“This change reflects a weaker macroeconomic outlook, significant uncertainty from the ongoing trade war hamstringing managements’ efforts to devise appropriate defensive strategies, more risk-averse capital markets, and anticipated higher interest expense that disproportionately affects issuers at the lower end of the rating spectrum,” it said.
Indeed, Fitch recently cut its global economic forecasts. It now expects U.S. growth to slow to just 0.4% by the fourth quarter.
Yet, with “import prices set to rise sharply,” the U.S. Federal Reserve Board is also expected to keep interest rates higher for longer than previously expected, in the face of renewed inflation fears, it said.
“Deteriorating market sentiment has reduced issuances in the leveraged loan and high-yield markets since early April. Risk premia has widened both in the U.S. and Europe, exacerbating financial strain,” it noted.
At the same time, Fitch increased its corporate default rate forecasts, as higher tariffs weigh on revenues and profits in most sectors.
Alongside the cut in the outlook for the leveraged finance market, Fitch said that structured finance asset performance will face higher risks in 2025.
While global structured finance outlooks are balanced overall, “Negative outlooks will likely start outweighing positive outlooks over the course of the year,” it said.
“Sectors exposed to more vulnerable borrowers or directly affected by policy changes will be especially affected. We are reassessing asset forecasts and asset performance outlooks globally and expect to publish updates in the coming weeks,” it added.
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