European Structured Credit 2025 Outlook: Steady as She Goes

This commentary presents our outlook for key European Structured Credit markets in 2025, including:
-- Broadly syndicated loans (BSLs) collateralised loan obligations (CLOs)
-- Small and medium-sized enterprise (SME) CLOs
-- Commercial lease asset-backed securities (ABS)

Key Highlights:
-- BSL CLO issuance in 2024 reached a record high, driven by improving economics and investor appetite. For 2025, we expect BSL CLO issuance to remain strong, backed by stable borrower performance expectations, a further improving interest rate environment, and strong investor demand.
-- Pure defaults on leveraged loans have been trending down in 2024, but the use of distressed debt exchanges (DDE) has grown in Europe. Total defaults considering DDEs have grown close to 5% in 2024. The use of distressed exchanges is likely to carry on into 2025, but we expect the total default including DDEs to be lower than the peak observed in 2024, although still elevated.
-- We expect the growth of private credit and fund debt backed by private credit assets to continue in 2025. It is likely we will see more European middle market CLOs and public credit fund debt rated issuance in 2025.
-- Public SME CLO issuance remained timid in 2024, a trend that is likely to carry on in 2025. However, public commercial/SME leasing securitisation issuance remains stable.
-- High borrowing costs, input prices, labour costs, and subdued consumer spending are likely to continue to spur SME insolvencies to a peak in 2025 before slowing down. However, SME CLO and SME leasing ABS ratings are expected to remain resilient in 2025.
"Our stable outlook across structured credit markets is based on improving macroeconomic indicators such as inflation and interest rates", said Carlos Silva, European Structured Credit team lead. "However, minimal forecast economic growth across the largest European economies remains a concern while geopolitical uncertainty remains a top consideration and could derail our stable forecast".