As the U.S. economy forges ahead with resilience on the surface—marked by steady GDP growth and a robust labor market—beneath the surface, credit quality concerns are mounting. According to an abundance of asset management research, including insights from the Federal Reserve’s January 2025 Senior Loan Officer Opinion Survey (SLOOS), corporate credit risk remains stubbornly high and is expected to persist throughout 2025. This divergence between macroeconomic strength and micro-level credit stress reveals a complex and increasingly fragile financial landscape.

Credit Stress and Corporate Defaults: A Divergent Landscape

At the end of 2024, the average probability of default (PD) for U.S. public companies surged to 9.2%, its highest level since the global financial crisis. This figure marks a stark warning sign for investors and lenders alike. Forecasts indicate that this elevated risk will not abate quickly. Interestingly, high-yield companies—typically considered riskier due to their higher leverage—are currently displaying lower PDs (3.3%) compared to the broader public market. This counterintuitive dynamic stems from proactive refinancing efforts and better access to capital markets.

However, smaller, loan-financed companies are feeling the real strain. These firms are especially vulnerable to interest rate volatility, with many burdened by floating-rate debt. As borrowing costs have risen in recent years, the pressure on these companies has intensified. Limited access to traditional capital markets forces them to rely heavily on bank loans or private credit.

Since 2021, credit risk has been on an upward trajectory, diverging from the post-pandemic low of around 4%. While larger firms locked in low rates and extended maturities, smaller and mid-sized businesses are often stuck with short-term, variable-rate debt that exposes them to escalating costs and market instability.

Restructurings Over Bankruptcies

A notable structural shift in the credit environment is how defaults are manifesting. Rather than heading straight to bankruptcy, more companies are opting for distressed restructurings—renegotiating existing debt terms with lenders. In 2024, distressed exchanges made up 63% of all corporate defaults, the highest proportion ever recorded.

This trend reflects a preference among creditors to work collaboratively with borrowers to preserve value. Here, the role of turnaround consultants and performance improvement professionals aiding distressed businesses becomes vital. These professionals help companies stabilize operations, improve financial management, and navigate complex restructuring processes. Their work is particularly impactful among private equity-backed companies, where sponsors have both the resources and the incentive to extend maturities or inject capital rather than risk full default.

While these restructurings help avoid market shocks, they also indicate that underlying financial weaknesses may be greater than headline default figures suggest.

Private Credit’s Resilience Faces a Test

Private credit, especially through Business Development Companies (BDCs), continues to play a central role in financing middle-market companies. These entities lend to firms that may lack access to public markets or large banks. Historically, BDC portfolios have maintained credit profiles similar to Baa-rated corporates. However, their focus on smaller, less diversified borrowers exposes them to broader economic pressures.

As of early 2025, PD-implied ratings for many BDC portfolios remain relatively stable. However, the ongoing "higher-for-longer" rate environment poses significant challenges. Companies depending on private credit often operate with tighter margins and weaker cash flows. As interest costs consume a larger share of earnings, defaults in this sector may rise—even if broader credit markets remain steady.

Recent years have also seen a surge in capital flowing into private credit, resulting in increased competition among lenders. As a result, underwriting standards have declined, and covenant-light structures have become more common. These factors may now contribute to heightened risk, especially if refinancing windows begin to close.

Bank Lending Trends: Mixed Signals and Strategic Shifts

The January 2025 SLOOS report highlights a continued tightening of bank lending standards across both commercial and industrial (C&I) loans and commercial real estate (CRE). Driven by asset quality concerns and regulatory scrutiny, banks are becoming more selective. Still, demand for C&I loans is rebounding—especially among large and mid-sized firms responding to recent interest rate cuts and signs of economic stabilization.

Looking ahead, banks expect to ease credit standards in targeted segments, such as loans backed by multifamily real estate, GSE-eligible residential mortgages, and auto loans. These sectors are perceived as lower risk and remain attractive to borrowers.

In contrast, consumer credit is facing increasing pressure. Demand for credit cards and personal loans has declined, prompting banks to tighten terms, particularly for nonprime borrowers. This shift reflects a broader trend of risk aversion, as delinquencies in consumer credit start to rise after years of historically low defaults.

Emerging Trends: Technology and Policy Influence

Two developments are significantly shaping the credit landscape:

AI-Powered Lending: Financial institutions and fintech companies are integrating artificial intelligence to enhance borrower risk assessments, streamline origination, and expand credit access. These AI-driven models use alternative data and behavioral analytics to create more accurate and inclusive credit profiles.

Regulatory Adjustments: The arrival of a new administration has brought renewed attention to deregulation, aimed at reducing the compliance burden on financial institutions. While core banking safeguards remain in place, the lighter regulatory environment allows for greater flexibility and innovation in credit practices.

Outlook for 2025: A Delicate Balance

Despite three rate cuts in 2024, borrowing costs remain significantly higher than pre-pandemic levels. The average yield on Baa-rated corporate bonds exceeds 6%, compared to just above 3% in 2021. This sharp increase is forcing companies to rethink capital allocation strategies, with more disciplined debt usage and a renewed focus on liquidity.

Key Outlook Highlights:

• Public company defaults are expected to stay elevated around 9%.
• High-yield issuers may outperform expectations, with projected defaults in the 3–3.4% range.
• Leveraged loan defaults could rise to 7.6%, more than double the historical average.
• Private credit markets face growing stress, particularly among mid-sized firms.
• Lending standards may selectively ease but will remain cautious in high-risk sectors.
• Business credit may see marginal improvement, while consumer credit could stagnate or worsen.

Navigating a Shifting Credit Terrain

The 2025 credit environment is defined by caution, complexity, and the need for expert navigation. On the surface, economic indicators suggest stability but below, many businesses, particularly those carrying floating-rate debt, face significant headwinds.

Strategic planning is essential. Companies must build strong banking relationships, maintain liquidity buffers, and closely manage cash flow. Lenders, in turn, benefit from deploying experienced partners, such as turnaround consultants and performance improvement professionals aiding distressed businesses to regain control before defaults occur.

Rather than writing off borrowers, many lenders now view early intervention as a way to strengthen long-term relationships, recover assets, and avoid costly defaults. These win-win scenarios are only possible with timely, skilled support.

360 Veritas Turnaround Solutions

360 Veritas offers elite turnaround consulting services through a national network of top-tier independent consultants, each with proven expertise in crisis management, operational excellence, and strategic transformation. Our collaborative model is designed for speed and impact—blending deep industry experience with modern tools and real-time insights.

Whether it’s stabilizing cash flow, renegotiating debt, or reengineering operations, our consultants guide companies through periods of distress with clarity and confidence. Through our performance improvement focus, we help clients not only survive inflection points—but emerge stronger, leaner, and more resilient.

In today’s volatile environment, early intervention doesn’t just save the company—it saves the loan, protects the lender’s position, and preserves jobs and community stability. At 360 Veritas, we’re proud to be the partner that helps make that happen.