After a period of volatility, Europe’s leveraged finance market is primed for resurgence, with new and exciting opportunities available to lenders and borrowers alike
Leveraged finance markets in Europe have entered 2025 with a renewed sense of vitality, as our latest leveraged finance report reveals. Interest rate cuts in 2024 created more favorable conditions for the region’s syndicated loan and high yield bond markets, while continued competition between public and specialized private lenders is reshaping the financing landscape. Today, the market is more innovative, competitive and liquid—qualities that benefit all borrowers.
In 2022 and 2023, Europe’s debt markets came under significant strain. The aggregate value of high yield bond and leveraged loan issuance in both years fell far short of the peak achieved in 2021, and, in fact, trailed the levels recorded in the five preceding years. However, the central banks’ pivot toward monetary loosening in 2024 allowed the market to breathe easier, driving borrowers and lenders to seize new opportunities. Overall, total issuance last year nearly matched 2021’s record high, and dealmakers hope that the upswing will remain sustainable through 2025.
Overall Issuance by value 2015 – 2024
Instrument type: High yield bonds and Leveraged loans Use of proceeds: All
Location: Western and Southern Europe Sectors: All Sectors
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An increasingly significant force in the leveraged finance landscape is private credit, with specialized firms coming to prominence during the higher interest rate environment. Today, these private credit players face a more competitive environment, as the revival of broadly syndicated loan markets and high yield presents borrowers with a broader range of financing choices. Moreover, public lenders are now more likely to offer flexible financing packages, and in response, private credit firms have tightened margins and are offering more covenant flexibility to retain their share of the market.
Promising runway for M&A and leveraged buyouts
One of the key questions on lenders’ minds is whether M&A activity will gain stronger momentum in 2025. Last year saw deal announcements and aggregate value increase relative to 2023, though volume declined during the first half of 2024. Higher financing costs and valuation gaps have caused buyout activity to slow down since 2021, leaving private equity firms with a backlog of unexited assets. With market conditions at least somewhat more favorable, these firms are now better positioned to strike deals than they were at the start of 2024. Buyouts that previously leaned on private credit can now find cost-effective solutions in the syndicated loan and high yield bond markets.
Hybrid structures, combining elements of both private and public debt, are also becoming increasingly popular. Leveraging multiple sources of financing will allow sponsors to mix-and-match terms to create ideal capital structures and maximize value. Even as syndicated loan markets continue their recovery, borrowers may try to capitalize simultaneously on the flexibility and rapid execution that private credit can provide.
Another important development over the past 12 months has been the role of liability management transactions. As part of their efforts to avoid a surge of defaults and debt restructurings, European markets have turned to these liability management deals—which already have a more established legacy in the US markets—in which lenders and borrowers strategically restructure debt hierarchies. Liability management deals remain rare in Europe, but their profile is certainly growing in the region following the announcement (or threat) of a few high-profile transactions in 2024.
Market evolution
Beyond the realm of buyouts, Europe’s broader leveraged finance market is going through a period of transformation that will see more financing options open up to borrowers. Several different stakeholders are driving that change.
Investment banks, for one, played an essential role in the reopening of public debt markets last year, and are poised to drive further innovation in deal structuring. Dealmakers expect dual-track processes to become increasingly popular as investment banks create optimal financing packages that combine syndicated loans or high yield bonds with private credit solutions.
Private credit firms, for their part, are doubling down on their core competencies. To maintain market share, they are emphasizing their made-to-order financing solutions and rapid deal execution. In a few instances, firms are forming partnerships with traditional lenders in which the banks originate loans that can be partially financed by private credit providers—the latter can profit from the banks’ large networks, while the traditional lenders can maintain their exposure to valuable borrowers without having to commit all the loan capital.
Ultimately, these developments should benefit borrowers and private equity sponsors who can leverage the public-private competitive dynamic to secure tailored, cost-effective financing. Considering these factors in conjunction with the increasingly favorable macroeconomic conditions, one can expect leveraged finance markets to remain highly active in 2025. Though refinancing and repricing drove the lion’s share of activity in 2024, more M&A- and buyout-related financing is expected to come to the forefront this year, drawing on the wide range of financing options now available to dealmakers.
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