DC Advisory’s latest European Debt Market Monitor highlights a challenging start to 2026 for the European Broadly Syndicated Loan (BSL) market.
Loan volumes plummeted to 22.7 billion euros in Q1, marking the lowest first-quarter total since 2023 and a sharp decline from the 41.4 billion euros recorded in Q1 2025.
The drop was driven by escalating geopolitical tensions in the Middle East, compounded by uncertainty around tariffs and AI, which disrupted global trade and inflation expectations.
Market freeze post-Iran airstrikes
Nearly 82 percent of Q1 issuance occurred before the airstrikes on Iran, after which BSL activity ground to a halt. Lenders paused to assess the fallout from rising oil prices, inflationary pressures, and the potential closure of the Strait of Hormuz.
The scrutiny of software and technology credits persisted, with private credit lenders – some exposed up to 50 percent to software-related assets – facing heightened risks.
Shift in lender focus
While AI remains a key diligence priority, lenders have adopted more structured risk assessment frameworks.
However, limited partners (LPs) are pushing for portfolio diversification, leading to a clear shift away from software credits toward ‘blue-collar’ sectors. This has reduced the prevalence of ARR (Annual Recurring Revenue) financing structures.
Refinancing vs. M&A activity
Refinancing volumes dropped to 9.2 billion euros (from 22.3 billion euros in Q1 2025), as borrowers deferred opportunistic moves.
In contrast, M&A-linked issuance showed resilience, reaching 10.2 billion euros –approximately 45 percent of total Q1 BSL volumes – continuing the gradual recovery seen in late 2025.
Outlook: cautious optimism
Q2 began subdued, but conditions improved in May as the BSL market cautiously reopened. Dry powder remains abundant in both BSL and direct lending markets, and demand for high-quality credits is strong.
Geopolitical instability will continue to weigh on sentiment, but pressure to return liquidity to LPs is expected to drive a volume uptick. The rebalancing toward ‘blue-collar’ sectors is likely to persist.
Benelux spotlight
The Benelux debt market mirrored 2025 trends, with refinancing dominating due to caution around new M&A processes. Private equity investors, wary of macroeconomic and geopolitical risks, have extended holding periods, increasing refinancing activity.
M&A deals were limited to smaller, local founder-led companies or strategic buyer-led transactions. Exceptions included competitive dealmaking for mid-sized companies in resilient niches, such as the acquisitions of Innovad Group by PAI Partners and BUKO by GBL in April.
With LP demand for DPI (Distributions to Paid-In Capital) remaining strong, funds are expected to prepare assets for exit in Q4 2026, aiming to close deals in H1 2027 assuming geopolitical conditions stabilize.
