European Leveraged Credit in 2025: Yields Cushion Risk amid an Aging Credit Cycle
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European Leveraged Credit in 2025: Yields Cushion Risk amid an Aging Credit Cycle

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Mohamed Basma

Mohamed Basma, CFA

Managing Director, Head of Leveraged Credit

Floris van den Berg

Floris van den Berg, CFA

Senior Vice President, Portfolio Manager, European CLO and European Team Lead

Sunrise on cliff

While high starting yields should provide a buffer against potential volatility, credit selection will be critical as dispersion within and across sectors increases.

Executive summary

2024 review 

European leveraged credit markets delivered strong performance in 2024, supported by stable macroeconomic conditions, resilient corporate fundamentals and favorable technical dynamics. High yields and tightening spreads drove robust returns across both loans and high yield bonds, extending the momentum from 2023. 

  • Macroeconomic stability and monetary easing: The ECB lowered rates amid disinflation and modest economic growth, fostering a supportive environment for risk assets. Consumer spending benefited from wage growth and declining energy prices.
  • Strong technical drivers: Demand for leveraged credit remained robust, driven by record levels of CLO issuance and increased inflows into high yield funds. Loan prices strengthened, while spreads tightened significantly.
  • Resilient corporate fundamentals: Issuers maintained stable earnings, and refinancing pressures eased. Defaults remained low, with underperformance largely isolated to lower-quality credits, while stronger-rated names outperformed. 

2025 outlook 

The outlook for European leveraged credit remains constructive, supported by attractive yields, continued monetary easing and stable economic growth. While tighter valuations and a maturing credit cycle may temper returns, elevated carry is expected to provide income and cushion against potential volatility. 

  • Demand supported by high yields: Investors are likely to remain engaged in leveraged credit markets given attractive yields and sustained demand from institutional buyers such as CLO managers.
  • Moderate supply growth: Refinancing activity is expected to dominate issuance in high yield, while M&A and leveraged buyout activity are expected to increase as borrowing costs decline.
  • Selectivity is key: While credit fundamentals remain stable, geopolitical risks, policy uncertainty and potential sector dispersion underscore the importance of disciplined credit selection and a focus on quality.

Performance outlook 

Although a range of scenarios could shift return outcomes, our base case projection is a total return range of 6.5-7.0% for European loans and 6.0-6.5% for the European high yield bond market. Broad market volatility will remain a prominent theme as the credit cycle matures. With increased bifurcation, individual credit selection will remain a key driver of performance.

Exhibit 1: We project that leveraged credit markets will deliver attractive returns in 2025, driven by high starting yields
Exhibit 1: We project that leveraged credit markets will deliver attractive returns in 2025, driven by high starting yields

As of 12/31/24. Source: LCD, Barclays, Bloomberg. Loans represented by the Morningstar European Leveraged Loan Index. High yield bonds (HY) represented by the Bloomberg Pan-European Corporate High Yield Index. Loan rate represented by a blended rate of Euribor contracts tracked by MarkIt partners; loan spread is LCD’s nominal credit spread for the loan index. HY spread is the average spread of the HY index, while the rate component backs out spread from the yield-to-worst of the HY index. Past performance is no guarantee of future results. Investors cannot invest directly in an index.

A note about risk 

Principal risks for senior loans: All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield. Voya’s senior loan strategies invest primarily in below investment grade, floating rate senior loans (also known as “high yield” or “junk” instruments), which are subject to greater levels of liquidity, credit and other risks than are investment grade instruments. There is a limited secondary market for floating rate loans, which may limit a strategy’s ability to sell a loan in a timely fashion or at a favorable price. If a loan is illiquid, the value of the loan may be negatively impacted and the manager may not be able to sell the loan in order to meet redemption needs or other portfolio cash requirements. The value of loans in the portfolio could be negatively impacted by adverse economic or market conditions and by the failure of borrowers to repay principal or interest. A decrease in demand for loans may adversely affect the value of the portfolio’s investments, causing the portfolio’s net asset value to fall. Because of the limited market for floating rate senior loans, it may be difficult to value loans in the portfolio on a daily basis. The actual price the portfolio receives upon the sale of a loan could differ significantly from the value assigned to it in the portfolio. The portfolio may invest in foreign instruments, which may present increased market, liquidity, currency, interest rate, political, information and other risks. These risks may be greater in the case of emerging market loans. Although interest rates for floating rate senior loans typically reset periodically, changes in market interest rates may impact the valuation of loans in the portfolio. In the case of early prepayment of loans in the portfolio, the portfolio may realize proceeds from the repayment that are less than the valuation assigned to the loan by the portfolio. In the case of extensions of payment periods by borrowers on loans in the portfolio, the valuation of the loans may be reduced. The portfolio may also invest in other investment companies and will pay a proportional share of the expenses of the other investment company. 

Principal risks for high yield bonds: All investing involves risks of fluctuating prices and the uncertainties of rates and return and yield inherent in investing. High yield securities, or “junk bonds,” are rated lower than investment grade bonds because there is a greater possibility that the issuer may be unable to make interest and principal payments on those securities. As interest rates rise, bond prices may fall, reducing the value of the portfolio’s share price. Debt securities with longer durations tend to be more sensitive to interest rate changes than debt securities with shorter durations. Other risks of the portfolio include, but are not limited to, credit risk, other investment companies risks, price volatility risk, the inability to sell securities and securities lending risks.

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While high starting yields should provide a buffer against potential volatility, credit selection will be critical as dispersion within and across sectors increases.

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Index definitions 

An investor cannot invest directly in an index, and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations, as volatility and other characteristics may differ from a particular investment. The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 of the largest companies in the United States. The Nasdaq Composite Index measures all domestic and international common stocks listed on the Nasdaq Stock Market. The Bloomberg U.S. Treasury Index is an unmanaged index that includes public obligations of the U.S. Treasury. Treasury bills and certain special issues, such as state and local government series (SLGS) bonds, as well as U.S. Treasury TIPS and STRIPS, are excluded. The Bloomberg U.S. Corporate Index measures the performance of investment grade, USDdenominated, fixed-rate, taxable corporate bond market securities. The Morningstar LSTA Leveraged Loan Index is an unmanaged total return index that captures accrued interest, repayments and market value changes. The Bloomberg U.S. High Yield Index covers the universe of fixed-rate, non–investment grade debt. Eurobonds and debt issues from countries designated as emerging markets are excluded, but Canadian and global bonds of issuers in non-EMG countries are included. The Bloomberg Corporate High Yield Index is an unmanaged index that measures the performance of fixed income securities generally representative of corporate bonds rated below investment grade. Bloomberg® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indexes. Bloomberg does not approve or endorse this material, nor guarantee the accuracy or completeness of any information herein, nor make any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, shall not have any liability or responsibility for injury or damages arising in connection therewith.

Past performance is no guarantee of future results. This document has been prepared by Voya IM for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Opinions expressed herein reflect our judgment and are subject to change. Certain information may be received from sources we consider reliable, but we do not represent that such information is accurate or complete. Certain statements contained herein may constitute projections, forecasts or other forward-looking statements based on our current views and assumptions and may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) changes in laws and regulations and (4) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this document regarding holdings are subject to change without notice. Information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors. 

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Voya Investment Management Co. LLC (“Voya IM”) is relying on an exemption from the adviser registration requirement contained in section 8.26 of NI 31-103 in the provinces of Ontario, Québec and Nova Scotia. Please note that: (i) Voya IM is not registered in Ontario, Québec or Nova Scotia to act as an adviser, (ii) Voya IM’s principal place of business is located in the City of New York, N.Y., U.S.A., (iii) all or substantially all of Voya IM’s assets may be situated outside of Canada, (iv) there may be difficulty enforcing legal rights against Voya IM because of the above, and (v) Voya IM has appointed McMillan LLP as agent for service of process in Ontario (c/o Leila Rafi, Brookfield Place, 181 Bay Street, Suite 4400, Toronto, Ontario M5J 2T3) and Québec (c/o Enda Wong, 1000 Sherbrooke Street West, Suite 2700, Montreal, Québec H3A 3G4) and Stewart McKelvey as agent for service of process in Nova Scotia (c/o Marc Reardon, Queen’s Marque, 600-1741 Lower Water Street, Halifax, Nova Scotia B3J 0J2). For use by qualified institutional investors and financial professionals only. Not for inspection by, distribution to or quotation to the general public.

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