Lenders brace for LBO financing gold rush
A series of high profile leveraged finance deals should make their way across to European desks, with at least €16.5bn of M&A issuance in the pipeline to meet CLO platforms coming off a record 12 months and set for another year of bounty.
Although bankers are cautious about heralding the full-blown return of the LBO machine given expectations around the return of leveraged buyouts have been frustrated several times over in the past few years, European investors could see a substantial slice of several US jumbo buyout financings.
“The leveraged finance M&A pipeline in Europe is the highest we have seen since 2021,” said Benjamin Thompson, head of EMEA leveraged finance capital markets at JP Morgan.
“We are tracking around €16.5bn across leveraged loans and high-yield of new money supply. It is encouraging, and we hope that trend continues as it is two to three times higher than the comparable levels we have seen over the last two to three years.”
The cross-border deals include the US$15.5bn-equivalent of TLBs and notes backing the buyout of video game maker Electronic Arts – expected for the end of the first quarter – plus transactions for medical technologies firm Hologic, which should front-run EA, and packaging company Sealed Air.
More euro-focused trades could come from the €3bn financing package backing media group Banijay’s cash acquisition of a majority stake in German betting firm Tipico from CVC. The financing backing Apax Partners' acquisition of a treasury and capital markets unit from UK software company Finastra is primed for the first week of January and buyout deals for Spanish private education institution UAX and UK-based Smiths Detection, known for its baggage-screening kit in airports and explosive detectors, should also materialise.
Looking further ahead, a leveraged finance banker said that syndication of the around €4bn package to back the acquisition of a majority stake in BASF Coatings by The Carlyle Group and the Qatar Investment Authority could slip into April given timing around closing of the deal.
“There is definitely increased optimism around potential for M&A pick up, with a lot of supporting factors in place to drive that,” said Alex Leonard, head of European liquid loan strategies for Blackstone Credit and Insurance.
“Base rates have come down, spreads are tighter and the discount needed to make primary look attractive on a relative basis has fallen away. Financing costs increasingly looking attractive.”
Ramping up
The big driving force on the demand side in Europe has been the flood of CLO issuance, whether from established managers ramping up supply or new managers entering the market and looking to reach critical mass.
“CLO creation and the appetite for broadly syndicated loans has been huge in 2025, and European CLO new issue volumes will end the year as the best on record,” said Leonard.
“The technical demand for assets have been very strong and supportive, and that has been a big driver of tightening spreads.”
The outlook for even more CLO supply has been buoyed by an ever-increasing list of debut managers appearing on the horizon and a large number of warehouses already in existence, with estimates, depending on the source, running anywhere from 100 to 150, said Andrew Doig, partner at Anchorage Capital.
“For the vast majority of those warehouses, you should expect managers to try to price deals consistently throughout 2026, providing there is not a major move on the liabilities or asset side,” said Doig.
“Given where liabilities are pricing today, we should also expect reset activity to remain elevated as older, more expensive vintages continue to come out of non-call. It looks like it will be very busy.”
Anchorage itself executed six CLO transactions in 2025.
“We expect to do one deal in the first or second quarter of 2026 and another in the second half of the year – but if there is a material improvement in market conditions, then it is possible we could look to do more.”
Doig said that the interplay between supply and demand should keep the financing wheels greased for leveraged buyouts.
“The asset imbalance remains, for now, tilted in the favour of sponsors and so a relatively large increase in M&A activity over the course of 2026 could actually help catalyse even more CLO creation,” he said.
“All managers are actively searching for new, quality assets in order to build spread, ramp, diversify and rebalance their portfolios. Along with more than 100 warehouses open, an increase in M&A activity would really be welcomed by the market.”
Crucial calls
While spread performance in leveraged loans from a bird’s eye view appears relatively benign, Nicolo Perari and Francois Gauvin, partners and portfolio managers of European liquid credit at Ares Management, told LPC that credit selection has been crucial this year, driven by greater bifurcation in secondary asset prices.
“The market is highly reactive to weak earnings, adversely impacting any credit that delivers disappointing results or faces other idiosyncratic challenges,” said Perari and Gauvin.
“Meanwhile, performing assets continue to trade at tight spreads and elevated prices above par. We expect this dynamic to continue into 2026, making initial credit underwriting and sector positioning even more essential to sustain a stable high-performing portfolio.”
For the more challenged names and sectors, there will be an opportunity to make some key decisions about re-engaging that will help drive returns, in the view of Michael Craig, senior portfolio manager and head of European senior loans at Invesco. Timing, however, will be key.
“When things are less than par, in the 70–90 range, then taking a different view on different sectors can become pretty interesting,” said Craig.
“For non-CLOs paid to outperform the market, at some point these healthcare, TMT and particularly chemical names with very large structures trading at a substantial discount will become a buy to add performance to a portfolio. Timing your entry point will be crucial for driving performance, although it looks like being more of a story for the back-end of next year.”