Technical drivers led loan pricing tighter through 2025 despite record gross issuance, as new-money supply continued to lag. Banks and investors say any shift toward more balanced conditions will depend largely on a continued recovery in what remains a challenging M&A market.
- Bank outlooks point to modest growth in 2026 loan volumes and a healthier mix of new money, but execution will hinge on whether M&A and LBO activity finally reaccelerate.
- Fundamentals have softened with downgrades rising, triple-Cs expanding and valuation bifurcation deepening — yet a benign macro backdrop and a 2028 maturity peak could create selective opportunities.
- Technical factors were dominant through 2025 in European loans, with record issuance and CLO-driven demand pushing spreads toward post-crisis lows, despite muted net supply.
In volume terms at least, 2025 was a strong year for European loans, marking a second consecutive year of record issuance of more than €200 billion (including repricings). On a net basis, however, the picture was more muted. The overall size of the market as measured by the Morningstar European Leveraged Loan Index (ELLI) increased by roughly €25 billion from December last year, to stand at €336 billion at the end of November.
Some €57 billion of CLO formation through November underpinned demand, according to LCD data. According to JPMorgan figures published Nov. 12, after accounting for redemptions and new money arising from resets, net CLO supply was €40 billion — lifting the total notional outstanding amount to €300 billion, from €260 billion at the start of the year.
This scale of technical support weighed on spreads, which trended toward post-crisis lows and are ending the year around E+325 for solid B2 credits. “The risks have not reduced, but the spreads have reduced,” said one manager. “There’s too much money chasing too little in terms of opportunities,” he added.
Bank forecasts
Analysts are hopeful that even if overall volumes do not rise in 2026, new-money supply will. Measures vary by bank, limiting like-for-like comparisons, but the broad message from sellside outlooks is for modest growth in activity and a better mix of new money over refinancings.
Barclays — using a base assumption for this year of €100 billion gross and €60 billion net — forecasts gross and net supply of €85 billion and €70 billion respectively for 2026, according to an outlook published Dec. 3. JPMorgan also expects an uptick in volumes, and is forecasting an increase in net supply of €40 billion in loans for €250 billion of total loan activity, including extensions and repricing.
Deutsche Bank, in a CLO outlook published Nov. 19, expects overall loan volumes to increase to €300 billion next year, from €230 billion. The bank does not break out the net component, but notes that new-money issuance accounted for €57 billion (or 25%) of this year’s total — broadly in line with last year’s 27%.
Finally, Morgan Stanley also expects loan volumes to increase. In its European Credit Outlook published Nov. 21, the bank said it expects overall loan issuance to rise year-on-year by 9%, to €95-100 billion.
Part of Morgan Stanley’s optimism on volumes is predicated on rising LBO and M&A activity. These volumes in loans were higher this year at a combined €41.2 billion (to Nov. 30), according to LCD, but remain well below the post-crisis peak of €110 billion in 2021.
Well-stocked pipeline
The new year will start with a relatively well-stocked pipeline that includes large new-money trades from cross-border borrowers including Electronic Arts, Sealed Air, Hologic, BASF Coatings and Smiths Detection. These situations are all either take-privates or corporate carve-outs, and bankers are hopeful they will provide a solid source of supply in early 2026.
“The cost of capital is cheap but is no longer free, and corporates are looking at returns across their portfolios to make sure they pay their way,” summed up one banker.
Several key assets remain in play, including Nestlé’s water and vitamin units, as well as DSM’s animal nutrition business. Europe’s focus on more traditional industries could also support dealmaking, as these businesses typically come with more palatable valuation multiples compared with AI-powered technology firms.
“Indices are skewed by a small number of highly valued tech names. Not every sector is trading at high multiples,” said a second banker. “General industrials that have recovered from the tariff shock resulting from Liberation Day look more interesting over the long term,” he said.
A bigger question mark remains over secondary buyouts. This year has seen some significant deals, and the syndication of debt financing backing Cinven’s acquisition of Spain-based university group UAX is set to launch in early 2026. That said, the recent failure of auctions for Solina and Kersia highlights the persistent difficulty in securing sponsors’ agreement on valuations.
“Many of the assets that have traded have been top quality,” said a banker. “Sponsors are still unwilling to commit to a multiple that could cause a negative revaluation of other assets in their fund.” Investors concur, noting increased caution from much of the sellside on prospects for sponsor-to-sponsor deals in the coming year when compared to the end of last year.
Still, after the disruption to activity from the ‘Liberation Day’ announcement on US tariffs, bankers are talking a good game. “There is not an avalanche of deals coming, but activity feels more sustained in the number of deals in play,” said one. But will this be enough to shift the market’s technical outlook?
CLO effect
Some argue pricing is so tight — and so far away from what CLOs need — that it will not take much to shift the balance. “Pricing does not work for CLOs and it does not work for other credit strategies seeking a balanced return,” one manager summed up. Another was more circumspect. “Assuming there is €10 billion to launch come January, this is not nearly enough to move the needle when looking at the wall of CLO money looking to ramp,” he said.
The year finishes with around 140 CLO warehouses open, filings show, versus roughly 120 at the same point last year. Assuming an average CLO size of €400 million, pricing at a 50% ramp, that points to a total warehouse capacity of €28 billion — notwithstanding assets already collected.
Either way, the fate of loan markets is inextricably linked to CLOs, which now provide roughly 70% of liquidity in Europe. So far, medium-term analyst predictions for CLO formation point to roughly stable volumes through next year, which in turn suggests, according to Barclays, a “slightly deteriorating supply-demand technical.” The bank further argues that a market so dependent on one source of demand is not “healthy” and presents “clear risks to a disruption of the generally strong technicals that have prevailed in 2025.”
Fundamentals have also deteriorated this year, and downgrades have easily outweighed upgrades. For the year through November, LCD counted 2.72 downgrades for each upgrade on a rolling 12-month basis, while a total of 49 facilities in the ELLI were downgraded this year.
The proportion of triple-C assets in the index has also risen, reaching 5.06% of the ELLI at the end of November — more than double the level at the start of 2024. Managers say they are relaxed for now about the build-up in triple-C baskets, but concede that the space is unlikely to become a meaningful source of value. “I don’t think there’s a lot of tolerance,” said one manager. “Even if you were to find value, the downside to getting it wrong is such that your investors would just tell you that you should have known better.”
Return journey
Weaker fundamentals are also reflected in the performance of European loans this year. Choppy trading and sharp price drops in some large capital stacks have capped returns out of the ELLI, which are on course to finish 2025 below expectations at a “slightly less than carry” 3.86% (excluding currency, as of Dec. 5).
Banks expect returns to pick up modestly next year, although they may still lag high-yield. Barclays projects total loan returns of 4.50%, with carry partly offset by a slight decline in the ELLI and marginally higher default rates, while JPMorgan forecasts loan returns of 4.75% from the JPM ELLI, compared to 5.50% from the iBoxx EUR HY index.
Valuation distortions remain another constraint. Limited convexity in loans will continue to hamper returns, analysts say, and — with 63% of the ELLI priced above par at the end of November — the late-year repricing wave could resume in early 2026. “The par market is now closer to 101, which is not where you would expect loans to trade,” said one source, adding that some offers have been reaching toward 102.
Despite so much of the market trading above par, the ELLI is still set to finish the year off its highs. This performance reflects a shift in price distribution, with a persistent bifurcation between names that CLOs want — typically marked at par or higher — and those they do not. “You have 60-70% of the market that is staying above par and another 30% that people really don’t love,” said a manager. That split has narrowed slightly in the past month, but the year is still on course to finish with roughly 5% of the index quoted below 80 — more than double the share at the start of the year. Barclays analysts add that the shrinking group of credits in the “somewhat wide, but not too storied” 98-100 area further limits performance potential.
Sector focus
A significant share of the discounted space comes from sectors still facing headwinds, led by chemicals, which is now entering a fourth year of a cyclical and potentially structural downturn. Given the falls across many of these names, some participants see signs of value re-emerging. “Do people think chemicals are oversold?” asked a manager. “It is the number-one sector that people think could outperform and provide good relative value,” he said.
Other out-of-favour names could also provide investors with opportunities, especially as they approach refinancing. A strong refinancing year means the European market enters 2026 in structurally sound shape, but a sizeable maturity peak remains in 2028, dominated by deals struck at the height of the QE-fuelled LBO boom in 2021. “This is a bucket that we are focusing on for next year,” one manager said.
For these names, the wider backdrop should remain relatively benign, or what Barclays analysts call “comfortingly dull.” Europe is largely a bystander in the global AI capex boom, meaning it should be insulated from the worst effects of any potential ‘tech bust’ — though managers concede there would clearly be some contamination. “A global technology-led stock market rout would inevitably hit credit, but I think we are well positioned in Europe,” said a manager.
Rates also remain stable, with the ECB at or very close to the terminal rate, and unlikely to begin hiking rates before 2027. Economies should also benefit from the German stimulus programme in defence and infrastructure, even if the effects have so far been less pronounced than hoped. “By no means is this impressive, but we consider it ‘good enough’ — and far enough away from recession risk — to see it as supportive for leveraged loans,” said Barclays of the market’s prospects.
Bankers add that further issuance needn’t be too damaging to the overall market technical, as it could help attract further liquidity as managers take comfort from a greater certainty of supply. “When managers go fundraising, they quite often come up against the idea that there aren’t that many opportunities to deploy,” said a banker. “So more deals in Europe and more M&A could help the fundraising script and lead to CLOs doing more prints — currently limited by the amount they think they can ramp.”
As such, how much new money 2026 produces — and whether the long-promised resurgence in M&A finally materialises — will ultimately determine whether conditions finish next year as tight as they end this one.
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