The distressed landscape in 2025 presents a paradox: while overall default rates remain manageable at 2-3% according to Barclays forecasts, sector-specific stress has created concentrated pockets of opportunity and risk. Healthcare leads all industries in defaults with 14 defaults and selective defaults so far in 2024, while software companies acquired at mid-teens EBITDA multiples struggle with floating-rate debt burdens.
Healthcare: Leading the Distress Charts
Healthcare’s distress dominance stems from multiple pressures converging simultaneously. S&P Global Ratings reports the sector’s 14 defaults in 2024 and 15 in 2023 represent a sharp increase from six in 2022, despite an improved operating environment with normalized utilization.
The slower path to interest rate cuts has been a drag on free cash flow generation while the industry grappled with elevated skilled labor costs that plateau rather than decrease to pre-pandemic levels. The No Surprises Act and Change Healthcare cyber breach constrained cash flow through 2024’s first half, though pressure is dissipating.
Within healthcare, specific subsectors face acute stress. Staffing companies and doctor roll-ups have emerged as particular trouble spots, according to PineBridge Investments analysis. The combination of high leverage, labor intensity, and reimbursement pressure creates a challenging operating environment.
McKinsey projects MA margins will recover 150 to 200 basis points by 2025, leading to a rebound to long-term margins of 3 to 3.5% by 2028. This recovery trajectory suggests differentiated outcomes within healthcare, with payers potentially stabilizing while provider-focused businesses remain stressed.
Technology and Software: From Darlings to Distressed
Software companies emerged as unexpected distress candidates. Marathon Asset Management identifies software as a generator of distressed investments, noting many were acquired in 2020 and 2021 for mid-teens EBITDA multiples with floating-rate debt and are now burning cash.
Credit Benchmark predicts US Technology will post a modest increase (+10%) in median default risk by mid-2025, but the range of projections is extraordinarily wide. There’s a small chance (<10%) of a spike in default risk of more than 25%, possibly exceeding 50%.
The sector’s challenges reflect fundamental shifts. Deteriorations versus improvements have dropped significantly in recent months, suggesting potential stabilization. However, volatility in the semiconductor market could reverse improvements rapidly.
Annual recurring revenue (ARR) facilities have proliferated, giving early-stage companies flexibility to reinvest cash through PIK options. These structures concentrate risk in growth-dependent businesses vulnerable to market sentiment shifts.
Telecommunications and Broadcasting: Structural Decline Accelerates
Broadcasters present clear distress opportunities in 2025. Election-related advertising spending buoyed results in 2024, but underlying business deterioration continues. While some operators attempt diversification, legacy businesses face inexorable decline.
The telecommunications sector faces similar structural headwinds. Both telecommunications and capital goods sectors are heavily influenced by single issuers with large and complex debt structures, creating systemic risk within subsectors.
Market observers note that debt of subsectors such as television broadcasters has been lingering behind and not appreciated, creating potential value opportunities for distressed investors willing to navigate complex restructurings.
Retail and Consumer: Divergent Paths
Retail distress follows predictable patterns with notable exceptions. Minimum wage increases in California and elsewhere negatively impact companies in restaurants and retail sectors, according to Jay Weinberger of Houlihan Lokey in a Pitchbook analysis.
Small signs of economic slowdown appear in retail, small-market gaming, packaging, and chemicals. Yet declining oil prices could help troubled consumer cyclical companies as customers gain discretionary spending power.
The divergence within retail reflects business model differences. E-commerce native brands with asset-light models access financing more easily than traditional brick-and-mortar operators burdened by lease obligations.
Commercial Real Estate: Location and Quality Define Outcomes
Commercial real estate presents a particularly complex distress landscape. Office markets appear especially cheap, but return potential remains challenging. Class-A buildings are filling up, but visibility on class-B and class-C buildings remains limited.
Location drives outcomes dramatically. New York’s Park Avenue corridor and pockets of South Florida and Los Angeles show potential, while secondary markets face persistent challenges. Industrial buildings trade too richly for distressed investors, while malls may offer opportunities due to general bearishness.
Multifamily properties show regional divergence, with overbuilding in the southern US creating localized stress while supply-constrained northern markets maintain stability. The quality and location specificity make broad sector generalizations impossible.
Business Services: Operational Leverage Challenges
Business services face diverse challenges across subsectors. Gaming companies, particularly small-market operators, confront declining revenues and high fixed costs. Aerospace/defense/government contracting companies appear on distressed watchlists despite historically stable revenue streams.
The sector’s challenges often reflect customer concentration and contract dependency. Loss of key contracts or customer bankruptcies can trigger rapid deterioration given high operational leverage.
Default Rate Projections and Market Implications
UBS forecasts USD high yield defaults at 4.8%, declining to 3.1% when two large distressed names are removed. Healthcare and telecommunications sectors drive negative outliers, while overall market health remains reasonable.
The distressed ratio of 4.5% by issuer count sits inside the 10-year average of 5.4%, suggesting manageable systemic risk. However, significant numbers of issuers trade at distressed levels—when analyzed from market value basis, the default rate drops to approximately 1.8%.
Credit migrations show interesting patterns. Projections indicate shifts out of ‘bbb’ and ‘b’ categories, partly into ‘c’ but mainly into ‘bb’, suggesting bifurcation between improving and deteriorating credits rather than broad-based stress.
Ecosystem Positioning for Distress
Private Equity Sponsors: Portfolio monitoring intensifies with dedicated workout teams for stressed investments. Focus shifts from multiple expansion to operational improvement and debt restructuring.
Direct Lenders: Enhanced workout capabilities become differentiators. Lenders with sector expertise and operational resources gain advantages in competitive restructuring situations.
Investment Banks: Restructuring advisory practices expand as complexity increases. Liability management exercises require sophisticated structuring capabilities and deep market relationships.
Legal Advisors: Uptier transactions and creative restructuring structures elevate legal expertise importance. Firms with cross-border capabilities gain advantages as distress spreads globally.
Turnaround Consultants: Operational improvement mandates increase as financial engineering alone proves insufficient. Industry-specific expertise commands premiums.
Strategic Considerations for 2025
Marathon Asset Management’s observation that “we are not seeing a traditional distress cycle where one particular industry falls out of favor” defines the current environment. Distress is diversified as private equity levered companies across sectors, creating opportunities for selective investors.
The fulcrum security identification process has evolved. In the past, distressed investors identified the loan or bond class most likely to convert to equity. Today’s complex capital structures with multiple debt tranches and creative securities require sophisticated analysis.
Market participants should prepare for continued sector divergence. While systematic distress appears unlikely given economic stability, sector-specific challenges will create both risks and opportunities requiring careful navigation and deep expertise.
Sources
- Morningstar. “2025 US Distressed Outlook: Market Strength to Boost Defaults, Opportunity Set?” December 26, 2024. https://www.morningstar.com/markets/2025-us-distressed-outlook-market-strength-boost-defaults-opportunity-set
- McKinsey. “What to expect in US healthcare in 2025 and beyond.” January 10, 2025. https://www.mckinsey.com/industries/healthcare/our-insights/what-to-expect-in-us-healthcare-in-2025-and-beyond
- Credit Benchmark. “2025 Default Risk Outlook: US Industries (Q3 Update).” March 5, 2025. https://www.creditbenchmark.com/white-papers/2025-default-risk-outlook-us-industries-q3-update/
- UBS. “2025 Fixed Income Default Study.” https://www.ubs.com/us/en/assetmanagement/insights/asset-class-perspectives/fixed-income/articles/2025-fixed-income-default-study.html
- S&P Global Ratings. “Record-High Health Care Defaults Will Moderate In 2025, Though Higher Than Normal.” https://www.spglobal.com/ratings/en/research/articles/241120-record-high-health-care-defaults-will-moderate-in-2025-though-higher-than-normal-13332545
- PitchBook. “2025 US Distressed Outlook.” December 12, 2024. https://pitchbook.com/news/articles/2025-us-distressed-outlook-market-strength-to-boost-defaults-opportunity-set
