European leveraged finance overview

Headlines

• Leveraged finance markets rallied in 2024 to record remarkable year-on-year gains
• Interest rate cuts and tighter margins generated a surge in refinancing, as borrowers leapt at the chance to bring down financing costs
• Bumper CLO issuance drove demand, with investors seeking yield as rates came down
• A dynamic interplay between private debt and public debt continues to develop, with the two markets competing and, in some instances, collaborating

European leveraged finance sprang back to life in 2024, as falling interest rates and a growing investor appetite laid the foundation for a return to a healthier market.

The aggregate value of leveraged loan issuance in Europe in 2024 (€307.4 billion) was almost double the annual total recorded in 2023 (€161.1 billion), with Q2 2024 generating the highest single-quarter total on record (€103.2 billion).

Europe’s high yield bond markets were equally lively—indeed, issuance in H1 alone (€76.1 billion) surpassed the full-year sum recorded in 2023 (€73.2 billion), before rounding out to €137.6 billion for 2024 as a whole.

Rate cuts put financing markets back on track

Falling interest rates have been the primary catalyst for the market’s revival, with both the European Central Bank and Bank of England making interest rate cuts in 2024 for the first time in two and two-and-a-half years, respectively. 

Lower rates have spurred activity in the collateralized loan obligation (CLO) space.

According to Debtwire, new euro CLO issuance was up 79.7 per cent year-on-year to €48.4 billion in 2024, as lower base rates pushed fixed-income investors to take on more risk to secure yield.

Lower base rates have also caused borrowing costs to fall, as have tighter margins in the leveraged loan markets and lower yields to maturity in the high yield space. Borrowers have jumped at the opportunity to refinance existing capital structures at lower prices.

In loan markets, refinancing issuance in 2024 was up 46 per cent year-on-year, reaching €161 billion and accounting for more than half of the overall issuance. In the high yield market, refinancing climbed to €85.1 billion, more than doubling last year’s output, and generated almost two-thirds of the overall issuance in 2024.

Private and public debt: A new dynamic

Lower pricing in the broadly syndicated loan (BSL) and high yield markets has tipped the balance between public and private debt back in favour of public debt markets. Credits financed with more expensive private debt unitranche structures in some cases flipped back to BSL and high yield options over the course of 2024, as borrowers capitalised on lower costs during the year.

Phenna Group, backed by Oakley Capital, and Deutsche Fachpflege, a portfolio company of Advent International, are among the borrowers that have taken out private credit facilities with cheaper BSL borrowings. In early 2024, Neopharmed Gentili issued a €750 million senior-secured high yield bond to refinance a unitranche loan raised in 2022.

The increasing competition between BSL and private debt has directly benefitted borrowers. In addition to refinancing in the public debt markets, borrowers have been able to negotiate lower margins with incumbent private credit providers.

However, the dynamic between private debt and the BSL markets has not been an exclusively competitive one—some issuers are opting to include tranches of financing from both sources in their capital structures.

Some banks and private debt managers have formalised these relationships by establishing partnerships where banks leverage their branch networks and geographic footprints to originate loans. They can then be shared with private credit partners, so that banks do not have to hold the full loans on their own balance sheets. Citigroup and Apollo, and Lloyds Bank and Oaktree Capital Management, are among the lenders that have announced such partnerships.

A mature, sophisticated market

2024’s wave of repricing and refinancing activity, in addition to the evolving relationship between public and private debt markets, is reflective of an increasingly sophisticated European loan market that is better able to respond quickly to changes in the business environment.

Investment banks, investors and borrowers were ready to spring into action as soon as interest rates began to recede, while remaining sensitive to any lingering concerns around risk. Few deals have priced outside of initial guidance, with all parties focused on seamless execution and completing deals with minimal disruption.

The only piece of the puzzle missing from the market in 2024 was a full recovery in M&A and buyout transaction volumes. But, if the speed of the market’s response to an improving interest rate environment is anything to go by, chances are that lenders and borrowers will be ready to spring into action as soon as the first signs of a much-anticipated M&A revival materialise.

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