May 1, 2025 - The Fed’s April 2025 Financial Stability Report (FSR) is light on references to leveraged lending, but what it does say about the asset class is benign. This is notable given that the report reflects market conditions and data as of April 11^th, over a week into the market’s Liberation Day-induced volatility. We provide some takeaways below.

1. According to the FSR, nonfinancial business debt adjusted for inflation fell modestly in 2H24, but institutional leveraged loan volume meant net issuance of sub-investment grade debt was positive. The FSR concludes that business debt vulnerabilities are moderate.
   
   
2. Newly issued leveraged loans with leverage greater than 4x increased slightly but remained near their lowest levels in a decade. While noting that vulnerabilities in leveraged loans remained above historical norms, the report points out that gross and net leverage ratios declined modestly while median interest rate coverage (ICR) increased slightly.
   
   
3. The FSR points out that private credit continues to grow quickly (accounting for about 9% of total outstanding nonfinancial corporate debt, up from 7% in the November 2024 report) but that gross and net leverage are similar to the previous report and the average interest coverage ratio (ICR) at issuance for private credit borrowers (defined as small and medium sized private firms) has increased. (Specifically, according to the report, the ICR for private credit borrowers remains around 2x, in line with ICRs of sub-investment grade public companies – a level that the Fed thinks provides headroom for borrowers to service their debt.) 
   
   
4. The FSR is the first to capture a change in methodology for identifying banks’ commitments to NBFIs that reclassifies a substantial amount of loans previously classified as loans to “Other financial vehicles” as loans to private equity (PE) firms, business development companies (BDCs), and private credit (PC) funds. While the Fed notes that commitments in 4Q24 to the collective private equity, BDC and private credit sector under the new classification are higher by $243 billion, it clarifies that estimated historical growth rates are unchanged relative to the growth rates reported before the change. Furthermore, the report notes that bank lending to NBFIs generally is not significantly concentrated in any one sector, most commitments are IG-rated, and these loans traditionally have lower delinquency rates than loans to nonfinancial businesses.
   
   
5. The FSR includes the results from a survey on risks to U.S. financial stability that the Federal Reserve Bank of New York conducted from February to early April. (The survey was based on 22 respondents from the investment and academic world.) Out of 14 potential shocks, private credit and nonbank financial institution stress were the fourth and third least cited, respectively, at under 20% of respondents. This compares to the most cited potential shock – risks to global trade – at more than 70% of respondents.