European Leveraged Finance Survey: Macro anxiety outweighs credit risk

Leveraged loans expected to outperform high yield in H2 2026.

After a sharp rise in the ELLI distress ratio, respondents see conditions stabilising.

European loan index predicted to outperform its US counterpart.

Triple-C loans expected to underperform other rating cohorts.

With 60% of the vote, survey respondents expect the Morningstar European Leveraged Loan Index (ELLI) to outperform the Morningstar LSTA US Leveraged Loan Index over the next six months.

At the year-end 2025 poll — taken before the mass unwinding of software risk took hold — respondents had broadly expected the US benchmark to outperform Europe, which it did in the first quarter. As AI fears gripped the markets, however, the software-heavy US index recorded a year-to-date return of 1.32% at the end of June, versus 1.82% for the European index.

Respondents strongly favour floating-rate risk over high yield bonds for the second half, with 80% expecting loans to outperform high yield. This preference comes as markets remain uncertain over the future path of central bank rate cuts, keeping the floating-coupon carry advantage offered by loans intact.

Funding landscape As for pricing, a clear majority of respondents (80%) expect European credit spreads to stay broadly unchanged over the next six months, with the remaining 20% anticipating moderate widening. Notably, no respondents forecasted either significant widening or any tightening (whether moderate or significant) — pointing to an expectation of spread stability at current levels rather than further compression or a risk-off repricing.

In addition to funding costs, buyout structures are expected to hold steady through the second half of the year, with the majority of survey respondents forecasting no change in leverage multiples or equity contributions.

Weekly coverage of US and European loans, bonds, private credit, and more.

There was a similar expectation for average purchase price multiples of European buyouts, with the majority of respondents also predicting no change on this market measure.

Constructive thinking On the deal-flow side, sentiment is more constructive. Some 60% of respondents expect M&A-related issuance via broadly syndicated loans to rise in the second half — but not by enough to improve the current technical supply shortage.

Another 20% expect issuance to increase alongside an improving supply-demand picture, thereby putting a combined 80% in the broader "more M&A loan supply" camp. Only 20% expect issuance to fall.

AI financing Respondents were split on how AI-related financing needs might reshape high yield issuance. A third (33%) say AI is unlikely to provide material new supply, and an equal 33% think it's simply too early to make a call on this key issue. Just over a quarter (27%) expect AI to add modest incremental supply.

Asked what will most likely drive portfolio performance over the next six months, LCD's survey participants pointed first to geopolitical volatility (21%), ahead of credit quality risks, tightening financial conditions, and inflation (each selected by 14% of respondents). With defaults and restructurings drawing just 7% on this question, the findings suggest geopolitics and macro conditions will outrank idiosyncratic credit risk in the second half of the year.

Strong energy Turning to which sectors are likely to outperform in H2, Energy leads the way with 19% of responses — the only segment to stand out from an otherwise dispersed set of views. This result is consistent with expectations of firmer oil prices supporting energy-sector credit fundamentals.

Triple-C loans are expected to underperform double-B and single-B loans in the second half of this year. As of July 10, the triple-C cohort of the ELLI had returned 0.67% this year (excluding currency), versus 1.76% for single-B loans and 2.91% for double-B facilities.