Leveraged Credit 2025 Review & 2026 Outlook
Leveraged credit markets showed resilience in 2025, with AI and economic shifts setting the stage for new challenges and opportunities in 2026.
Polen's leveraged credit team reflects on the resilience and shifting dynamics of 2025, and explores how AI and economic uncertainty may shape opportunities and risks for investors in the year ahead.
Key Highlights
2025: Disruption Met with Resilience: Despite a turbulent year marked by rising volatility, inflationary pressures, and a record-long U.S. government shutdown, leveraged credit markets proved resilient, with high yield bonds and leveraged loans posting positive returns for the third year in a row.
Strong Technicals; Higher Quality Outperforms: Technicals remained strong as refinancing and repricing activity extended maturity profiles. Investors favored higher-rated credits, which outperformed lower-rated peers in both the U.S. and Europe amid volatile conditions.
Defaults Remain Low: Default rates for high yield bonds and loans stayed subdued in the U.S., supported by solid balance sheets and abundant private capital. While Europe saw a modest uptick, overall distress levels remain limited, and the 2026 outlook is broadly stable.
Private Credit Faces New Challenges: The private credit market continued to expand, particularly in AI-related deals. However, rising default rates and a more front-loaded maturity wall are emerging risks demanding close attention.
2026 Outlook Demands Agility: Artificial intelligence is set to remain a powerful force, creating both opportunity and risk in leveraged credit. With tight spreads, political uncertainty, and economic headwinds ahead, the ability to manage portfolios with agility and selectivity will be critical for success in 2026.
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