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Credit investors face a complex landscape in 2025, characterized by uneven recoveries across various sectors and regions.

This environment necessitates a strategic balancing act to identify and capitalize on selective opportunities. Investors must prioritize credit differentiation, regional growth, policy-driven momentum, and issuer resilience to navigate this challenging terrain effectively.

The municipal bond market, for instance, presents a mixed picture. While some regions and sectors exhibit stabilizing fundamentals, others continue to struggle with uneven recoveries. This divergence creates selective opportunities for discerning investors. Regions experiencing robust economic growth, such as Texas, Florida, and Arizona, offer promising prospects. These states benefit from favorable demographic trends, policy support, and economic expansion, making them attractive for investments in sectors like charter schools, toll roads, and housing.

In this environment, credit investors must perform somewhat of a balancing act ...

In this environment, credit investors must perform somewhat of a balancing act, focusing on credit differentiation and geographic positioning. Resilient issuers in growth regions with strong balance sheets and adaptable strategies will lead the way.

Sectors to watch

Across healthcare, education, infrastructure, and housing, strong credits continue to pull away from weaker ones, underscoring the importance of sector and geographic differentiation.

Healthcare

The healthcare sector mirrors this divide. Larger hospital systems in growth regions – particularly the South and Sun Belt states – are benefitting from rising patient volumes, workforce stabilization, and margin recovery. Large systems in growing markets with access to capital are thriving, supported by volume growth and cost containment initiatives.

In contrast, smaller, rural providers reliant on Medicare face structural headwinds from reimbursement lag and staffing shortages. The divergence of credit quality is deepening, with weaker issuers potentially exposed to downgrades. Cyberattacks and climate disruptions are underappreciated operational risks that could destabilize even well-positioned hospitals.

Policy tailwinds could emerge for healthcare under the new administration, with reduced scrutiny on M&A potentially enabling strategic consolidations.

Policy tailwinds could emerge for healthcare under the new administration, with reduced scrutiny on M&A potentially enabling strategic consolidations. Continuing Care Retirement Communities (CCRC) and Life Plan Communities have demonstrated a similar resiliency as hospitals. However, workforce stabilization has proved more difficult, with reliance on agency staff being a problem most communities continue to address.

Systems that have successfully right-sized their skilled nursing facility (SNF) operations and divested underperforming assets are outperforming, especially those with diversified care models like entrance fee CCRCs. Single-site life plan communities in competitive or oversupplied markets remain under stress.

Education

Charter schools remain attractive, particularly in Texas, Florida, and Arizona, where favorable demographic trends, low penetration, and policy support create expansion opportunities. Flat per-pupil funding and elevated capital costs persist as challenges, but schools with strong operational flexibility and enrollment growth demonstrate credit resilience.

Higher Education has become increasingly bifurcated. Large public universities, particularly those with broad geographic reach and substantial research funding, remain stable due to steady state appropriations and demand in cost-efficient regions. Small liberal arts-focused colleges and universities in the Northeast and Midwest, on the other hand, face growing pressures from enrollment declines, rising tuition discounting, and constrained financial flexibility.

Demographic headwinds, affordability, and changing demand for technology-focused curriculums drive this division. Leading many of these institutions to run sustained operating deficits, creating liquidity risk and increasing vulnerability to rating downgrades. The best-positioned institutions recognized these trends early in their strategic planning, making tough decisions such as eliminating programs, redesigning curriculums to focus on in-demand fields, and expanding online degree offerings.

Infrastructure

Infrastructure credits – particularly toll roads and airports – remain stable with pockets of strength. Toll roads in high-growth states like Texas, Florida, and Georgia are positioned to benefit from higher vehicle miles traveled and Consumer Price Index-linked toll increases.

Managed lane projects in these regions have demonstrated pricing power and resilient demand despite affordability concerns. Airports offer a favorable outlook as passenger traffic stabilizes at 2% growth in 2025.1 Airports with strong liquidity, cost pass-through mechanisms, and exposure to international or tourism-driven markets stand out.

Projects along the Gulf Coast tied to energy and oil infrastructure are positioned for success as favorable regulatory and policy tailwinds drive domestic production and investment. These projects are expected to benefit from improved economic sentiment and resilient revenue streams tied to energy exports and industrial activity.

Utilities

Natural disasters like wildfires pose a significant financial threat to public utilities. They can cause extensive damage to infrastructure, disrupt operations, and increase liability exposure. Public utilities operate large networks of power lines, gas pipelines, and other critical systems that are particularly vulnerable to destruction during fires. Moreover, legal doctrines like inverse condemnation hold utilities liable, regardless of negligence, allowing property owners to seek compensation for damages to their property, especially if the infrastructure is alleged to have caused the damage.

Following the devastating 2023 Maui wildfires in Hawaii, utility companies faced intense scrutiny and potential lawsuits over their alleged role in igniting the fires. Accusations that power lines were not de-energized during high-wind conditions highlight the financial liabilities utilities may face, with claims potentially amounting to billions of dollars. This situation not only threatens the financial stability of the utilities but also leads to higher costs for consumers and challenges in securing future investments for grid modernization and wildfire mitigation efforts.

More recent events, such as the wildfires in Los Angeles County, highlight the growing prevalence of these risks and raise concerns about whether investors are adequately compensated for investing in entities with high exposure to such events.

Key themes for 2025

As we enter 2025, the credit market, as is the case with every market, offers both challenges and opportunities. This year's outlook highlights the significance of credit differentiation, regional growth, policy-driven momentum, and issuer resilience. Here are the key themes we believe credit investors should watch for:

  • Regional selectivity
    Growth states like Texas, Florida, and Arizona will dominate opportunities across charter schools, toll roads, and housing.
  • Healthcare resilience
    Larger systems in growth regions stand out, particularly those managing SNF costs and leveraging M&A to improve scale.
  • Higher education bifurcation
    Public universities and academic medical centers outperform, while small private colleges in the northeast face continued headwinds.
  • Infrastructure strength
    Airports and toll roads remain resilient, particularly in growing regions with manageable capital programs and revenue stability.
  • Policy tailwinds
    Gulf Coast energy infrastructure and healthcare M&A activity could benefit from favorable regulatory shifts under a new administration.

Final thoughts

We believe investors will need to prioritize credit differentiation and geographic positioning in 2025 to capitalize on these trends. Resilient issuers in growth regions, with strong balance sheets and adaptable strategies, will lead the way as selective opportunities emerge amidst a stabilizing but still fragile credit landscape. By focusing on these key themes, credit investors can navigate the complexities of the market and may achieve resilient returns.

1 "Annual World Airport Traffic Report, 2024" Airports Council International (ACI) World, February 2024. https://store.aci.aero/product/annual-world-airport-traffic-report-2024/.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

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