Leveraged Finance Outlook: Demand for New Paper Continues to Outpace Supply in Primary; Interest Rate Uncertainty, Tariffs Loom Over Market

As 2025 progresses, leveraged finance market participants’ appetite for new high-yield bond and leveraged loan issuance appears as robust as it has ever been. However, the threat of tariffs by President Donald Trump and uncertainty around the Federal Reserve’s decision on interest rates could hinder future primary issuance, sources say, and that would impact new-money deals coming from M&A or leveraged buyouts this year.

As the leveraged finance market settles after Trump’s return to office, market participants note that issuance has not been affected by the change in administration, in view of the strong demand for new deals among investors.

“There’s been a lot of uncertainty with regards to the new administration’s policy,” said John Sherman, a high-yield portfolio manager at Polen Capital. “But still, both bond and loan markets have been very active and strong so far this year, with many deals being oversubscribed.” Overall, buy-side market participants have been hungry for new deals so far this year, added Sherman.

Market conditions have been indicative of just this. Average high-yield bond spreads currently sit at 299 basis points as of March 6, according to ICE BofA data, close to the tightest point in the past year at 259 bps in January 2025. The SOFR rate currently stands at 435 bps as of March 6, more than 100 bps tighter than where it stood a year earlier.
 

While conditions remain conducive in the leveraged finance market, participants have noted that appetite for riskier-rated credit has increased, more so than years past, and these issues are viewed as attractive by investors from corporate issuers when coming to the primary.

“Market appetite for risk is as strong as it’s ever been, rivaling 2006-2007,” said Sherman, regarding demand from investors for risk compared with nearly 20 years ago. “Overall, the market is hungry for new paper.”

Average spreads on the ICE BofA CCC & Lower US High-Yield Index was at 790 bps as of March 6, close to its tightest point at the beginning of the year at 690 bps, according to ICE BofA data.

The problem is the lack of consistent new deal flow in both the high-yield bond and leveraged loan primary markets, which sources say is a symptom of waiting until there is more clarity from President Trump and his new policies, market participants note.

“It’s been pretty quiet for the leveraged finance market since Trump has been in office,” said a leveraged finance banker on primary activity so far in 2025. “Everyone has kind of taken a breather to wait and assess what President Trump’s first 100 days in office will be like given a lot of noise around tariffs and geopolitical dynamics.”
 

In recent weeks the market has begun to price in further Federal Reserve interest rate cuts, which could lead to more M&A activity, market participants noted.

“It’s clear from recent pricing that the market doesn’t think we’re in a Goldilocks scenario anymore,” said Scott Giardina, head of credit trading and public capital markets at FS Investments. Giardina noted that while the market has priced in roughly two more Federal Reserve interest rate cuts this year, inflation has proven to be sticky, and that will ultimately dictate the Fed’s choices.

This will impact M&A and LBO dealmaking this year, market participants say, and it is not expected to pick up significantly after starting the year off relatively slowly, while a disconnect between buyers and sellers persists.

M&A activity is expected to rise 10% year over year in 2025, following a 13% advance in 2024, according to a 2025 M&A market outlook report by EY-Parthenon. The report also predicts a 16% rise in 2025 for private equity deal volume and 8% growth for corporate M&A deals.

“M&A and LBO dealmaking activity will continue to be constricted this year with the valuation disconnect persisting with sponsors and the cost of capital still being so high,” said Mike Scott, head of global high-yield and credit opportunities at Man Group, about activity this year.

“Private equity buyers are more cautious, given the lack of clarity in company cost structures and tariff impacts,” said Giardina about the threat of tariffs on private equity sponsors.

The Trump administration’s emphasis on deregulation is another major theme anticipated among dealmakers, who expect that the regulatory landscape governing M&A will be more business-friendly. However, market participants say it is too soon to tell, as such deregulatory policies remain to be seen.

“Recent news indicates that this is the slowest M&A landscape we’ve seen in a decade, which speaks to potential trepidation related to the new administration’s changes,” said Dylan Brown, a partner at Goodwin, who emphasized that deregulation is still in nascent stages at this point.

On Feb. 18, Federal Trade Commission Chairman Andrew N. Ferguson announced that the FTC and Department of Justice’s joint 2023 merger guidelines remain in effect and will serve as the framework for the FTC’s merger-review analysis.

“Stability is also good for the enforcement agencies,” Ferguson said in his memo. “The wholesale rescission and reworking of guidelines is time consuming and expensive. We should undertake this process sparingly. We have limited resources to patrol the beat, and constant turnover undermines agency credibility.”
 

Market participants also identified the increasing overlap between the broadly syndicated loan and private credit markets as another major theme that will continue in 2025.

“It’s a pendulum swing, and last year the BSL market came back,” said Brown about the dynamic between the public and private markets. “Cov-lite deals originated in the BSL market have now come to private credit – there’s a lot of convergence. The popularity of portable deals in private credit deals, a concept which has been around for a while, also speaks to the competition between direct lenders.”

Sherman likewise emphasized this competition, noting that the BSL market is winning market share over private credit recently as strong investor demand leads to aggressive pricing and looser documents. In 2024, private credit deal activity in the Americas totaled 505 deals, up more than 17% compared with 2023, according to Octus’ PCDO Dashboard. So far this year, there have been 47 private credit deals in the Americas, according to the dashboard. Average pricing on a private credit deal in the Americas stood at 587.3 bps in the first quarter of 2024; in the fourth quarter of 2024 it tightened to 522.36 bps, according to the dashboard.

“The fact that new deals are multiple times oversubscribed is enabling borrowers to push across more aggressive terms – especially ‘portability,’ in allowing companies to move debt structures in place to the next owners,” said Sherman. “Even though investors scrutinize it greatly, it is still being pushed through due to the overwhelming demand for new paper.”

Several deals in the market this year tapped both the BSL and private credit markets, whether in dual tracking to both markets to find the best rate, or packaging hybrid deal structures with both broadly syndicated and direct lending loans. Sycamore Partners, for example, has been in talks with BSL bankers and private lenders to prepare its $12 billion package financing its buyout of Walgreens, which will consist of both broadly syndicated loans and private credit loans.

Market participants also note a substantial increase in the number of private credit loans refinanced in the BSL market recently, given that the market is very active currently and may offer more attractive rates. One leveraged finance banker noted that there is a slate of private credit annual recurring revenue, or ARR, loans to be refinanced in the BSL market coming soon – a result of a wave of private credit ARR loans underwritten in 2021-2022 that now look to tap the BSL market. Morgan Stanley is expected to launch a refinancing for Avalara’s $2.5 billion ARR loan, which was provided by private lenders in 2022 to back its $8.4 billion acquisition by Vista Equity Partners, Octus reported this week.

Nonetheless, there are still loans which, despite fertile market conditions, did not gain traction in the BSL market but found success among private credit lenders. A recent example is Lakeview Farms pivoting to private lenders for its loan financing its acquisition of Noosa Yogurt after it struggled in the BSL market, as did Modernizing Medicine.

Another leveraged finance investor added that sponsors have proposed more loose covenant terms in credit agreements in BSL loans, a result of a rapid rise in borrowing rates and costs. The investor added that such aggressive tactics have been destigmatized and are prevalent in the BSL market, where credit agreements are extremely weak.
 

With the change in administration, investors have highlighted that Robert Kennedy Jr.’s appointment as secretary of the Department of Health and Human Services could negatively impact businesses operating in the biopharma and medical research sectors, given his anti-vaxx rhetoric. New policies could also impact sugary consumer brands, as Kennedy pushes to ban artificial food dyes, such as red 40. Other sectors that investors expect will be challenged by the new administration’s policies are companies with a tariff slant, particularly those with large operations in China.

For example, Apollo-backed Michaels Stores’ bonds and loans have been trading down recently in the secondary market as concerns rise over the U.S.-imposed tariffs on China that could affect the arts and crafts retailer’s ability to originate products from that country, Octus reported. Market participants noted that it will be difficult for Michaels to circumvent the tariffs imposed on China because, unlike those imposed on Mexico and Canada, they will likely remain for the duration of Trump’s term. The impact and legitimacy of imposed tariffs on Canada and Mexico remain to be seen, market participants added.

“Tariffs are not great in terms of market outlook, but fewer regulations at margin will be better for business,” Brown said. “There’s a lot of dry powder, and people want to put money to use.”

Nonetheless, market participants say primary market activity will continue to be lackluster compared with years past, given higher interest rates. Issuers with lower credit ratings will opportunistically borrow when windows of opportunity become available.

“Primary market remains constrained relative to expectations with issuers grappling with a backdrop of continued higher rates and inflation,” said Scott. “We would expect lower rated issuers to be more opportunistic in issuing debt, trying to tap into periods when markets remain open.”