While European leveraged finance debt prices are being pulled in different directions amid a volatile backdrop, a growing number of names appear simply to be stuck in an unforgiving doom loop.
Key points:
- Several European issuers have gone back to the drawing board only a few months after implementing debt restructurings.
- Repeat defaulters will be one of the key drivers of European high-yield bond and leveraged loan default rates in 2026, according to Fitch.
- In an era of loose documentation, bold liability management exercises (LMEs) can replace the more innocuous amend-and-extend (A&E) processes of the past.
- Par investors dread LMEs, but these exercises — especially uptier transactions — help some holders improve their position ahead of a possible second restructuring.
Looking at names in the market, Accell and Lowell have gone back to the drawing board, just a few months after completing a recapitalisation. Atalian and Lecta have gone through a slower‑burn process, but both outlined new restructuring plans in January. “Repeat defaults are ticking up in Europe, but this is still anecdotal,” says Othman Kacimi, credit research team leader at Aegon Asset Management.
Duncan Turner, senior managing director in FTI Consulting’s Corporate Finance & Restructuring segment practice, agrees: “Repeat defaults are relatively common, and have been for years.”
New dynamic
So, what is new? First, there is the speed at which some companies are returning to the negotiating table. Second, the use of increasingly sophisticated LMEs in place of the more familiar amend‑and‑extend (A&E) playbook is bringing processes into play that can provide borrowers with breathing space, but may also leave some investors in a weaker position.
“We’re now seeing a real moment of reckoning for those large balance sheets built during the era of free money,” notes Aegon’s Kacimi. “The full range of flexibility afforded by loose documentation had not been used much in Europe until recently, but this is starting to happen as European issuers begin to emulate behaviour which has so far been more common in the US.”
Until late 2023, it was unclear whether Europe would embrace aggressive US-type LMEs, such as drop-downs. Now, however, “we’ve started to see some European companies either deploying them or threatening to do so to force investors to the negotiating table to drive forward a consensual deal to recapitalise a business,” says Alex Reed, a director in EY-Parthenon’s Financial Restructuring practice. But the US experience shows that an LME strategy is not by itself enough to prevent a subsequent insolvency, he adds.
“The more complex LMEs tend to attract a different type of investor, who may pursue a litigation-driven strategy or aim to reshape terms to their own advantage,” explains Henry Beech, a partner at EY-Parthenon, pointing out that the objectives of those investors are not always aligned with the interests of the company or other creditors — which is why second-round restructurings may emerge.
Risk assessment
Defaults do not come out of the blue. Indeed, Spread Research noted in its review of 2025 that most of the bonds due in 2026 that it viewed as having a high refinancing risk ended up defaulting — including Klöckner Pentaplast, Standard Profil, Victoria PLC, Oriflame, Ardagh, and HSE.
As S&P Global Ratings observed, default rates have been higher in recent years than market and economic indicators would historically suggest — chiefly because of a rise in distressed exchanges. S&P says “many distressed exchanges ultimately result in future defaults for those issuers,” while noting that the proportion of repeat defaulters in the US has been rising for a decade.
According to LCD, of the LMEs and distressed exchanges targeting ELLI loans between 2015 and 2025, roughly 28% can be classed as “repeat offenders,” having already undergone a restructuring.
Rinse and repeat
Meanwhile, Fitch Ratings estimates that 30% of defaults recorded in 2025 in the European bond and loan markets were repeat defaults (defined as those processes completed within two years of an initial default). This reading compares with 15% in 2024 and 13% in 2023.
Looking at each asset class, repeat defaulters accounted for 32% of European high yield defaults in 2025 (up from 8% in 2024), and 18% of leveraged loan defaults (down from 23% in 2024 but above the 13% average since 2021).
Fitch estimates that the average interval between defaults was eight months for European high-yield issuers, and 11 months for European leveraged loan issuers, rising to nine and 12 months, respectively, in cases where the initial default was a distressed exchange. “This suggests a modest timing benefit rather than a durable fix for capital structure weakness,” it concludes.
The agency also predicts that repeat defaulters will be one of the key drivers of European high-yield bond and leveraged loan default rates in 2026, noting that of all issuers on its European Market Concern Bond list, 41% have defaulted within the last two years, and 85% of those defaults were distressed debt exchanges.
Fitch also found that among the loans on its European Market Concern Loan list, 27% have defaulted within the past two years, and 21% have completed distressed exchanges.
C-suite
Since many restructurings leave too much debt on the balance sheet, repeat defaulters are heavily represented in the triple-C category.
At the start of 2026, roughly 43% of CCC/C issuers in Europe were previous defaulters — up from 16% at the start of 2020, writes S&P in its latest “Default, Transition, and Recovery” report, dated Feb. 17.
In 2025, 93% of defaulters with an active rating at the start of the year were rated CCC+ or lower, up from the recent low of 62.5% in May 2024, according to S&P. Currently, 9.4% of speculative-grade issuers in Europe are rated CCC/C, a level that has been relatively stable since mid-2022 — around the time when distressed exchanges began to make up a larger share of total defaults.
“This particular default cycle has been characterized by prolonged high distressed exchange use. And when these prior defaulters receive new ratings after default, many are still lower rated,” S&P explains.
Stretched sheets
According to Fitch, meanwhile, distressed exchanges “can buy time but often leave balance sheets stretched.”
In the case of Klöckner Pentaplast, the company’s April 2025 distressed debt exchange was limited in scope, focusing on the unsecured notes, as KP’s holding company, Kleopatra Holdings 2, was duly downgraded to SD by S&P and given a limited default designation at Moody’s. As Moody’s explained at the time, this was the first step in the company addressing its 2026 maturity wall, with the second stage focusing on the first-lien debt. This second stage gave first-lien creditors almost all the equity in the reorganised company.
Pfleiderer (PCF), meanwhile, did not launch a fresh restructuring but carried out an asset sale. In December 2025, it moved Silekol’s assets and operations into Maple Group, a new unrestricted subsidiary wholly owned by PCF. Maple then raised a €110 million senior loan due 2028 and a €25 million shareholder loan. Market participants — and presumably rating agencies — did not expect such a move following the 2024 A&E.
On Feb. 16, S&P said most of the loan proceeds were upstreamed to PCF to support liquidity, and subsequently downgraded the company’s €750 million senior secured notes to CCC from CCC+, revising its outlook to negative. S&P pointed out that Silekol generated roughly one-third of PCF’s EBITDA and €10–20 million of annual FOCF, calling the transfer “detrimental to PCF’s creditors.”
Ground rules
In its 2026 outlook, dated Feb. 4, 2026, Sona Asset Management highlights the rising number of issuers restructuring more than once in a short period. “This reflects a combination of structurally challenged industries and the economics of recent restructurings, particularly the aggressiveness of LMEs,” the authors argue.
Fitch estimates that more than a third of the repeat defaulters on its European Market Concern Loan list completed a distressed exchange that also qualified as an LME, specifically an uptier exchange, within two years. As Fitch notes, even aggressive liability management transactions “do not reliably avoid follow-on events.”
However, LMEs can and often do shift the ground rules.
Restructurings frequently fall short of true balance sheet repair, because neither the capacity nor the appetite exists to go deeper. In those cases, an LME may be the more practical next step. “LMEs provide a way to access liquidity without the pain of a full restructuring. The logic is evident — if the option is available,” says FTI’s Turner.
According to Aegon’s Kacimi, an A&E can be helpful and often credit neutral to slightly positive, whereas LMEs tend to be more problematic because they reduce recoveries, while the more aggressive versions — such as drop-downs coupled with double dips — can shift the priority waterfall in ways that hurt existing creditors.
Celine Buttanshaw-Chan, a partner at PVTL Point, notes that companies now pursuing LMEs may well have been more likely to complete a simpler A&E a few years ago, when low rates made them a cheaper fix. “Today’s capital structure solutions are far more expensive, often provided by more flexible and opportunistic capital providers,” she notes.
Creative industry
Tools such as debt priming are not new, but companies are applying them in increasingly creative and aggressive forms, including non-pro rata transactions.
According to Buttanshaw-Chan, there are broadly two kinds of LMEs — opportunistic and distressed — and not all LMEs lead to more defaults. “Companies which are already in distress and are pursuing LMEs should pair these with a credible operational turnaround plan to be of most effect,” she observes.
Without operational change, the company is merely buying time, and is likely to face another restructuring — this time under much tighter covenants, she notes. At that point, optionality and runway for the company become limited, and the process may need to be court‑led, unless advisors can find another creative path.
“The LME technology has evolved in recent years, but the psychology of core investors has changed little,” says Turner. In many cases, most parties prefer a less radical restructuring than the underlying business requires. Par lenders naturally aim to minimise losses and may question whether the proposed haircuts are justified, while sponsors can have incentives to delay addressing the underlying issues, he explains.
But rather than a new technology that plagues the corporate world, LMEs can also be viewed in a more positive light. “By disempowering minority bondholders, an LME may facilitate a more fundamental restructuring down the line if required,” Turner adds.
Court scrutiny
In the near term, courts may play an increasingly decisive role in shaping restructurings. A couple of LMEs are already being challenged in the UK courts, while court‑led processes have introduced an element of uncertainty for market participants. The implementation of the UK’s restructuring plan regime no longer appears as straightforward as it seemed in 2023 or 2024, while judicial clarification may come in 2026. At the same time, out‑of‑court processes raise their own fundamental questions and carry meaningful post‑implementation risks.
If the more aggressive forms of LMEs are deemed off-limits under English law, issuers will have to rely more heavily on pro rata solutions and court-led processes to bind different stakeholder groups, FTI’s Turner suggests.
But it may be that European LMEs could become less confrontational, regardless of how courts rule in the high‑profile cases still pending.
In the US, LMEs initially produced binary outcomes that split investors into clear ‘in’ and ‘out’ groups, often prompting litigation from those lenders left on the sidelines, recalls Mark Knight, partner, co-head of Davis Polk’s restructuring practice in London. “That landscape has since evolved, with a more even distribution of value in LME transactions — still prioritising creditor groups that drive outcomes and/or provide new money — but making it less economically rational for minority lenders to sue.”
“Given Europe is at an earlier stage in the LME cycle and some of the early cases have been litigated, it feels logical that — depending on the outcome of those cases currently being litigated — we will likely move in the same direction as the US, with LMEs becoming increasingly inclusive and less binary,” Knight says.
Adjustment bureau
The tendency of some issuers to pursue repeat restructurings — alongside the growing use of LMEs — creates a demanding environment for investors.
Sona AM expressed this sentiment in its outlook, titled “material doubts about the current distressed market,” noting how difficult it has been to invest consistently and profitably in recent years.
European managers typically have less appetite for deeply distressed credits than their US counterparts, due to benchmark differences and internal risk constraints. But avoiding risk altogether is seldom an option. “If you only target issuers with strong documentation, you won’t have enough names to build a portfolio,” says Aegon’s Kacimi. “Investors must try to avoid landmines — this is a great source of alpha.”
PVTL Point argues that “LME fear is not simply a risk to be minimised but a source of potential alpha.” Minority creditors can sometimes participate in new‑money financings tied to drop‑down transactions, PVTL Point’s Buttanshaw-Chan explains. In a holistic restructuring pursued through a court‑led process, any difference in rights can shape class composition regardless of the size of their holding, she adds.
However, Buttanshaw-Chan also says investors must anticipate the possibility of an LME from the outset, and be prepared to navigate the legal risks embedded in the documentation.
Many investors — including incumbent creditors — are definitely alert to the risk of potential uptier and drop-down/asset sale transactions.
Davis Polk’s Knight says his team is now being approached by investors well ahead of maturity to assess whether provisions in the documentation could leave them vulnerable to such transactions. Conversely, he adds, prospective third-party financing providers “are showing growing interest in identifying valuable assets that could support new capital deployment pursuant to these LME strategies.”
Featured image by PBNJ Productions/Getty Images
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