European loans continued their strong run through 2025, delivering a second consecutive year of record gross volume. But despite the heavier flow, M&A activity remained disappointing, while returns were only middling against the backdrop of a volatility-punctuated year.
In raw numbers, European loan issuance hit new highs. Excluding repricings, total volume reached €125.9 billion by the end of October. Including repricings, the total activity rises to €224.9 billion.
This effort already takes volumes through last year’s post-GFC record, as well as the lofty annual supply tracked during the last blast of the QE era in 2021. Loan issuance has also outpaced the high yield market, where activity easily beat analyst predictions made at the end of 2024.
M&A shortfall
The scale of the M&A shortfall becomes clear when looking at the breakdown of loan activity. Refinancings led the way, contributing to €73.9 billion of total non-repricing supply. M&A volume through October is up from last year — though not by much, at €38.5 billion — and remains well behind the post-GFC peak achieved in 2021, let alone the €110 billion tally prior to the collapse of Lehman Brothers in 2007.
The lower-than-hoped-for M&A supply comes despite what appeared to be strong momentum entering 2025. “At the start of the year, optimism around M&A was high,” noted Martin Luehrs, managing director and co-head of leveraged capital markets at Morgan Stanley. “Reflecting on 2025, however, refinancing activity continues to dominate deal activity. That said, the year has been far from disappointing. It has, in fact, been a strong one for European leveraged finance.”
Another banker agreed, explaining how the announcement of reciprocal tariffs in the US disrupted activity. “Everything was derailed in April, and it takes time to get going again,” he said.
While risk assets recovered quickly from that shock, the damage to M&A was more long-standing. Part of the challenge here is that M&A deal-making is typically a three-month process that requires a clear and uninterrupted window, sources explain. It is also extremely time-consuming for management, who must balance transaction work with running the business.
This means sponsors may not be inclined to restart a disrupted process immediately when conditions improve. “Financial markets bounced back, but a sales process is complex, and April’s events shifted activity to the second half at best,” the second banker added.
Money tree
The year still delivered some sizeable new-money deals — including Opella, Boots, Spectris, and Reckitt Essential Home. Loans also cemented their status as the asset class of choice for sponsors looking to fund big-ticket buyouts. In contrast, high yield has only helped fund four buyout deals this year, down from 12 last year.
“Stronger markets tend to favour loan issuance,” explained Martin Luehrs of Morgan Stanley. “In such conditions, loan inflows increase, reducing the focus on convexity, and issuers gravitate toward non-call protected loans over bonds. Amongst others, thanks to advantages like margin ratchets and future repricing opportunities.”
The year’s new money has not been enough to satisfy demand, however. Despite the headline volume number, the overall size of the market as measured by the Morningstar European Leveraged Loan Index (ELLI) has increased by 8.8% in 2025 — from €310.7 billion across 409 facilities at last year’s close, to €338 billion from 412 facilities by Oct. 31. LCD has recorded €53.5 billion of gross CLO supply this year, while issuance here has outweighed net loan supply every month since September 2021.
On a net basis, data from JPMorgan shows net loan supply — accounting for refinancings and resets — totals roughly €40 billion, while the total stock of CLOs in Europe stands at about €300 billion. This figure is up roughly 15.4% from €260 billion tracked by the bank a year earlier, a rate approaching double the growth of loan supply.
This supply imbalance has weighed on pricing. “Spreads do not reflect both the geopolitical and credit risks,” said one manager. This dynamic has generally kept spreads for decent B2-rated names in an E+325–350 range for much of the year, even reaching down to E+300 at times. LCD data shows that at the end of October, the average spread (on a rolling three-month basis) for single-B names was E+358, the lowest since 2017.
Wave theory
Even if a deal caught the market during an off-week, sponsors have been able to return within six months amid one of the year’s repricing waves. A third wave could potentially be underway now, after a slew of borrowers took advantage of strong late-year demand to reprice deals in November. “The market feels extremely robust,” said a banker. “And when the market has bounced back from volatility, there’s been a flight to quality and pricing has dipped down to E+300–325 for a B2/B.”
The fall in pricing has inevitably weighed on performance, with loan returns ending the year below expectations set at the end of 2024. Total returns excluding currency from the ELLI stand at 3.20% to Oct. 31, compared with 8.94% last year and median forecasts of around 5.50%. “A lack of new money and tight technicals mean investors are being paid less for the same risk. This was always going to show up in returns,” summed up a banker.
Volatility has increasingly fed through into performance as the year has gone on, with the market bifurcating between structurally resilient sectors — such as technology, business services and parts of healthcare — and those exposed to the economic cycle or disruptive technologies such as AI.
Chemical reaction
The clearest example of the weak side of that divide this year has been the chemicals sector. Indeed, this industry has faced a continuing and unexpectedly steep cyclical downturn, further weighed down by well-publicised remarks from Ineos CEO and Chairman Jim Ratcliffe on the prospects for the industry in Europe. “The market is differentiating,” said a banker. “Take chemicals. Investors ask where borrowers sit in the value chain — are they commodity chemicals, or are they speciality? And are they only speciality chemicals because you said it is, or is it actually speciality chemicals?”
Chemicals are the worst-performing sector in the ELLI this year, recording a loss of 1.7% to Oct. 31, according to LCD. The bifurcation in secondary has also fed through into primary, producing increasingly binary outcomes in syndications. “When everything is priced to perfection, investors become extremely nervous,” said a banker. According to sources, this became particularly evident in October, when at least a couple of deals are said to have closed short of target, or with a sponsor contribution.
Such reticence means that despite historically tight pricing, managers and bankers agree the market has so far avoided the excesses of past peaks. “We don’t think this is a 2006 or 2007 market, or even a 2021 market,” said a banker. “Yes, it’s been a good market, but it has not got to the point where investors are doing every deal plus or minus 25 bps.”
For now, bankers describe any late-year pullback as more of a case of fatigue than a structural turn, but the fear of a broader sell-off lingers beneath the surface. The technical backdrop remains supportive and demand is still there, yet investors are acutely aware that any renewed bout of volatility could test an extremely tight yet skittish market. “There is still demand out there for the final couple of weeks of the year, but I’m willing to bet it will be stronger come January,” concluded a banker.
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