European Leveraged Finance Market: Macro Anxiety Overshadows Credit Risk

Results from LCD's H1 2026 European leveraged finance survey indicate a market expecting broad stability in credit fundamentals, despite fractured sentiment on macro risks. The survey forecasts leveraged loans to outperform high-yield bonds in H2 2026, with respondents seeing the ELLI distress ratio stabilizing. 60% of respondents predict the Morningstar European Leveraged Loan Index (ELLI) will outperform the Morningstar LSTA US Leveraged Loan Index over the next six months. In the 2025-year-end poll, before software risk unwinding, the US benchmark was expected to outperform Europe, which it did in Q1. However, with AI fears gripping markets, the software-heavy US index recorded a YTD return of 1.32% vs. 1.82% for the European index. Respondents strongly favor floating-rate risk over high-yield bonds for H2, with 80% expecting loans to outperform. This preference stems from uncertainty over central bank rate cuts, preserving the floating-coupon carry advantage. For pricing, 80% expect European credit spreads to remain broadly unchanged over the next six months, with 20% anticipating moderate widening. No respondents forecast significant widening or tightening. Buyout structures are expected to remain stable, with no change forecasted in leverage multiples or equity contributions. On the deal-flow side, 60% expect M&A-related issuance via syndicated loans to rise in H2, though not enough to alleviate the technical supply shortage.

Markets remain risk-on but credit-risk-sensitive, with macro concerns driving positioning. This dynamic will shape European leveraged finance performance in the coming months.