After stumbling in the spring, the US leveraged loan market found its footing in Q3, surging back to near-record levels of activity. But the rebound was less about fresh deal flow and more about opportunism — borrowers rushing to refinance, reprice, extend maturities and extract liquidity through dividend recaps. With technicals tilting further in borrowers’ favor, the market is now defined by tight spreads, strong demand, and limited net supply, as investors remain poised for an eventual rebound in M&A activity.
Key takeaways:
- Primary syndicated loan activity surged to $385 billion in Q3, the third-highest quarterly total on record, rebounding sharply after tariff-driven disruptions in the second quarter.
- Only 16% of the activity funded new-money deals, with the rest dominated by refinancings and repricings.
- Year-to-date, repricings have cut spreads by an average of 51 bps, saving issuers $2.4 billion annually.
- PE sponsors financed roughly $34 billion of dividend recaps through the leveraged loan market — the highest level in at least seven years.
- Nearly half of 2025 dividend recap issuers have been in portfolios for over five years.
- Refinancing issuance surged in Q3, with B-minus rated borrowers driving 44% of activity as they rushed to address 2028 maturities.
- New-issue spreads for B-minus loans fell to S+366 in Q3 — the lowest since the Global Financial Crisis — as technicals continue to favor borrowers.
Dramatic rebound
The US leveraged loan market rebounded sharply from the tariff-driven slump earlier in the year. Primary activity surged to $385 billion in Q3 2025 (as of Sept. 27) — making it not only the busiest quarter of the year, but also the third-highest quarterly volume on record. This marked a dramatic recovery from the $115.5 billion in Q2 2025, when heightened macroeconomic uncertainty temporarily weighed on new issuance.
Beneath the headline surge, however, the issuance picture looks far less robust — net supply remains notably muted. Roughly 84% of third-quarter activity was driven by borrowers seeking to cut interest costs, extend maturities, or both. That marks an even greater tilt away from true net supply than in the first quarter, when repricings, extensions and refinancings made up 79% of total volume.
Only 16% of Q3 issuance — about $62.3 billion — funded new-money transactions unrelated to refinancings or amendments. Although that’s more than the $53.8 billion in Q2, it’s still 15% below Q1 levels and 23% below Q3 2024, despite tighter spreads and strong investor demand.
Although the tariff shock and sharp volatility from Q2 have subsided, their ripple effects carried into the third quarter. Dealmaking takes time: The disruptions that shut down the syndicated loan market and sidelined asset buyers and sellers in Q2 derailed pipelines that would have otherwise supported M&A and buyout financing activity in Q3. The absence of those transactions remains evident in Q3 volume data.
Speculative-grade companies raised $31.4 billion in the institutional syndicated loan market in Q3 to finance buyouts and other M&A transactions — the lowest quarterly volume this year. Issuance fell 5% from Q2’s already muted levels and was down 31% year-over-year. Private equity–backed borrowers drove much of the pullback, with issuance plunging 14% quarter-over-quarter and 28% from a year earlier. In contrast, corporate M&A activity rebounded 20% in Q3, though volume still trailed Q3 2024 by 36%. Constrained exit conditions, macroeconomic uncertainty, elevated debt costs and diminished investor tolerance for leverage have curbed private equity activity. Corporates, benefiting from healthier balance sheets and strategic imperatives, are increasingly stepping in where sponsors have pulled back.
Buyout financing from the BSL market totaled just $13 billion between July and September, the weakest quarter so far in 2025. A large chunk of that volume came via one transaction — the $5.5 billion term loan B for Dayforce that will finance the $12.3 billion LBO of the company by Thoma Bravo. No other Q3 LBO financing surpassed $1.5 billion, versus five above that mark in Q2 (three topping $2 billion). Prior to Dayforce, the market hadn’t seen a $3 billion-plus financing since March.
Loan volume trails 2024
With one quarter still to go, 2025 loan issuance (excluding repricings and extensions) is $359 billion — about 10% behind last year’s pace. Refinancings ($169 billion) are down 20% from 2024’s record levels. Meanwhile, issuance tied to M&A is gradually normalizing, totaling $111.5 billion — up 12% year over year, helped by a strong start to 2025.
Sponsor-backed issuance mirrored the broader market, with overall volume down 10% from last year, driven by a 17% drop in refinancings. LBO activity is only slightly ahead of 2024’s pace, but add-on acquisitions stood out — surging 30% year over year, to $28.2 billion, the most in four years.
Widest supply-demand gap in a year
Constrained net supply paired with strong investor demand is amplifying the market’s technical imbalance, further tilting conditions toward borrowers. As of Sept. 27, net outstandings in the Morningstar LSTA US Leveraged Loan Index — a proxy for supply — rose by just $12.1 billion, marking the slowest expansion since Q3 2024. In contrast, investor demand remained robust, totaling $52.6 billion during the quarter. The result was a supply shortfall of $40.5 billion, the widest gap in a year.
CLO issuance in the third quarter continued to pace ahead of the record-setting 2024 levels, buoyed by a resurgence in middle-market/private credit CLO offerings that continues to expand its share of the overall new-issue primary market. CLO managers have priced $52.6 billion worth of vehicles so far in Q3, the third-busiest quarter on record.
Meanwhile, retail investor sentiment toward leveraged loans remained weak in Q3, with outflows in eight of the past 13 weeks. LCD estimates $73.3 million in withdrawals for the quarter, far more modest than the $8.4 billion exodus in Q2, but still a reversal from inflows in Q1.
The subdued new-issue market spurred a rally in the secondary at the start of the third quarter. By the end of July, the weighted average bid of the Morningstar LSTA US Leveraged Loan Index had risen to 97.58, just shy of the intra-year high of 97.70 set in late January. However, heavy loan issuance in July and softer economic data cooled momentum in August. Then in September, the quick collapse of First Brands Group, widely held by CLOs, dominated leveraged loan headlines.
Nonetheless, by mid-September, nearly half of all performing loans in the Morningstar LSTA US Leveraged Loan Index were priced at par or above — a clear sign of strong investor demand. For ‘B’ rated borrowers, that share was 54% on Sept. 25, underscoring the segment’s strength. This group also represents the largest slice of the leveraged loan market, at 27% of the par amount outstanding, followed by B-minus issuers at 25%. In contrast, only 26% of B-minus loans were priced at par or higher on Sept. 25, highlighting more cautious investor appetite for lower-rated debt.
Reprice and repeat
Amid scarce net supply, opportunistic activity rebounded in Q3 after pausing in Q2. Speculative-grade borrowers repriced $226 billion of institutional term loans through Sept. 25 — the second-highest quarterly total on record, behind Q4 2024 ($279 billion). The surge was fueled by a record July, which accounted for $159 billion in repricings.
Year to date, leveraged loan investors have signed off on $440 billion of amendments to cut spreads on outstanding term loans, trimming them by an average of 51 bps and generating about $2.4 billion in annual interest savings. Roughly one-third of all first-lien term loans outstanding at the end of 2024 have been repriced so far in 2025, with more than 20 borrowers doing so twice. Notably, nearly 44% of this year’s repricing cohort had already repriced in 2024.
Refi revival led by B-minus issuers
Issuance of new loans for refinancing jumped to $71.4 billion in Q3 (through Sept. 27), marking the busiest quarter since the refinancing surge in early 2024. Activity had dropped sharply in Q2 to just $27.8 billion — the lowest level since late 2022. Year-to-date, refinancing-related loan volume is $169 billion through Sept. 27, down 19% from the 2024 pace, but still tracking toward the second-highest annual total in the past decade.
Borrowers rated B-minus spearheaded the refinancing rebound in Q3, driving $31.2 billion of issuance, or 44% of the total. By both dollar volume and share, this marks the second-highest level since the Fed began raising rates in early 2022. Over the past nine months, lower-rated issuers have raised $67.6 billion in refinancing loans — down 16% from last year’s record pace, but a lesser decline than the 38% drop posted by higher-rated borrowers (BB-minus and above).
The B-minus refinancing surge in Q3 is logical: These issuers face more immediate refinancing needs than higher-quality cohorts. With new-issue spreads tightening to post-GFC lows, they’re seizing the opportunity. The Morningstar LSTA US Leveraged Loan Index shows a pronounced maturity wall in 2028, when $331 billion comes due — 37% of it from B-minus borrowers ($124 billion). Put differently, of the $366 billion in outstanding B-minus loans, roughly a third matures in 2028. In contrast, among the B-flat rated cohort, just 20% of $411 billion outstanding falls due in 2028.
Tight supply, tighter spreads
After briefly spiking in Q2, new-issue spreads resumed their downward trend in Q3 across all credit tiers as market conditions normalized. The riskiest, highest-yielding loans fell to their lowest levels in more than a decade. Term loans to B-minus borrowers closed with an average spread of S+366 in Q3 — a post-GFC low, seven basis points below Q1 and 58 bps tighter year over year.
Likewise, the B-rated cohort tightened by about 60 bps over the past year, to S+317, also marking a decade-plus low. Meanwhile, B-plus and BB-minus averages dipped to S+275 and S+247, respectively.
Focusing on loans backing M&A deals — which remain scarce — spreads fell to post-GFC lows, averaging S+302 in September, nearly 60 bps tighter than a year earlier. At the same time, yields to maturity slid to 7.37% by quarter-end, down about 160 bps year over year.
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