Risks and resilience: H1 2025 European loan market review

The first half of 2025 was nothing if not eventful. In the immediate aftermath of US President Donald Trump's tariffs announcement, public equity markets fell around 10% before rebounding almost as quickly. Volatility remained elevated with the tariff’s endgame remaining unclear. However, despite all the noise, the European loan market proved to be a relatively safe harbour for investors. We look back on key events during the first six months of the year, their impact on the European loan market and consider what investors can likely expect as the year progresses.

Whilst every week seemed to bring another challenge for markets to deal with, so far in 2025 there have perhaps been three key themes which have impacted the European loan market.

Tariff turbulence

At the start of April, President Trump, via social media, upended financial markets with the announcement of a sweeping set of reciprocal tariffs intended to re-balance what the president believed to be unfair tariffs being levied against the United States. With almost 90 countries targeted, global markets went into a tailspin. US equities witnessed one of their sharpest single-day declines since World War II and 30-year US Treasury yields briefly surpassed 5%, unmistakable evidence of investor anxiety.

Despite this drama however, the syndicated loans market demonstrated notable resilience, experiencing only a modest -0.28% decline in April. The market rapidly recouped its losses, supported by robust economic data, easing inflation and a temporary de-escalation of trade tensions. By the time the first quarter of the year had closed, risk assets had rebounded with US equities 11% higher and European equities posting a respectable 1.4% gain.

M&A: A tale of two quarters

With respect to merger and acquisition (M&A) activity, the first half of 2025 experienced two very different quarters. During the first quarter, uncertainty created by the ‘Liberation Day’ tariff announcements dampened momentum in M&A activity. With markets unsettled, the disparity in valuation expectations between buyers and sellers widened, hampering new M&A activity. Refinancing and repricing dominated loan issuance as traditional leveraged buyouts stalled.

However, this backdrop had shifted noticeably by the end of the second quarter. During Q2, the market witnessed a wave of genuine new issuance, with almost half the volume coming from M&A and leveraged buyout (LBO) related financings. In fact, announced M&A volumes advanced 30% year-on-year with transactions within the private equity ‘sweet spot’ – deals between €2-5 billion – jumping by 50%. Looking forward, this surge suggests renewed confidence, with a rebuilding of the deal pipeline as market volatility starts to recede. 

The quiet bang

Even as headline default rates remained subdued, growing signs of underlying credit stress emerged. Early during Q2, ratings agency, Fitch, raised its European loan default forecast by 50 basis points, suggesting a 2.5-3.0% default rate for 2025. This was despite defaults remaining low at 0.71% in Europe and 1.11% for the US.

However, revealingly, cracks started to emerge from beneath the surface. High profile issuers, such as Altice France and Lowell, faced the resolution of their long-trailed difficulties and entered a restructuring process involving debt write-offs. Further, the increased use of Liability Management Exercises (LMEs) in the US and payment-in-kind (PIK) instruments in direct lending pointed towards mounting credit pressures.

Bank of America estimated that, when including LMEs, the actual US default rate climbs to 3.6%, almost four times the headline figure. This perhaps underlines the divergence in risk-adjusted spreads between the US and Europe and underscores the importance of vigilant credit monitoring as the cycle matures.