Institutional leveraged loan activity increased threefold on the previous year in 2024 (Chart 1). The vast majority of this activity was accounted for by the repricing of loans via an amendment process or issuance for the purpose of refinancing existing debt, leaving the global stock of leveraged loans broadly unchanged over the year. In contrast, new issuance to support mergers and acquisitions and leveraged buyout activity (M&A/LBO) remained below its historical average.
Strong investor demand for leveraged loans came against a backdrop of resilient US growth and fewer expected central bank policy rate cuts, which makes leveraged loans attractive given they are a floating rate instrument. Collateralised loan obligations, the predominant buyers of leveraged loans, also saw record new issuance over 2024.
Strong investor appetite also led to compression in leveraged loan spreads, despite global leveraged loan default rates remaining elevated relative to historical averages.footnote [1] Spreads have dropped by 60 basis points for the US and by 50 basis points for European loans since the start of 2024 and are now towards the bottom of their historical distribution – at the 10th percentile for the US and the 25th percentile for Europe.footnote [2] As highlighted in the November 2024 Financial Stability Report, the Financial Policy Committee (FPC) remains concerned about the risks associated with the compression of financial market risk premia, including in the leveraged loan market.
If risks to the downside were to materialise, market prices could see a sharp correction as investor risk appetite reduces, which can be amplified by vulnerabilities in market-based finance (such as liquidity mismatches in leveraged loan funds). This would impact the cost and availability of financing to the real economy, particularly affecting those issuers with near-term refinancing concerns.
That said, refinancing and extension activity over 2024 has moderately reduced the near-term implications of a reduction in risk appetite for the real economy.footnote [3] Bank staff estimates suggest that less than 5% of outstanding global institutional leveraged loans are now due to mature over the next two years (see Chart 2). At the end of 2023, leveraged loan issuers faced slightly greater near-term refinancing needs, with 7% of institutional stock due to mature within the following 24 months. Maturity walls further out have also fallen but remain material – with 46% of global stock due to mature before the end of 2028.
Chart 2: The maturity profile of global institutional leveraged loans
Footnotes
- Sources: PitchBook Data, Inc. and Bank calculations.
The FPC continues to monitor the risks to financial stability associated with leveraged loans and their potential impact on the UK real economy.
This post was prepared with the help of Owen Clark, Edward Egan, Sarah Munson and George Pugh.
This analysis was presented to the Governors in 2024 Q4.
Share your thoughts with us at BankOverground@bankofengland.co.uk
Based on default rate data from PitchBook Data, Inc. and Moody’s. Includes distressed exchanges.
Sources: PitchBook Data, Inc. and Bank calculations.
For more on the role of leveraged lending in financing the UK real economy, see recent Bank publications Why do UK companies raise market-based finance debt? and Shining a light on private equity backed corporates in four findings.
