According to Bloomberg Business, European leveraged loan issuance exploded to a record this week, with over €26.5 billion ($31.6 billion) in term loans priced. That massive figure represents about 5.3% of the entire European leveraged loan market. The activity was dominated by repricings and refinancings, with companies like Dechra and Ahlsell slashing 50 to 75 basis points off their borrowing costs. High-yield bond sales also surged, hitting over €7.2 billion, the highest weekly amount since July. Despite the frenzy, not all borrowers succeeded, as European software firm Team.Blue halted a planned term loan deal amid rising investor anxiety about AI disruption to its sector.
The Debt Gold Rush
So what’s fueling this bonanza? Basically, it’s a perfect storm of pent-up demand and a momentarily calm geopolitical climate. Borrowers, especially those backed by private equity, saw a window and jumped through it. They’re keenly aware that there’s a mountain of cash sitting in CLO warehouses and high-yield funds, and investors are so desperate to put that money to work they’re accepting lower yields. The iTraxx Xover index, a key fear gauge for junk debt, hovering near four-year lows tells you everything about the current risk appetite. It’s a borrower’s market, and they’re driving a hard bargain.
The AI Spanner in the Works
But here’s the thing: the party isn’t universal. The abrupt halt of Team.Blue’s loan deal is a massive red flag for an entire sector. The quote from the Ironshield Capital portfolio manager says it all: “People are very worried about AI making SAAS programs redundant.” That’s a fundamental, existential fear that’s now directly impacting capital markets. If investors are getting skittish about pricing software loans—one of the largest sectors in the loan space—it signals that AI disruption is no longer a distant theoretical risk. It’s a present-day underwriting problem. This selective nervousness amidst a broader debt rush is a fascinating split in market psychology.
CLOs Feel the Squeeze
On the other side of these sweetheart deals are the CLO managers, and they’re getting pinched. Their margins are getting squeezed because the cost of the debt they issued to fund their portfolios isn’t falling as fast as the yields on the loans they’re buying. They’re also facing a practical problem: too many loans are trading above par, making it hard to find decent paper at a discount. So what are they doing? They’re starting to hoard cash. A Bank of America report shows almost two-thirds of European CLOs now have positive cash balances, with the median position at its highest since 2019. They’re becoming picky, waiting for better opportunities, like the new-money deals expected from a pickup in M&A later this year.
Waiting for the Next Big Thing
And that’s really the next chapter of this story. The current record week is mostly about refinancing old, expensive debt. The real test for the market’s depth and health will come with new-money deals to fund acquisitions and buyouts. The anticipated mega-deals for companies like Electronic Arts and BASF will demand fresh capital and could offer those wider spreads CLO managers are craving. There’s broad optimism, as one capital markets head put it, for a supportive credit environment. But the caution tape around software, and the cash piling up on CLO balance sheets, shows that beneath the surface-level frenzy, a more cautious, selective mindset is taking hold. The easy money from refinancing might be getting made, but the hard work of pricing genuine growth and disruption is just beginning.
