How European Debt Markets are Navigating 2025’s Uncertainty

3 Themes We’re Watching

In a year that’s been largely defined by uncertainty and change, a number of themes are emerging within the European debt capital markets that will shape activity in the balance of 2025. Here, Baird’s European Debt Capital Markets team shares our perspectives on three trends we’re watching closely at 2025’s midpoint, as we believe they illuminate opportunities and challenges alike for investors and other market participants:

1. Impact of geopolitical uncertainty on European debt markets

While European M&A volumes this year have continued to lag those in 2024 (-22% by deals to end of May), the syndicated debt markets have seen meaningful growth with year-to-date primary issuance up 34% vs. the same period in 2024. This was despite a period of around three weeks when no new issuance hit the market following President Trump’s liberation day tariff announcements. Since that hiatus, the market has quickly resumed its positive trends with single B credits spreads almost back to levels achieved prior to April and secondary market pricing similarly recovered.

This serves to highlight the short-term volatility of the syndicated markets, a feature which private market direct lenders have again used to their advantage. While direct lenders took time post-liberation day to review the impact on portfolio credits, as in 2022/24, the funds have been able to look through the headlines and provide commitments to transactions when the syndicated market was challenging (e.g. KKR’s recent acquisition of Karo Healthcare). That said, there is naturally a greater scrutiny of borrowers directly impacted by known or potential tariffs and lenders are also mindful of the impact on borrowers’ clients and their ability to navigate or absorb changes.

Beyond this, while always credit-specific, recent Baird processes would suggest an initial widening of around 25-50bp of unitranche credit spreads from the tightest levels seen earlier in the year. Notwithstanding, given the continued weight of uninvested capital, competition remains very high for quality assets and the tightest terms remain available for those opportunities.

2. Extended hold periods

The potent mix of Covid, inflation, higher interest rates and heightened geopolitical risk have all contributed to the bid-offer spreads behind much of the extended hold periods within private equity portfolios (the median in Europe increased from 5 years in 2021 to 6 years in 2024 and average European EV multiples in 2025 is 9.99x down from 10.51x in 2024). Clearly, this also has a direct impact on direct lenders’ portfolio hold periods; whereas typical loan hold periods used to be three years or less, funds are now assuming a further 12 or 24 months on average. And whereas unitranche facilities hitting maturity used to be unheard of, it’s now becoming a more regular occurrence.

The fate of these loans certainly depends on the performance of the borrower, but there are other factors at play, too. Even for strong credits where sponsors have the scope to extend their hold, the direct lender’s fund may be beyond its investment period, precluding it from refinancing. Furthermore, given the sensitivity of carried interest to the outcome of those final credits, managers will be reluctant to extend for multiple years, even if it’s possible. The direct lender may already be investing from their next fund, but there are challenges with managers refinancing deals from old funds with new funds. A change of ownership or a switch into a continuation vehicle can overcome that hurdle, but otherwise it’s likely that a third-party refinancing is needed.

Like banks, direct lenders are cautious about refinancing incumbent lenders out of credits, particularly given the efforts usually made to maintain portfolio credits. Therefore, the bar is higher and may call for new layers of capital or, indeed, alternative capital to provide a solution. But for the strongest credits and deepest sponsor relationships, the market will find a way through structuring challenges to support and be competitive. This could involve investing from separate pockets of capital and there’s even talk of some exploring continuation vehicles for debt portfolios. Given the potential range of outcomes, independent advice to help consider the broadest range of options is increasingly important.

3. Dual-market processes on the rise

Matching the currency of borrowings to profits, cashflows and assets has always been a means of hedging FX risks inherent in cross-border deals, but there has been a recent increase in cross-border borrowing by corporates for different reasons. While the Fed maintains rates at 4.25% - 4.50%, ECB rates are now down to 2.25% and borrowers taking advantage of these lower rates has seen so called Reverse Yankee issuance (U.S. borrowers raising funds in Euro) increase to the highest level in nine years. At the same time, in the private credit markets, higher levels of competition in the U.S. has seen some U.S. lenders look to Europe for slightly wider credit spreads.

While more leveraged borrowers are unlikely to create currency mismatches in their capital structures, the above highlights that for some, different markets offer different opportunities and can only be compared by exploring all options. At Baird, with both U.S. and European teams, we are ideally placed to run dual-market processes and compare the best available from each market to the benefit of our clients.

Contact a member of our European Private Capital Markets - Debt Advisory team to learn more.

Sources: Pitchbook, Dealogic, Baird estimates.