bn of HY bond maturities with around half of that tally from B or lower-rated issuers. For loans, YTD gross volume including repricings and extensions now totals $1.1 trillion, well ahead of US HY issuance and closer to the hefty issuance pace of the much larger US IG market. Broadly syndicated loan maturities total a very moderate $107 bn in 2025-2026, though 85% of these maturities are from issuers rated B or lower.

Looking ahead, the extent and impact of further relief on borrowing costs may ultimately depend on numerous factors that will play out over the course of 2025, including economic indicators that drive Fed policy, the economic and trade policies of the incoming Trump administration, and Congress’s willingness to enact legislation, cut taxes, and reduce spending, among others.

The trajectory of covenant protections over the course of the year also underscores the overwhelmingly strong demand for leveraged finance in 2024. With not enough supply to satisfy investor appetite, covenant protections continued their modest, but consistent, downward trajectory. Through September 2024, “Covenant Review Doc Scores” show that the CS leveraged loan index hit a weighted average of 3.83, or a record for “loose” covenant protections (on a scale of 1 being the most protective and 5 the most permissive). Sponsors and borrowers continued to innovate, introducing new aggressive terminology over the course of the year—“highest watermark” provisions being the most notable. These allow borrowers to take advantage of their historically highest EBITDA, even if such borrowers’ financial fortunes later decline. Given the significant uptick in LMEs in 2024, which can at least partially be attributed to weak covenant protections as discussed in detail later in this report, we therefore expect out-of-court restructuring to continue into 2025. However, if risk sentiment remains intact, ample private sector liquidity leaves distressed borrowers with access to more traditional sources of capital.

It is against this backdrop that we have organized our “U.S. Special Situations: 2025 Outlook & 2024 Review” into two parts:

• In Part I, we discuss our 2025 “special situations” strategy outlook. Part I examines the strong performance of leveraged finance markets in 2024, especially in lower-rated segments, despite early-year concerns about distressed debt exchanges and defaults. It then explores our more cautious outlook for 2025 due to emerging fundamental headwinds, including intentional releveraging, mixed economic trends, and higher-than-expected policy rates. Key themes for 2025 are also discussed, including anticipated M&A and LBO activity, steady default rates, more consensual LMEs, and spread decompression. Part I also covers sector themes across media and telecom, technology, healthcare, and retail, and then offers a discussion of key credits of interest within each of those sectors. Finally, Part I concludes with a discussion of LevFin Insights’ “U.S. Bankruptcy Runway Report,” which offers a curated list of distressed issuers facing upcoming restructuring catalysts in the near future.
• In Part II, we recap major 2024 “special situations” themes and events, highlighting coverage across our fundamental research, covenant, and news teams. Part II starts with commentary on LMEs in 2024 and details each notable LME that occurred over the year. Part II then discusses notable litigation related to specific credits that we cover from a fundamental perspective and categorizes that litigation between bankruptcy-related and non-bankruptcy-related cases. Finally, Part II concludes with a discussion of our news and research efforts on each bankruptcy case with over $200 mn in funded debt that either filed or emerged from chapter 11 in 2024.

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