European leveraged loans continued to appeal to investors in 2025, offering defensive characteristics while maintaining attractive risk-adjusted returns against a backdrop of global macroeconomic uncertainty, Aramide Ogunlana, director of private credit at M&G Investments, told Paperjam. She explained, “Leveraged loans are senior secured floating rate investments with returns inherently overweight to income and significantly lower mark-to-market risk versus other fixed credit asset classes.”

Ogunlana noted that the European loan market had entered 2025 in a strong position after effectively managing its maturity profile and debt pricing. “The European loan market has efficiently pushed out its maturities, repriced its debt, and thereby stabilised corporate capital structures,” she remarked. These changes, she said, had positioned the market well, with technical and structural supports in place, including renewed signs of mergers, acquisitions and IPO activity.

Looking ahead, she observed that “while absolute issuance in 2025 may prove lower than 2024, net new money is expected to be higher, relative to repricings and refinancing.” With investor focus shifting to primary deal flow, she added that “loan secondary marks will likely remain slightly discounted,” offering yields of 6% to 7% in euro terms, adjusted for default risk.

2024 performance

The European leveraged loans market outperformed both investment-grade and government bonds in 2024. Ogunlana stated, “Geopolitics and election volatility were the key concerns at the start of 2024,” but despite quarterly disruptions, she observed that “most markets ended in positive territory with varying degrees of success.”

In fixed income, she said that “lower duration assets, such as loans and high-yield bonds, performed particularly well” as a result of persistent ‘higher for longer’ interest rate expectations. She highlighted that “European government bonds returned just 1.76%, compared to 8.53% for European loans.”

CLOs and diversified demand

The leveraged loan market expanded by €12bn to €420bn over the past year--an increase of nearly €100bn from pre-covid levels and almost three times the market’s size a decade ago. In contrast, the European high-yield bond market contracted by €10bn to €366bn. Ogunlana stated that “this extra loan capacity was easily digested,” citing strong demand from collateralised loan obligations (CLOs), which issued a record €48bn, alongside €34bn in refinancing and resets.

She also noted a broadening investor base, saying that “new sources of broadly syndicated loan (BSL) demand, such as wholesale investors, Eltifs and family offices, were seen,” which contributed to overall net undersupply. “The prospect of liquidity with high yield evidentially piqued interest,” she added.

Credit risk remains

Discussing key risks, Ogunlana emphasised that leveraged loans were sub-investment grade assets, and therefore default risk remained the most significant factor. “Loans have asymmetric risk/return characteristics, with limited potential for capital upside,” she said, underlining that the “minimisation of credit deterioration is a key driver in portfolio performance.”

While duration risk was limited due to floating rate structures, Ogunlana warned that “where rates are elevated, weaker companies may struggle to cope with financing risks and may default.” She stressed the importance of credit selection in managing such risks.

To mitigate downside exposure, she stated, “We favour senior secured exposure through a cycle given the superior downside protection.” M&G also preferred to invest in “companies that are market leaders in their sector with identifiable enterprise valuation points” and where the team had internal expertise.

Diversification remained a central objective. “Minimising specific risks within portfolios is essential given the asymmetry of risk and reward that exists in this par asset class,” she concluded.

Emerging structural risks

European loan default rates continued to be historically low. Ogunlana reported that “defaults trended down yet more at just 0.29% as of March” and that “CCC-rated exposure in the market is low at around 4%.” She added that “Moody’s tempered its expectations for speculative grade defaults overall to just 2.7% in 2025,” while Barclays forecast a loan-specific default rate of only 1%.

However, she warned that investors should look beyond technical defaults. “The rise of lender-on-lender violence via liability management exercises (LMEs)... are potentially a cause for concern for European lenders,” she said. Though most prevalent in the US due to weaker documentation and guarantees, Ogunlana noted that these practices could still become problematic in European markets.

Eltifs access to private credit

Ogunlana also discussed M&G’s involvement in an European long term investment fund (Eltif) focused on private credit. She explained that “the core of the philosophy of the Eltif framework is well-structured, regulated access to private assets for a broader investor base,” and that M&G aligned with this approach.

She observed that the recent enhancements under Eltif 2.0 had made the product more appealing. “The enhancements... allowing for semi-liquid structures, have provided the liquidity that is often a requirement for a broader investor base,” she said, noting growing traction among European investors.

Looking ahead, she concluded that while the market would take time to fully mature, “we expect [Eltifs] to continue to grow as more investors gain meaningful access to the benefits of allocating to private assets.”