Trends in corporate direct lending 1H25

Returns: Across both the US and European markets, returns remain attractive by historical standards, despite moderating tailwinds as yields decrease alongside base rates and spreads.

Pricing: Spreads continued to compress in 1H25. This was mainly driven by an imbalance between the demand and supply of loans within the direct lending market. High and persistent economic uncertainty may lead to wider spreads ahead, particularly in sectors vulnerable to tariffs and supply chain risks.

Credit metrics: Fundamentals are showing early signs of improvement, with interest coverage ratios beginning to recover as some central banks ease policy rates. Newly issued loans’ leverage levels have also stabilized. However, US middle-market companies saw lower earnings growth rates in early 2025 compared with previous quarters. Some sectors (e.g., consumer) were affected more than others.

Volumes: Lending fell in 1H25 relative to a very strong 4Q24 but was still solid by historical standards. However, if uncertainty persists, the muted M&A activity and delayed IPOs could hurt direct lending volumes.

Macro: The environment is shifting, with the gap between US and European growth projected to narrow by year-end—marking a potential end to the recent period of US economic exceptionalism. Rising policy uncertainty is weighing on US business confidence and consumer demand and contributing to a softer outlook. Inflation trends are diverging. As a result, the Federal Reserve (Fed) appears likely to hold rates steady through most of 2025, while the European Central Bank (ECB) may cut rates further to support growth.